Suppose that the nominal tariff rate on final good X is 7 percent and that the weighted average of the nominal tariff rates on the inputs used in producing good X is 10 percent. In this situation, the effective rate of protection (ERP) for final good industry X
A) will be greater than 10 percent.
B) will be less than 10 percent but must be greater than 7 percent.
C) will be less than 7 percent but must be greater than 0 percent.
D) can be negative.

Question

Quizplus · Accepted Answer

The effective rate of protection (ERP) can indeed be negative if the tariff on the final good is lower than the tariff on the inputs. This situation can make the domestic production of the final good less competitive compared to importing the final good directly, as the cost of inputs is artificially increased by tariffs more than the protection provided to the final good itself.

Suppose That the Nominal Tariff Rate on Final Good X