Safeguards by Alan V. Deardorff University of Michigan 2018 PubPol/Econ 541 Safeguards by Alan V. Deardorff University of Michigan 2018

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 a non-discriminatory tariff or other non-discriminatory barrier for a limited time.)

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

Outline Small country, homogeneous product World price drop Increase in domestic cost Small country, differentiated product, Fall in foreign cost Change in preferences

World price drop Shock: Drop in the world price Output falls Imports rise P S P0 P1 M0 D M1 S1 S0 D0 D1 Q

World price drop, & tariff response Shock: Drop in the world price Output falls Imports rise Tariff t = P0 – P1 Raises price back to P0 Restores S2=S0 M2=M0 P S P2, P0 t P1 M0 ,M2 D M1 S1 S0 D0 D1 “Injury due to imports”? Output would have stayed constant, “but for” the increase in imports. Q S2 D2

Outline Small country, homogeneous product World price drop Increase in domestic cost Small country, differentiated product, Fall in foreign cost Change in preferences

Increase in domestic cost Shock: Rise in domestic cost Output falls Imports rise P S0 P1= P0 M0 D M1 S1 S0 D0 Q

Increase in domestic cost Shock: Rise in domestic cost Output falls Imports rise Tariff to restore M2=M0 Raises output part way back toward S0 Reduces demand while restoring M2=M0 P S0 P2 t P1= P0 M2=M0 M0 D M1 S1 S2 S0 D2 D0 “Injury due to imports”? Output would have fallen less, “but for” the increase in imports. Q

Outline Small country, homogeneous product World price drop Increase in domestic cost Small country, differentiated product, Fall in foreign cost Change in preferences

Differentiated Products Home Import P P* S MS P0 P0* MD(P*,P) D(P,P*) Q0 Q M0 M

Drop in Foreign Cost Home Import Shock: Drop in foreign cost MS0 P0 P0* MS1 P1 D(P,P0*) P1* D*(P*,P0) D(P,P1*) D*(P*,P1) Q1 Q0 Q M0 M1 M Shock: Drop in foreign cost Output falls Imports rise

Drop in Foreign Cost Home Import Tariff to restore M2=M0 MS0 P2= P0 P2=* P0* MS1 P1 t D(P,P0*) P1* =D*(P*,P0) D(P,P2*) D*(P*,P0) D(P,P1*) D*(P*,P1) Q1 Q0 Q M0 M1 M =Q2 =M2 “Injury due to imports”? Output would have stayed constant, “but for” the increase in imports. Tariff to restore M2=M0 Restores output to Q0

Outline Small country, homogeneous product World price drop Increase in domestic cost Small country, differentiated product, Fall in foreign cost Change in preferences

Differentiated Products Home Import P P* S MS P0 P0* D0(P,P0*) MD0(P*,P0) Q0 Q M0 M

Differentiated Products Home Import P P* S MS P1* P0 P0* P1 D0(P,P0*) MD1(P*,P1) MD0(P*,P0) D1(P,P1*) Q1 Q0 Q M0 M1 M Shock: Preference shift toward imports Output falls Imports rise

Differentiated Products Home Import P* P P2* S MS t P1* P0 P0* P2 MD2(P*,P2) P1 D0(P,P0*) MD1(P*,P1) D2(P,P2*) MD0(P*,P0) D1(P,P1*) Q1 Q2 Q0 Q M0 M1 M =M2 Tariff to restore M2=M0 Raises output part way back toward Q0 “Injury due to imports”? Output would have fallen less, “but for” the increase in imports.