Notes and Comments An Intertemporal Calculation of Effective Rates of Protection for South Africa¹

Abstract

2) THE PURPOSE OF THIS STUDY is to calculate rates of effective tariff protection for South Africa for two points in time. This is of interest for a number of reasons. Firstly, there has so far been no published calculation of effective rates of protection for South Africa. Secondly, it is important to know how nominal rates of protection change over time compared with changes in effective rates. Frequently, the structure of nominal protection is so complex that the ultimate protection accorded to industry cannot be ascertained. It is therefore advantageous to have some knowledge of effective tariff rates in evaluating and rationalizing commercial policy. Finally the determination of how effective rates have changed through time is an important first step in assessing the influence of effective tariff rates on resource allocation, an area where there remains an important gap in the effective protection literature.Economists have long realized that nominal tariff rates do not provide an accurate indication of the influence of protective policy on resource allocation. However, it was only in the 1950s that the concept of effective protection was conceived and a satis factory analytic foundation remained undeveloped until the mid-1960s. Since then the theory and application of effective protection has commanded the attention of an increasing number of economists, effective tariff rates have been computed for many countries, both developing and developed, and the underlying theory has been extended. The theory of effective protection provides an understanding of how nominal tariff rates affect a country's pattern of production. Effective protection can be most simply defined as the proportionate change in the value added of a process due to the tariff structure. A simple example should serve to illustrate the difference between nominal and effective rates. Let us assume that a country can manufacture shoes at a world price of $10 a pair; $8 of inputs such as leather and buckles are required per pair, and the value added by labour and 1975 SAJE v43 (3) p371 capital in the final stage of manufacture is $2 per pair. To simplify, assume that the prices of the non-labour and non-capital inputs are equal to their world prices. The government of the country now decides to place a nominal tariff of 20 per cent on shoes, and 10 per cent on other traded goods. This raises the price of shoes to $12 and other inputs to $8.80 per pair. This means that the shoe manufacturing process can now spend $3.20 per pair on labour and capital. The theory of effective protection infers that given a nominal tariff of 20 per cent on the final good with a nominal tariff of 10 per cent on other traded inputs, the effective tariff protection given to the shoe manufacturing process is 60 per cent. The effective rate of protection f j can be defined as the proportionate increase in value added in an industry due to the tariff' structure, -relative to what the value added would have been in the absence of tariff protection. Then where V' j is the va...

Competition Law and Economic Regulation

“…Its calculation depends not only on the tariff on the final product but also on the input tariff and input coefficient (Corden, 1966). It is widely used as a measure of understanding how nominal tariff rates affect a country's pattern of production (Holden and Holden, 1975). Various studies (Edwards, 2006;Flatters, 2005;Holden, 2001;Holden and Holden, 1975) analysing tariffs show that the ERP is a useful tool for assessing the magnitude of protection.…”

“…It is widely used as a measure of understanding how nominal tariff rates affect a country's pattern of production (Holden and Holden, 1975). Various studies (Edwards, 2006;Flatters, 2005;Holden, 2001;Holden and Holden, 1975) analysing tariffs show that the ERP is a useful tool for assessing the magnitude of protection. They conclude that effective rates of protection are useful when the structure of tariffs is undergoing change.…”

Has South Africa Liberalised Its Trade?

“…where V j * is the domestic value added to final product j at tariff distorted prices, V j is the value added under free trade, t j is the tariff on outputs, t i is the tariff on inputs and a ij is the quantity of intermediate input i used in the production of one unit of j. ERP therefore increase with a rise in output tariffs, a decline in intermediate good tariffs and a rise in the share of intermediate inputs in total production. Although subject to severe methodological limitations (Holden and Holden, 1975;Holden and Holden, 1978;Greenaway and Milner, 1993;Anderson, 1998;Holden, 2001), ERP are still widely used to evaluate the structure of protection and therefore the potential for resource allocation across sectors (Greenaway and Milner, 2003). Within South Africa the debate remains inconclusive, largely due to a number of methodological differences in the estimates of FV and RH.…”

The Substitution Problem in the Theory of Effective Protection

“…As an aside, with calculated ERPs of up to 231% (Holden and Holden, 1975), input substitution is hypothesized to cause significant errors in ranking these ERP changes (Holden and Holden, 1978a). Thus, even in the face of the index problem induced by these high levels of effective protection, the inaccurate ranking of effective protection changes was still found to statistically reflect the actual resource flows induced by the protection scheme.…”