Webinars
A Generalization of the Concept of Effective Rate of Protection (ERP) in a SAM Context
Jueves, 25 de Marzo de 2021
“The concept of ERP derives from the fact that a tariff on imports of a particular commodity represents a subsidy to a domestic activity because it allows domestic producers to charge more than the world price for the protected commodity. However, the tariff also represents a tax on other activities to the extent that their input prices are higher than free trade prices. It follows that the net effects tell us whether an activity has benefited, and by how much, from a particular tariff structure; a positive ERP indicates that the tariff system allows value added to be greater than in a free trade situation, whereas a negative ERP suggests that a system of protection penalizes the activity by reducing its value added. A ranking of ERPs is an indicator of which activities would be hardest hit if a movement occurred towards free trade. As opposed to nominal tariffs, which focus only on output prices and government revenue, effective rates have a direct bearing on the allocation of resources. The assumptions underlying the estimations of ERP have been discussed by several authors. We will review their assumptions below and discuss how they operate in a SAM context, and how they differ from the traditional estimates based on I-O models. In this paper we show that in an estimation of ERP in a SAM context, the numerical value is the same as if it were estimated in an I-O context, but the trade elasticity of substitution no longer plays a determining role in the value of the ERP. Instead, we have to assume that domestic producers reduce their prices in the same proportion as the change in import prices in such a way that market shares between domestic and imported goods remain constant. In other words, when we move beyond the traditional I-O model, where input substitutability is ruled out, to the more general case where it is allowed for, we have to assume that domestic producers reduce their prices in the same proportion as imports. To better grasp this outcome, we discuss our results in a fix-price model, which can always be seen as a special case of a flex-price model, as long as we ensure that commodity prices are determined exclusively on the supply side of the economy. In other words, staying as fix-price model, we allow for some degree of substitutability between domestic and imported goods. To organize our methodological discussion, we estimate the value of ERP for the Mexican case, and analyze how tariffs on imports as well as domestic taxation interact.”
A Generalization of the Concept of Effective Rate of Protection (ERP) in a SAM Context
