PubPol/Econ 541
Safeguards
by
Alan V. Deardorff
University of Michigan
2016
Safeguards
• Safeguard protection is are permitted by
the WTO/GATT if an industry is
– Adversely affected, and
– The harm is caused by the imports
• (Countries are then permitted to use nondiscriminatory tariffs or other nondiscriminatory barrier for a limited time.)
2
Safeguards
• In each case below, I will show a shock
that will cause both
– Output to fall, and
– Imports to rise
• Did imports “cause” output to fall?
– No. The shock did
– Yes. “But for” the increase in imports, output
would not have fallen, or would have fallen by
less
• A tariff is shown that keeps imports constant
3
Outline
• Small country, homogeneous product
– World price drop
– Increase in domestic cost
• Small country, differentiated product,
– Fall in foreign cost
– Change in preferences
4
World price drop
P
• Shock: Drop in the
world price
S
– Output falls
– Imports rise
P0
P1
M
D
0
M
1
S1 S0
D0 D1
Q
5
World price drop,
& tariff response
P
• Shock: Drop in the
world price
S
– Output falls
– Imports rise
• Tariff t = P0 – P1
P2,P0
t
– Raises price back to P0
– Restores
P1
• S2=S0
• M2=M0
M ,M2
D
0
M
1
S1 S0
S2
D0 D1
D2
Q
“Injury due to imports”?
Output would have stayed
constant, “but for” the increase
in imports.
6
Outline
• Small country, homogeneous product
– World price drop
– Increase in domestic cost
• Small country, differentiated product,
– Fall in foreign cost
– Change in preferences
7
Increase in domestic cost
S1
P
• Shock: Rise in domestic
cost
S0
– Output falls
– Imports rise
P1= P0
M
D
0
M
1
S1 S0
D0
Q
8
Increase in domestic cost
S1
P
• Shock: Rise in domestic
cost
S0
– Output falls
– Imports rise
P2
t
P1= P0
• Tariff to restore M2=M0
– Raises output part way
back toward S0
– Reduces demand while
restoring M2=M0
M2=M0
M
D
0
M
1
S1S2S0
D2D0
Q
“Injury due to imports”?
Output would have fallen less,
“but for” the increase in imports.
9
Outline
• Small country, homogeneous product
– World price drop
– Increase in domestic cost
• Small country, differentiated product,
– Fall in foreign cost
– Change in preferences
10
Differentiated Products
Home
Import
P
P*
S
MS
P0
P0*
MD(P*,P)
D(P,P*)
Q0
Q
M0
M
11
Drop in Foreign Cost
Home
Import
P
P*
S
MS0
P0
P0*
P1
D(P,P0*)
MS1
P1*
D(P,P1*)
Q1 Q0
Q
M0 M1
D*(P*,P0)
D*(P*,P1)
M
• Shock: Drop in foreign
cost
– Output falls
– Imports rise
12
Drop in Foreign Cost
Home
Import
P
P*
S
MS0
P2= P0
P1
P2=*P0*
t
D(P,P0*)
P1*
D(P,P2*)
D(P,P1*)
Q1 Q0
Q
=Q2
• Tariff to restore M2=M0
– Restores output to Q0
MS1
M0 M1
=M2
=D*(P*,P0)
D*(P*,P0)
D*(P*,P1)
M
“Injury due to imports”?
Output would have stayed
constant, “but for” the increase
in imports.
13
Outline
• Small country, homogeneous product
– World price drop
– Increase in domestic cost
• Small country, differentiated product,
– Fall in foreign cost
– Change in preferences
14
Differentiated Products
Home
Import
P
P*
S
MS
P0
P0*
D0(P,P0*)
MD0(P*,P0)
Q0
Q
M0
M
15
Differentiated Products
Home
Import
P
P*
S
MS
P1*
P0*
P0
P1
D0(P,P0*)
Q1 Q0
D1(P,P1*)
Q
MD1(P*,P1)
MD0(P*,P0)
M0 M1
M
• Shock: Preference shift
toward imports
– Output falls
– Imports rise
16
Differentiated Products
Home
P
S
P0
P2
P1
P*
P2*
Import
MS
t
P1*
P0*
D0(P,P0*)
D2(P,P2*)
D1(P,P1*)
Q1Q2Q0
Q
• Tariff to restore M2=M0
– Raises output part way
back toward Q0
MD2(P*,P2)
MD1(P*,P1)
MD0(P*,P0)
M0 M1
=M2
M
“Injury due to imports”?
Output would have fallen less,
“but for” the increase in imports.
17