Question

1. Suppose the world price of shoes is $20 and that it takes $12 worth of leather at the free-trade world price to make a pair of shoes. Now suppose Country A levies a nominal tariff of 30% on shoe imports but allows leather to be imported duty free. What is the Effective Rate of Protection offered the shoe industry? 2. Suppose the world price of shoes is $20 and that it takes $12 worth of leather at the free-trade world price to make a pair of shoes. Now suppose Country A levies a nominal tariff of 30% on shoe imports and a 20% tariff on leather. What is the Effective Rate of Protection offered the shoe industry? Which do you think shoe producers in Country A will prefer: A tariff on shoes or a tariff on leather?

Answer 1

1.

	Firm in country A	Firm in free trade world
Shoe Price	$26 ($20 +0.30*$20)	$20
Leather input	$12	$12
value added	$14	$8

Effective Rate of Protection = (Value Added in country A- Value added in free trade)/value added in free trade

Effective Rate of Protection = (14-8)/8 = 0.75 = 75%

2.

	Firm in country A	Firm in free trade world
Shoe Price	$26 ($20 +0.30*$20)	$20
Leather input	$14.40 ($12 +0.20*12)	$12
value added	$11.60	$8

Effective Rate of Protection = (11.60-8)/8 = 0.45 = 45%

The effective rate of protection falls from 75% to 45% when tariff is imposed on leather as well. So the shoe producers in country A will prefer tariffs on shoes but will not prefer tariffs on leather.