So you think we should tax raw materials...

Day 340, 15:05 • Published in USA USA • by Vincent Garibaldi

The thing is, if we raise import taxes on raw materials, we will be putting our manufacturing at a disadvantage. Here's why.

The Effective Rate of Protection (ERP) is found by the following formula:
ERP😞TP*-tp😉/V

T= Tariff on finished product
P*= International price of finished product
t= tariff on intermediate product
p*= international price of intermediate product
V= Domestic Value Added
V😛-p*
P😃omestic Price of finished product

What this boils down to is a higher tariff on intermediate products leads to a lower ERP, since it puts our domestic manufacturers at a disadvantage to foreign ones.

An example with our weapons industry, (eRepublik's simplified economy lends itself to pure economics so well!)

I don't want to bother going through all the countries' markets so I'll use Spain as a trading partner rather than actual international prices.

With Q1 weapons, Weapons are the finished product, and Iron is the intermediate product. The variable have the following values:

T= 60%
P*= 1.72 USD
t= 0%
p*= 0.21 USD
V= 2.82

Thus,
ERP😞(.6*1.72)-(0*.21))/2.82

ERP=36.6%

If however we change the tariff on iron to 100%

ERP😞(.6*1.72)-(1*.21))/2.82

ERP=29.1%

So, we can see that while your aim is to secure our access to weapons in war time, through ensuring access to iron supply, the knock on effect will be a disadvantage to our weapons manufacturing sector, which could in turn hinder our access to weapons.

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