Effective rate of protection

The effective rate of protection is a statistic used by economists to measure the real protection yielded by import duties or tariffs. This equals (VA_d/VA_int) - 1, where:

VA_d = domestic value added

VA_int = international value added

An alternative that yields an identical answer is that the effective rate of protection equals [(T_f - T_i) / VA_int] - 1, where:

T_f = the total tariff theoretically or actually paid on the final product

T_i = the total tariffs paid, theoretically or actually, on the importable inputs used to make that product.

The effective rate of protection is used to estimate the protection really afforded to domestic producers at each stage of production, i.e., how much extra they can charge and still be competitive with imported goods. In this context, it does not matter whether the final product or the inputs used to made it were actually imported or not. What is important is that they are importable. If so, the implied tariffs should be included in the above formulas because, even if the item was not actually imported, the existence of the tariff should have raised its price in the local market by an equivalent value.

The effective rate of protection is used to estimate the protection really afforded to domestic producers at each stage of production, i.e., how much extra they can charge and still be competitive with imported goods. If the total value of the tariffs on importable inputs exceeds that on the output, the effective rate of protection is negative, i.e., the industry is discriminated against in comparison with the imported product.

The effective rate of protection reveals the extremely adverse effect of tariffs that escalate from low rates on raw materials to high rates on intermediate inputs and yet higher rates on the final product as, in fact, most countries' tariff schedules do. Less developed countries complain that such tariff schedules gravely impede their access to developed countries' markets.