Trade Protection, and the Political Economy of (trade) Policy Reform Lecture Notes 11 Part IIA Paper 4: Economic Development Development Theory and Applications Sanjay Jain Michaelmas graded A in this work

Trade Protection • Import Tariffs (and export subsidies) • Quotas • Voluntary Export Restraints • Non-Tariff BarriersFigure 12.3 Import Substitution and the Theory of ProtectionMeasuring the Extent of Trade Protection • Tariff Structure and Effective Protection – Nominal rate of protection – Effective rate of protectionMeasuring the Extent of Trade Protection Nominal Rate of Protection • NRP = (p d – p w)/p w where p w and p d are, respectively, the world price and the domestic price of the good. • When there is a tariff on imports, e.g., an ad valorem tariff rate of t, then p d = p w(1+t), so then: NRP = [p w(1+t) - p w)]/p w = p w.t/p w = t. Measuring the Extent of Trade Protection Effective Rate of Protection ERP = (v d – v w)/v w where v w and v d are the value added when the good and its inputs are priced, respectively, at world prices and at domestic prices, i.e., v w = p w - C w Similarly, v d = p d – C dNominal and Effective Rates • For example, suppose that automobiles sell in world markets for $8,000, and they are made from factors of production worth $6,000. – The value added of the production process, p w – C w is $8,000 - $6,000 = $2000 • Suppose that a country puts a 25% tariff on imported autos so that domestic auto assembly firms can now charge up to $10,000. – Now, p d – C d = $4000.