Assume the United States is a large consumer of steel that is able to influence the world price. Its demand and supply schedules are respectively denoted by DU.S. and SU.S. in Figure 4.2. The overall (United States plus world) supply schedule of steel is denoted by SU.S.+W.
Figure 4.2. Import Tariff Levied by a "Large" Country ?
-Suppose that the production of a $30,000 automobile in Canada requires $10,000 worth of steel.The Canadian nominal tariff rates for importing these goods are 25 percent for automobiles and 10 percent for steel.Given this information, the effective rate of protection for the Canadian automobile industry is approximately
A) 15 percent.
B) 32 percent.
C) 48 percent.
D) 67 percent.

Question

Assume the United States is a large consumer of steel that is able to influence the world price. Its demand and supply schedules are respectively denoted by DU.S. and SU.S. in Figure 4.2. The overall (United States plus world) supply schedule of steel is denoted by SU.S.+W.
Figure 4.2. Import Tariff Levied by a "Large" Country  ?
-Suppose that the production of a $30,000 automobile in Canada requires $10,000 worth of steel.The Canadian nominal tariff rates for importing these goods are 25 percent for automobiles and 10 percent for steel.Given this information, the effective rate of protection for the Canadian automobile industry is approximately
A) 15 percent. 
B) 32 percent. 
C) 48 percent. 
D) 67 percent.

Quizplus · Accepted Answer

The effective rate of protection (ERP) takes into account not only the nominal tariff on the final good but also the tariffs on the inputs. It is calculated as: $$ERP = \frac{(V_{a} + T_{a}) - (V_{i} + T_{i})}{V_{a} - V_{i}} \times 100\% $$ where $V_{a}$ is the value added by the domestic industry (in this case, $20,000, which is $30,000 - $10,000), $T_{a}$ is the tariff on the final good (25% of $30,000 = $7,500), $V_{i}$ is the cost of imported inputs ($10,000), and $T_{i}$ is the tariff on the inputs (10% of $10,000 = $1,000). Plugging these values in gives: $$ERP = \frac{($20,000 + $7,500) - ($10,000 + $1,000)}{$20,000 - $10,000} \times 100\% = \frac{$26,500 - $11,000}{$10,000} \times 100\% = 155\%.$$ The effective rate of protection thus measures the percentage increase in value added by the domestic industry due to the tariff structure, which in this case is 155%. However, this calculation seems to have been misunderstood in the context of the provided options, suggesting a mistake in the calculation process. The correct approach to find the effective rate of protection should focus on how tariffs affect the added value in percentage terms, considering the tariffs on both the final product and the inputs. The correct calculation should reflect how the tariffs effectively protect the domestic industry by comparing the increase in production cost due to tariffs on the final product and inputs. Given the options and the typical way to calculate ERP, it seems there was a mistake in the initial explanation. The correct calculation is: $$ERP = \frac{25\% - (10\% \times \frac{10,000}{30,000})}{1 - (10\% \times \frac{10,000}{30,000})} = \frac{25\% - 3.33\%}{1 - 3.33\%} = \frac{21.67\%}{96.67\%} \approx 22.4\%.$$ This calculation aims to show the additional protection the automobile industry receives after accounting for the cost of inputs and tariffs. However, the correct answer based on the options provided and the typical formula for calculating the effective rate of protection seems to have been miscommunicated in the initial response. The correct approach involves comparing the nominal protection of the final product and the input costs, adjusted for tariffs, to determine the net protective effect on the domestic industry's value added.

Assume the United States Is a Large Consumer of Steel