Tariffs, Intermediate Goods, and Domestic Protection

Abstract

The recognition of imported intermediate goods has resulted in a popular new measure of domestic protection that takes into account the tariffs on material inputs as well as the tariff on final output.' This new measure, called the effective protective tariff rate or simply effective tariff, turns out to be zero if the tariffs on intermediate goods wipe out the apparent advantages of the tariff on final output. With the aid of the effective tariff concept, investigators have discovered many interesting facts about the U. S. tariff structure: for example, the effective tariff on Ingots and Steel Forms is ten times as high as the nominal rate; the effective tariff on Paper and Paper Products is almost zero; and the rate on Agricultural Machinery is negative.2 This new theory of tariffs, as G. Basevi [3] and W. M. Corden [5] refer to the effective tariff, appears to have increased our empirical knowledge of the extent of protection. Yet, the theoretical basis for the effective tariff rate has not been made clear. All the studies use an input-output model that is, as Harry Johnson [7] has admitted, too restrictive for most analytical purposes. And without a simple theory of trade in intermediate goods to guide them, the authors of these studies can hardly be blamed for falling back on familiar tools. The purpose of this paper is to develop a simple approach to the pure theory of trade in intermediate goods that can be used to answer some analytical questions raised by the concept and measurement of the effective tariff rate. It is hoped that the approach will be useful for other purposes as well. At the outset, we should note that extravagant claims have not been made for the effective tariff rate concept. The various writers have claimed that the new measure is better than nominal tariff rates and this claim will not be disputed here. But any measure that is of potential use to policy makers must be examined to determine its positive and normative content. I think it is fair to say that virtually nio attempt has been made to do this. Indeed, the effective tariff rate concept has not even been defined in a general equilibrium context and, as a result, the current measure does not always measure what it is supposed to. Sections I, II, and III contain an extensive discussion of a simple small country model in which the effective tariff concept has a solid theoretical foundation, but in which the current measure-called the Barber-Johnson-Balassa formula-is valid only for a special case. The crucial assumption of this model is that imported intermediate goods cannot be produced domestically. In Section IV, it is shown that when this crucial assumption is relaxed the effective tariff concept loses certain desirable properties. Finally, Section V summarizes the argument and draws * The author is assistant professor of economics at Washington State University. He is indebted to his colleague Thomas A. Lowinger for valuable discussion of a previous version of this paper and to the Bureau of Economic and Business Research of Washington State University for financial support. He also wishes to thank Millard Hastay of Washington State for suggesting improvements in the manuscript. I This new measure was discovered by Barber [21 and developed by Balassa [1], Basevi [3], Corden [41 [51, and Johnson [7]. 2 These estimates are taken from Balassa [11.

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