Imperfect Competition and the Resource Allocative Effects of Effective Protection

Abstract

Given the importance of intermediate goods as inputs into production and in international trade flows, Corden [10] and others have argued that calculating effective rates of protection would yield more accurate information on the resource allocative effects of a given tariff structure than would calculations of nominal tariff rates. Subsequently, a number of authors have attempted to clarify the conditions under which particular measures of effective protection would be appropriate-appropriate in the sense of correctly indicating the resource allocative effects of a particular tariff structure. The principal concern has been to define an appropriate measure of effective protection when the input-output coefficients of intermediate inputs are variable. In fact, [1], [10], [11], [12], [13], [14] are but a few of the papers that have dealt with this question. A second major direction for enquiry has been the exchange rate effects of increasing or decreasing tariff protection. For example, [3], [11], [17] and [18] contributed to this literature and to the development of the concept of net effective protective rates. Recent work, including [3], [9], [11] and [19] has shed light on the affect of the existence of nontraded intermediate inputs on the formulation of an appropriate measure of effective protection. Finally [23] and [25] developed extensions of effective protection theory under general equilibrium conditions. The purpose of this note is to explore the effects of imperfect competition in input and output markets on the appropriateness of currently used measures of effective protection. Our simple contention is that market imperfections are as relevant and significant in their impact on whether or not effective protective rates will reveal the resource allocative effects of a given tariff policy as any of the factors already mentioned. To illustrate this point, we present a simple two-commodity, two-factor model in which each commodity is a fixed coefficient intermediate input into the production of the other. We assume that domestic production of importables occurs under conditions of pure monopoly. Under these conditions, we show that a tariff change leads to ambiguous results. The effect of tariff changes on the allocation of resources when factor markets are imperfectly competitive is explored in Section 2. Assuming that a labour union maintains wages in the importable goods sector at some fixed proportion above the wage rate in the production of exportables, we again demonstrate that the effects of a given tariff change on factor allocation, and production levels are uncertain.