Effective rate of protection
Also called: ERP · Topic: International Trade Policy, WTO and Intellectual Property · NCERT: Beyond NCERT
Meaning
The effective rate of protection (ERP) shows how much tariffs really protect an industry. It looks at value added, the output price minus the cost of inputs, and not just the tariff on the final product.
ERP = (V′ − V) / V, where V is value added at free-trade prices and V′ is value added at tariff-inclusive prices.
Another form of the same formula is ERP = (t − a·tᵢ) / (1 − a), where t is the tariff on output, tᵢ is the tariff on inputs and a is the input share in output value. Cutting input duties raises ERP. An inverted duty structure, where inputs are taxed more than the output, lowers ERP and can even make it negative.
Example
A car sells for 100 at world prices and uses inputs worth 60, so V = 40. Add a 20% tariff on cars and 0% on inputs: V′ = 120 − 60 = 60. ERP = (60 − 40)/40 = 50%, far above the 20% headline tariff.
Don't confuse with
- Nominal tariff: this is the headline duty on the final product (20% in the example). ERP measures the protection given to value added, after counting duties on both output and inputs.
Related concepts
- Tariff
- Ad valorem tariff
- Specific tariff
- Compound tariff
- Mixed tariff
- Export duties
- Duty drawback
- Tariff escalation
- Tariff peak
- Bound tariff rate