AP MacroeconomicsInternational Trade & Finance
Effective Rate of Protection
The effective rate of protection measures how much a tariff structure raises an industry's value added per unit, accounting for tariffs on both outputs and imported inputs.
The nominal tariff on a finished good understates true protection because firms also pay tariffs on imported inputs. The effective rate compares protected value added (output price plus output tariff, minus input costs inflated by input tariffs) to free-trade value added. If input tariffs exceed output tariffs, effective protection can be negative, meaning the policy actually disadvantages the domestic industry.
Formula / Example
ERP = (V' - V) / V, where V = free-trade value added and V' = value added with tariffs