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The theory of effective protection, as developed and applied in the last decade is formulated around the case of fixed input coefficients, where the output level is determined by short-run supply constraints on inputs. For that case and that case alone, the protection on value added is a correct indicator of the economic cost of the tariff. Attempts to adapt the definition to other types of production functions that cannot succeed unless one starts from the fundamental decision-making process of the firm. In line with received economic theory, the article uses a profit maximizing model for the firm to allow for simultaneous changes in output price and marginal cost which reflect the changes in tariffs on both the output and the input. With particular reference to the Cobb Douglas and CES production functions, the article develops mathematical expressions for the changes in domestic production and in the level of labor input. These results are then used to formulate and compare alternative definitions of effective protection that is the proportional change in value added, domestic output, labor input and profits. For each variable both continuous and discrete cases are considered

Estimates of elasticities in international trade have been derived by a variety of methods, one of which employs the effect of tariff changes on the volume of trade to get import-demand elasticities. While the nominal tariff refers to the rate published in the country's tariff schedule, the effective protective rate is defined as the percentage increase in value added per unit in an economic activity, which is made possible by the tariff structure relative to the situation in the absence of tariffs but with the same exchange rate. For while nominal tariffs apply to the total value of imports, they protect only the portion of that value produced in the home country. At the same time, the level of protection accorded the production of a final good is also affected by the level of duty on imported inputs used in the production process. Industrial countries levy higher tariffs on finished manufactures than on raw materials and intermediate goods. Correspondingly the effective rates on manufactures are considerably higher than their nominal counterparts.

In his celebrated study of "The structure of U.S. foreign trade," Wassily Leontief came to the surprising conclusion that the U.S. specializes in labor-intensive lines of production. It would thus seem that this country resorts to foreign trade in order to economize its capital and dispose of its surplus labor. Since the U.S. is known to have a far higher capital/labor ratio than its trading partners, this finding contradicts the basic Ohlin model which explains international trade in terms of relative factor endowments. Under it a country would export those products which are intensive in its relatively abundant resource and import those which are intensive in its relatively scarce resource. A wealth of statistical and theoretical material has been published in the past decade in an attempt to reconcile the empirical finding with the Heckscher-Ohlin theorem. This paper is devoted to an empirical examination of Leontief's hypothesis concerning the superiority of U.S. labor. The problem does not easily lend itself to statistical measurement because of the difficulty of isolating the quality of labor from other factors affecting productivity.

The paper utilizes data from the two most recent General Agreement on Tariffs and Trade negotiations, conducted in 1955 and 1956, to examine the effect of the U.S. tariff-reduction program on the prices and volume of imports subject to tariff concessions. Prices of imported commodities, with which are concerned here, experienced violent fluctuations during 1948-1952, but exhibited a high measure of stability thereafter. The period since 1953 is therefore well suited for examination of the effect of tariff changes on import prices. Furthermore, the mid-1950's witnessed a return of production conditions to normal in Western Europe and Japan. Consequently, price and quantity changes occurring during the second half of the decade would have a better predictive value than earlier changes. Certain tentative policy conclusions can be drawn from the preceding analysis. First, the data point to a limitation on our ability to combat inflation of the cost-push variety through tariff concessions of the general magnitude undertaken in the recent past. Second, given a few simplifying assumptions, researchers are in position to set an approximate upper limit on the gain in welfare and loss of employment from the 1956 tariff concessions.

This article focuses on the establishment of the European Free Trade Area Association (EEFTA) by the outer members of the European Economic Community (EEC) in response to tariff reductions and quota increases within the EEC. Its members, frequently described as the Outer Seven are Great Britain, Sweden, Norway, Denmark, Austria, Switzerland and Portugal. The new scheme is not seen as a permanent arrangement. Rather it will give the seven countries a certain compensation for the losses they are suffering from the establishment of the Common Market. There are differences between the EEC and EFTAA. The Common Market, a customs union, will eventually have a common tariff against outsiders. The EFTAA is planned as a looser organization with much more modest and temporary goals. Since the Outer Seven plan to use their union as a stimulus for a wider agreement in Europe, their integration schedule corresponds roughly to that of the EEC. It will be somewhat faster than that of the Common Market, with the first step of a 20 per cent tariff cut to be taken in July 1960. Regional integration can affect quotas imposed on intra-union trade as well as those imposed on imports from outside countries. Both the EFTAA and the EEC call for abolition of quotas within their respective areas. There are factors to consider in the integration of the two unions, first, is the degree of monopoly existing prior to integration and on their ability to enforce proper rules of competition, second, the effect on international investments and third, the opportunities for economies of scale provided by integration.

The article examines empirically the extent to which U.S. foreign trade stands to be affected by moves toward European economic integration. Because foreign trade plays a relatively unimportant role in the U.S. economy, the impact of European integration on aggregate production in the U.S. is not likely to be significant. This does not mean that no one industry will be seriously affected. But to study the impact of the Common Market on individual industries in the U.S., one would need to examine the share of foreign trade in total production or consumption of products which have been discussed in the article to be seriously affected. Studies of regional integration must usually be couched in partial equilibrium terms, and the increasing emphasis on regional unions will undoubtedly result in greater use in research of the commodity composition of trade. A free trade area, which does not require adherence to a common tariff, may not be as discriminatory against nonmember nations as a customs union. In addition to keeping the Community's tariff low in the interest of world trade, mutual concessions would help to minimize discrimination against U.S.

The article presents a further comment on the article "Windfall Income and Consumption," by the author. My original paper pointed to the incomparability of the U.S. and Israeli data. References to the "availability of goods in the market" and the possible earmarking of the restitution receipts "for future consumption" alluded in part to the phenomena which researcher Ronald Bodkin discusses here. They were hypothetical then and remain so now. Bodkin makes them explicit but sheds no light on the magnitude of their effect. Suppositions are not an adequate substitute for empirical measurements.