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

2. 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.)

3. 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

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

5. 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

6. 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

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

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

9. 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

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

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

12. 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

13. 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

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

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

16. 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

17. 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.