Answer to Question #175814 in Economics for MICA

Question

What would be the effective rate of protection on bicycles in China if China places a 50 percent tariff on bicycles, which have a world price of Php200, and no tariff on bike components, which together have a world price of Php100?

Answer 1

EFFECTIVE LEVEL OF PROTECTION - the real level of protection provided to domestic suppliers of finished goods in a situation where competing imported finished goods are subject to a tariff, while the imported factors necessary for the domestic production of such products are either not tariffed or a lower interest rate is used. For example, suppose that the same domestically produced and imported products cost 200 pesos. Let us further assume that the price of a domestic product consists of 50% of the value added by domestic producers and 50% of the value of imported raw materials. If the imported finished product is now taxed at 50%, the price will increase to 300 pesos. However, if there is still no tariff on imported raw materials, then its price will remain equal to 150 pesos. As a result, domestic value-added (and price) will increase by 50 pesos, while domestic finished goods will remain fully competitive with imported ones. Thus, the effective level of protection afforded to domestic suppliers is 33% (ie 50 pesos of additional value / 150 pesos of previously added value).