effective rate of protection

Rate of Effective Protection

The added value to a domestically produced good or service resulting from a tariff that keeps out (or makes more expensive) foreign goods and services. That is, because the tariff make foreign goods and services more expensive than they otherwise would be, domestic goods and services are not forced to cut their own prices, which adds value and results in higher profits.

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effective rate of protection

the real amount of PROTECTION accorded to domestic suppliers of a final product when a TARIFF is applied to a competing imported final product (see IMPORTS), but either no tariff, or a lower rate of tariff, is applied on FACTOR INPUTS that are imported to produce that product. For example, assume that initially the same domestic final product and imported final product are both priced at £100. Assume, further, that the price of the domestic product is made up of 50% value added by domestic inputs and 50% by imported raw materials. If an ad valorem tariff of 10% is now applied to the imported final product, its price will increase to £110. If no tariff is applied to imported raw materials, however, then the import price of these will remain at £50. This allows domestic VALUE ADDED (and prices) to increase by up to £10, with the domestic final product still remaining fully competitive with the imported final product. The effective rate of protection accorded to domestic suppliers is thus 20% (that is, £10 additional value added/£50 existing value added). See NOMINAL RATE OF PROTECTION.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005