Cost of Protection: Where Do We Stand?

Abstract

Economists measure the cost of protection in terms of static efficiency, growth rates and firm- or industry-level productivity effects. This survey is devoted exclusively to the literature on the static efficiency. A key preliminary point to note is that estimates in this literature are not derived econometrically from pre- and post-liberalization data. Instead, they are based on simulations of partial- or general-equilibrium models that are parameterized using estimates from the literature and calibrated around a pre-liberalization base year. I. “Small ” Triangular Losses The natural starting point for our purpose is Harry Johnson (1960) whose central message was that static costs of protection, measured as a proportion of GNP, are inevitably low. Tariffs give rise to the triangular efficiency losses whose magnitude can be summarized in the formula: (1) Cost of protection as a proportion of GNP = () α.ητ 2 where α denotes the imports-to-GNP ratio at the tariff-ridden equilibrium, η the absolute value of the arc elasticity of demand for imports as we move from protected to free-trade equilibrium, and τ the ad valorem tariff rate at the domestic price. Because α is usually well below 1, estimates of η revolve around 1 or 2, and τ 2 is the square of a number less than 1, calculations based on this

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