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Inverted Duty Structures and the Paradox of Negative Effective Protection in India, 2000–2014

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  • Kanika Pathania
  • Aditya Bhattacharjea

Abstract

In recent years, sections of Indian industry have complained that they are being harmed by an inverted duty structure (IDS). That is, tariffs on their imported inputs are higher than that on their outputs. In this article, we argue that the concept of effective rate of protection (ERP), despite its limitations in the context of general equilibrium theory, provides an appropriate tool for analysing this issue. We outline the theory underlying the calculation of ERP and its relationship with IDS. We then offer new estimates of ERP for the period 2000–2014 using a data source that, unlike those used by earlier authors, enables us to construct a time series on ERP for each sector, using different tariff rates applied by India on imports from different countries. We find many instances of IDS but none of them results in negative ERP. Cases of negative ERP are found in a few sectors and years for which the counterfactual value added under free trade is negative. We discuss some possible explanations for this phenomenon. Finally, we show statistically and econometrically that, in line with theoretical expectations, ERPs are positively related to the degree of tariff escalation. JEL Codes: F13, F14, O24

Suggested Citation

  • Kanika Pathania & Aditya Bhattacharjea, 2020. "Inverted Duty Structures and the Paradox of Negative Effective Protection in India, 2000–2014," Foreign Trade Review, , vol. 55(2), pages 139-167, May.
    • Handle: RePEc:sae:fortra:v:55:y:2020:i:2:p:139-167
    DOI: 10.1177/0972266119894131
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    References listed on IDEAS

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    Cited by:

    1. Huria, Sugandha, 2020. "Gains from Free Trade Agreements: A Theoretical Analysis," MPRA Paper 109815, University Library of Munich, Germany.
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    3. Aditya Bhattacharjea, 2022. "Industrial policy in India since independence," Indian Economic Review, Springer, vol. 57(2), pages 565-598, December.
    4. Aditya Bhattacharjea & Kanika Pathania & Uday Bhanu Sinha, 2022. "Duty Inversion and Effective Protection: A Theoretical Analysis," Working papers 330, Centre for Development Economics, Delhi School of Economics.

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    More about this item

    Keywords

    Effective rate of protection; inverted duty structure; preferential trade agreements; tariff escalation; tariff inversion; trade policy;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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