Background
Nominal protection refers to the price elevation of imported goods within a country due to the imposition of tariffs. These tariffs result in a higher market price for imported goods as compared to their international price, driven by the proportional tariff rate applied.
Historical Context
Tariffs have been a widely adopted economic policy tool for centuries, aimed at protecting domestic industries from foreign competition, generating government revenue, and occasionally responding to political and strategic interests. The concept of nominal protection emerged as economies sought to quantify the impact of these tariffs on import prices.
Definitions and Concepts
Nominal Protection: The proportional increase in price of imported goods resulting from an imposed tariff. It is calculated as (1 + t) times the external price, where ’t’ is the tariff rate.
Effective Protection: Unlike nominal protection, effective protection measures the increase in value-added in the domestic production of a good, considering tariffs on all imported inputs used in its production. Effective protection might be lower than nominal protection if the parts or processes making up the final product are heavily taxed.
Major Analytical Frameworks
Classical Economics
Classic trade theory often relies on principles like Comparative Advantage, where tariffs and nominal protection can hinder optimal resource allocation on a global scale.
Neoclassical Economics
Neoclassical perspectives focus on market efficiencies and distortions caused by tariffs. Nominal protection is seen through the lens of how it affects supply and demand equilibriums.
Keynesian Economics
Keynesians would analyze nominal protection in light of its potential impacts on aggregate demand, employment and short-term economic adjustment measures.
Marxian Economics
Marxian analysis would consider how nominal protection affects capital accumulation and class relations within affected industries.
Institutional Economics
Institutional economists may evaluate how prevailing institutions and policies shape, enforce, or alter the effects and perceptions of nominal protection.
Behavioral Economics
Behavioral insights might focus on how individuals and businesses react to changes in tariffs and thus nominal protection, influenced by biases and bounded rationality.
Post-Keynesian Economics
Post-Keynesians could seek to understand how nominal protection interacts with issues of wage, income distribution, and macroeconomic stability.
Austrian Economics
Austrians might critique nominal protection from the perspective of its interference with laissez-faire principles, market signals, and entrepreneurial discovery processes.
Development Economics
Within this framework, nominal protection could be analyzed for its role in nurturing infant industries in developing nations against more advanced international competitors.
Monetarism
Monetarists are primarily concerned with the macroeconomic impacts of tariffs on monetary aggregates, potentially affecting nominal protection measurements indirectly.
Comparative Analysis
Comparing nominal protection to effective protection reveals how raw tariff rates might over or understate the true degree of economic shield for a domestic industry. Effective protection, taking into account input costs, provides a more comprehensive picture of the tariff protection’s net influence on domestic production’s competitiveness.
Case Studies
- US Steel Tariffs: Analysis of how nominal protection in the form of imposed tariffs on imported steel affected prices, industry profitability, and subsequent reactions throughout the supply chain.
- EU Agricultural Tariffs: Examination of the nominal protection provided to European agricultural products and its impacts on EU members vs imported goods.
Suggested Books for Further Studies
- Principles of Economics by N. Gregory Mankiw
- International Economics by Paul Krugman
- The Wealth of Nations by Adam Smith
- The General Theory of Employment, Interest, and Money by John Maynard Keynes
Related Terms with Definitions
- Effective Protection: The net protective effect of tariffs, factoring in costs of intermediate goods.
- Tariff: A tax imposed on imported goods to increase their market price relative to domestically produced goods.
- Trade Policy: A government’s approach to regulating international trade through tariffs, quotas, and other restrictions.
- Comparative Advantage: The economic principle whereby a country produces and exports goods that it can produce more efficiently relative to other goods.
