A rehabilitation of effective protection

Abstract

This note argues that the declining interest in the theory of effective protection is not justified, shows how the existence of intermediate goods affects the basic economics of tariffs, gives a simple proof of the symmetry of export subsidies and import duties with intermediate goods, and then applies the theory to analyze a potential route to free trade that could have minimal objections from special interests.

Keywords:

• effective production
• intermediate goods
• Lerner–Ricardo symmetry

JEL Classification:

• F11
• F13

Acknowledgement

The author wishes to thank Ed Tower for helpful comments.

Notes

1. Piermartine (2004) gives many examples of other export taxes, such as logs in the Philippines, cotton in Pakistan, or hides and skins in India.

2. Ruffin (2002, 744) points out Ricardo anticipated the symmetry result with an elegant statement suggesting a general equilibrium view of the economy.

3. See the interesting comments in Ethier (1977).

4. This assumption is for notational simplicity and is not critical (Ruffin l971).

5. Subscripts on summation signs will only be used when clarification is required.

6. See ‘India's iron ore export tax scares off Chinese buyers’, Reuters, India, March 14, 2007.

7. Ruffin (1979) formally shows the well-known intuitive result that, holding the money supply constant, a uniform export subsidy offset by a uniform import duty results in an appreciation of the currency by that amount, compared with zero subsidies and tariffs. This corresponds precisely to the impact on the shadow values λ and μ as those are in units of foreign currency.

8. This result was noted in Ruffin (1971, 95).