Revisiting the Effective Rate of Protection in the Late Stages of Chinese Industrialisation

• Author: David S. Jacks,Hong Ma,Bo Chen
• DOI: http://doi.org/10.1111/twec.12408
• Date: 01 February 2017
• Published date: 01 February 2017

Revisiting the Effective Rate of Protection

in the Late Stages of Chinese

Industrialisation

Bo Chen

1

, Hong Ma

2

and David S. Jacks

3

1

School of Economics, Huazhong University of Science and Technology, Wuhan, China,

2

Department of

Economics, Tsinghua University, Beijing, China and

3

Department of Economics, Simon Fraser

University, Burnaby, BC, Canada

1. INTRODUCTION

RECENT experience with the global financial crisis has called into question the role of

global imbalances in exacerbating financial fragility and, thus, the prospect of generating

future crises (Taylor, 2014). Generally, this perspective emphasises policy distortions, particu-

larly those in China and the United States, which gave rise to unprecedented current account

surpluses and deficits, respectively (Ferguson and Schularick, 2007). In the case of China, par-

ticular concern has been expressed with respect to export promotion through the use of an

undervalued nominal exchange rate and accommodative trade policy. Leaving aside considera-

tion of the exchange rate, economists have long struggled with developing summary measures

of protectionism as statistics such as the simple or value-weighted averages of tariffs have

long been known to be theoretically unsound and usually plagued by serious bias (Rodriguez

and Rodrik, 2001).

In this paper, we revisit the effective rate of protection (ERP), arguing that this insightful

but at times problematic approach is increasingly relevant in world economy predominated by

trade in tasks and in value added (Johnson and Noguera, 2012). In particular, we extend the

conventional framework of the effective rate of protection (Corden, 1966) by relaxing its most

binding assumptions. First, we decompose the incidence of tariffs on import demanders and,

from there, estimate the pass-through to domestic producers. Second, we conceptually incor-

porate multiple stages of production and, from there, capture the iterated use of intermediate

inputs using elements of the inverse Leontief matrix as measures of cumulative input inten-

sity. At the same time, we show that our new measure of the effective rate of protection

retains the most attractive feature of the conventional measure, namely its ease of application

to readily obtainable data.

Our next step is to confront the theory with data by applying our new measure to China in

the period from 1992 to 2010. Naturally, China is an interesting case study for a few reasons.

First, this period marks China’s transition from relatively limited international engagement to

its present role as the world’s largest exporter and the world’s second largest importer. Sec-

ond, a critical part of China’s miraculous growth in this period has not simply been interna-

tional trade, but rather the degree to which China has been able to embed itself at the very

centre of the global supply chain. In this case, multiple and well-articulated stages of produc-

tion as well as the repeated use of the same intermediate inputs are more common than not.

Thus, a comparison of our measure of the effective rate of protection with more conventional

ones can help us understand the degree of bias induced by maintaining their more restrictive

©2016 John Wiley & Sons Ltd

424

The World Economy (2017)

doi: 10.1111/twec.12408

The World Economy