Question

True or False: When material inputs or intermediate products enter a country at a high duty while the final imported product is protected by a low duty, the nominal tariff rate on the final product overstates the effective rate of protection

Answer 1

Answer:

The correct answer is True.

Explanation:

If the input tariff is small compared to the tariff for finished products, the nominal tariff rate will underestimate the effective degree of protection. For example, suppose that the tariff on imported parts is 0%, the tariff on finished products is 10%, and 80% of the cost of the product is imported resources. An effective level of protection will be: Therefore, a nominal tariff rate of 10% underestimates the effective degree of protection of 50%.

However, the tariff for imported components was 20%, while the tariff for finished products was 10%, and import units accounted for 80% of the cost of the product. Now the effective level of protection will be: In this case, the nominal tariff rate of 10% exaggerates the effective level of protection of -30%.

Thus, the effective level of protection will be greater than the nominal tariff if the nominal tariff for finished products exceeds the input tariff. The effective level of protection will be less than the nominal tariff if the nominal tariff for finished products is less than the input tariff.