Answer to Question #175816 in Management for MICA

Question

1. 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

The effective rate of protection (ERP) is a measure of the total effect of the entire tariff structure on the value-added per unit of output in each industry when both intermediate and final goods are imported. The rate is used to determine the protection that is actually afforded to the domestic producer at every phase of production. It means how much the domestic producers can charge and still be competitive with imported competitive products.

Placing 50% tariff will mean that the world price rise by;

$=50/100*200=100$

Thus the World price will rise by Php100 to Php 300

Value-added to the domestic market will rise from the initial Php100 to 200

Bicycle makers around the world add Php100 of value

Hence; ERP=Value added to domestic market/Original value added *100%

$ERP=100/100*100$

$ERP=100$%

The domestic bicycle maker is afforded a 100% effective rate of protection per Php of value-added.