Agreement On Safeguards

UNIVERSITY OF PETROLEUM AND ENERGY STUDIES
COLLEGE OF LEGAL STUDIES
INTERNATIONAL ECONOMIC LAW
PROJECT: AGREEMENT ON SAFEGUARDS
Submitted to:
Submitted by: MR.
SUJITH SURENDRAN
Asst Prof. (COLS)
U.P.E.S
AJEET SINGH VERMA

SECTION A (ROLL NO. 12)
AGREEMENT ON SAFEGUARDS
Page 1
INDEX
ACKNOWLEDGEMENT.3
CHAPTER 1....4
INTRODUCTION
CHAPTER 28
NEED FOR SAFEGUARDS
CHAPTER 3...12
DISCRIMINATORY IMPACT
CHAPTER 4...14
ARTICLE XIX AND THE AGREEMENT ON SAFEGUARDS
CHAPTER 5...17
THE POSITIVE ECONOMICS OF SAFEGUARDS MEASURES AND ITS
IMPLICATIONS
CHAPTER 622
THE POLITICAL RATIONALE FOR SAFEGUARDS
CHAPTER 6 ...27
CONCLUSION
BIBLIOGRAPHY...29
Page 2
ACKNOWLEDGEMENT
This project is an outcome of intensive research and study, with the hard work put in by many
people who helped me to complete this project.
My project is the combined outcome of the manual research done in the library and data
collected through internet, where I found out valuable material on this project.
I would like to thank Mr. Sujith Surenderan, for his support and his guidance. Thanks to the
college and library staff, for showing faith in me and providing me the opportunity to work on
this topic. I am also very grateful to classmates for their timely support in filling up the loop
holes and issues that I faced.
Page 3
CHAPTER 1
INTRODUCTION
The Agreement on Safeguards (SG Agreement) sets forth the rules for application of safeguard
measures pursuant to Article XIX of GATT 1994. Safeguard measures are defined
as emergency actions with respect to increased imports of particular products, where such
imports have caused or threaten to cause serious injury to the importing Member's domestic
industry. Such measures, which in broad terms take the form of suspension of concessions or
obligations, can consist of quantitative import restrictions or of duty increases to higher than
bound rates.
Major guiding principles of the Agreement with respect to safeguard measures are that such
measures must be temporary; that they may be imposed only when imports are found to cause or
threaten serious injury to a competing domestic industry; that they be applied on a non-selective
(i.e., most-favored-nation, or MFN, basis; that they be progressively liberalized while in effect;
and that the Member imposing them must pay compensation to the Members whose trade is
affected.
The SG Agreement was negotiated in large part because GATT Contracting Parties increasingly
had been applying a variety of so-called grey area measures (bilateral voluntary export
restraints, orderly marketing agreements, and similar measures) to limit imports of certain
products. These measures were not imposed pursuant to Article XIX, and thus were not subject
to multilateral discipline through the GATT, and the legality of such measures under the GATT
was doubtful. The Agreement now clearly prohibits such measures, and has specific provisions
for eliminating those that were in place at the time the WTO Agreement entered into force.
In its own words, the SG Agreement, which explicitly applies equally to all Members, aims to:
(1) clarify and reinforce GATT disciplines, particularly those of Article XIX; (2) re-establish
multilateral control over safeguards and eliminate measures that escape such control; and (3)
encourage structural adjustment on the part of industries adversely affected by increased imports,
thereby enhancing competition in international markets.
Page 4
The Uruguay Round Agreement on Safeguards represents an effort to improve the GATT
safeguards (SG) process and thereby encourage countries to choose this option over antidumping
and gray-area measures such as bilaterally negotiated export restraints. This paper offers a first
detailed analysis of the way safeguards initiated under the agreement have been implemented in
practice. We examine the actual trade effects of 14 safeguard actions, covering 85 different 6digit Harmonized System product categories, implemented by WTO signatories between 1995
and 2000. Our main focus is the extent to which safeguard actions conform to the GATT/WTO
mostfavored- nation (MFN) principle. We identify two types of discrimination that arise in the
application of safeguards: explicit departures from MFN treatment through formal exclusion of
some exporters, and implicit departures from MFN as reflected by systematic differences in
impact across trading partners. Our results indicate that the impact of SG action on a given
exporter depends on the specific form of the safeguard policy. A SG implemented as a quota
tends to preserve historical market shares more than a SG implemented as a tariff. When a SG is
implemented as a quota, countries that have recently increased market share face reductions in
market share relative to other suppliers. More generally, SG actions tend to favor established
suppliers, whether large or small, over new suppliers and those whose market share has recently
increased. We also find evidence that formal exemptions for developing countries and partners in
a preferential trading arrangement allow these countries to gain market share at the expense of
other suppliers.
History
The WTO Agreement,1 like all trade agreements, is meant to promote international trade and
therefore is also expected to increase import flows by mutually advantageous concessions. It
might therefore appear astonishing and somewhat contradictory that the same agreement allows
WTO Members
to back-pedal and place restrictions on imports in the form of safeguard measures if those
imports increase. While an increase in imports is the natural effect of trade liberalization, it has
generally been recognized in trade treaty practice that there are certain circumstances in which
import liberalization may become difficult to sustain - to a point of straining the very functioning
In this volume, the term WTO Agreement is used to refer collectively to the Results of the Uruguay Round
Multilateral Trade Negotiations.
1
Page 5
of those agreements. This is why, prior tothe GATT 1947, bilateral trade agreements normally
provided for a safety valve in the form of safeguard measures. This is meant to avoid those
circumstances where the contracting parties, faced with the dilemma of either having their
domestic market heavily disrupted or withdrawing from their agreements, choose the latter
option, thus ultimately reducing the overall level of liberalization.
This is why the GATT 1947 contained a special provision on Emergency Action, in Article
XIX. However, recognizing the potential for trade restrictive application of such provision, the
GATT 1947 prescribed in some detail the conditions under which safeguard measures may be
imposed. Article XIX, which has remained unchanged in GATT 1994, sets out such conditions
in summary form. Paragraph 1 provides:
1 (a) If, as a result of unforeseen developments and of the effect of the obligations incurred by a
contracting party under this Agreement, including tariff concessions, any product is being
imported into the territory of that contracting party in such increased quantities and under such
conditions as to cause or threaten serious injury to domestic producers in that territory of like or
directly competitive products, the contracting party shall be free, in respect of such product, and
to the extent and for such time as may be necessary to prevent or remedy such injury, to suspend
the obligation in whole or in part or to withdraw or modify the concession.
Grey area
Furthermore, some 150 safeguard measures were officially notified to the Contracting Parties to
the GATT 1947.8 Soon, however, it became clear that measures other than Article XIX
safeguard measures were resorted to by certain contracting parties to address import surges
considered to be particularly injurious. Those were often designated with the term grey area
measures and included the so-called Voluntary Export Restraints (VERs), Voluntary Restraint
Arrangements (VRAs) and Orderly Marketing Arrangements (OMAs). These measures, instead
of being formally adopted by the importing country, were formally taken by the exporting
country or negotiated by exporting companies with the importing country.
The reason for shifting to this type of measures is generally found in the difficulty to face the
request for compensation from the rest of the contracting parties, as allowed by Article XIX
[infra, section 4.6], and moreover, in the perceived additional difficulty in imposing safeguard
Page 6
measures targeting only the main exporting countries (the so-called selective application of
safeguard measures).
Attempts to enact supplementary safeguard rules during the Tokyo Round of multilateral trade
negotiations (1979) to, inter alia, contain this phenomenon did not succeed and no Safeguards
Code existed until the establishment of the WTO. The SA thus represents the first
supplementary safeguard discipline since 1947.
Current situation
Given the issues arisen in the application of safeguards under the GATT 1947, an Agreement on
Safeguards was negotiated during the Uruguay Round with the following objectives:2
improve and strengthen GATT 1994
clarify and reinforce GATT 1994, and specifically Article XIX (Emergency Action on
Imports of Particular Products)
re-establish multilateral control over safeguards and eliminate measures that escape
such control.
enhance rather than limit competition on international markets.
SA, Preamble.
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CHAPTER-2
NEED FOR SAFEGUARDS
Economists have a love-hate relationship with the idea of contingent policies in general and the
use of safeguards in a trade agreement in particular. On the one hand, because the economic
environment is constantly bombarded with sudden and unexpected changes in everything from
technology, to individual preferences, to the weather, it makes sense to give the parties to a trade
agreement some flexibility to change the terms of the agreement when something unexpected
occurs. On the other hand, depending on the rules of the agreement, it is not clear that the
benefits of flexibility outweigh their costs. If too much flexibility is allowed, the credibility of
the agreement could be undermined, and the agreement might provide few or no benefits.
A safeguard is a temporary import restraint that is used to protect a domestic import-competing
industry from foreign competition.3 Under the GATT/WTO system, when countries negotiate
reciprocal tariff concessions; they commit themselves to maximum "binding" tariffs. These
commitments restrict, to a considerable extent, a domestic policymaker's authority to unilaterally
raise its tariffs at some later date. The GATT of 1947 included two provisions under which
countries could reintroduce protective trade policies. Countries remained free to temporarily
raise a tariff above the maximum tariff binding or introduce a temporary quantitative restriction
under the Article XIX "safeguard" provision. Countries wishing to permanently raise their
bindings could do so under Article XXVIII. The GATT of 1994 provides for the use of
safeguards under the Agreement on Safeguards (AS).
Safeguards add flexibility to trade agreements. Theoretically, this flexibility can improve welfare
by making the trade agreement more responsive to a constantly changing economic environment.
Alternatively, it can reduce welfare by undermining the credibility of the agreement. Both
arguments have been made in the economics literature. As an empirical question, the issue is
unresolved.
Perhaps the most widely cited argument in favor of safeguards is that they can facilitate greater
tariff liberalizations by governments during trade negotiations. Because a government has an
escape valve if a tariff reduction causes pain to its producers, it has more freedom to make larger
Page 8
and potentially more risky tariff reductions. Because there are large gains from permanent tariff
reductions and relatively small costs from imposing temporary safeguards in a few sectors, the
world gains by having safeguards in a trade agreement, even if they are not used. Jackson (1997)
provides an intuitive discussion of this. Ethier (2002) asks: how does the interaction between
unilateralism and multilateralism affect the pace of trade liberalization? His central concern is to
analyze a trading system like the GATT/WTO which is characterized by the general practice of
negotiating tariff reductions to benefit all members and the occasional use of temporary
unilateral tariff increases through safeguards or antidumping duties. He develops a multi-country
model in which countries grow at different rates. He shows, first, the pace of trade liberalization
is constrained by the slowest growing countries in the world. He then illustrates how allowing
these countries to temporarily raise their tariffs can accelerate the pace of worldwide trade
liberalization. The key insight is that when countries negotiate tariff reductions, they do not
know if their growth will be fast or slow. In a trade agreement that does not allow temporary
tariff increases, countries fear their growth will be slow and will negotiate only small tariff
reductions. When safeguards are added to the trade agreement, countries negotiate large tariff
reductions because they know that if they turn out to have slow growth, they can temporarily
increase their tariffs. Klimenko, Ramey, and Watson (forthcoming) arrive at a similar result by
examining the question of why the WTO's Dispute Settlement Body (DSB) exists. In their paper,
they show that when countries regularly renegotiate their tariffs, as in the WTO's trade rounds, a
DSB is necessary for the trade agreement to survive. A DSB makes it possible for countries to
punish each other for violations. Because countries want to avoid punishment, they will not
violate the trade agreement when it includes a DSB. As an extension to their paper, they also
show that if the DSB allows countries to temporarily raise their tariffs (as is the case with
safeguard measures) in response to some unexpected change in the economic environment, they
will negotiate larger tariff reductions initially.
In some ways this is an impossible task - how can we prove that countries negotiate lower tariffs
when a safeguard is part of a trade agreement when all the trade agreements in existence include
safeguards. In section 4 I present an empirical model of the relationship between safeguards and
tariff reductions by WTO members that attempts to quantify this relationship by using crosscountry variation in safeguards use and tariff reductions. My results are generally supportive of
Page 9
the hypothesis that safeguards facilitate tariff reductions. An interesting study of India's trade
policies by Bown and Tovar (2007), which exploits cross-product variation in the magnitude of
tariff reductions, finds that safeguards and antidumping duties are applied more frequently to
products that experienced large tariff cuts in the 1990s. Thus, their findings appear generally
consistent with the idea that an "escape clause" in a trade agreement can facilitate greater tariff
reductions ex ante.
Another economic argument in favor of the inclusion of safeguards in a trade agreement is that
they act as a form of insurance against adverse economic shocks. When an unexpected change in
the economy occurs (e.g. a price falls, the volume of imports rises, etc.), imposing a safeguard
can partially mitigate the effect of the change (by stemming the price fall, restricting imports,
etc.) and, thus, acts as something similar to an insurance payout. Bagwell and Staiger (1990)
explore how price fluctuations affect large players in a trade agreement - countries like the US,
EU and Japan who have markets that are so large, their safeguard measures can significantly
alter world prices. They argue that due to the self enforcing nature of the trade agreement, in
periods of large import volumes, a safeguard measure acts as a pressure valve to enable countries
to sustain cooperation by temporarily raising tariffs. In the absence of a safeguard clause,
countries would not be able to sustain cooperation, and the result would be a costly trade war of
high levels of tariff retaliation.
Fisher and Prusa (2003) show that small countries, which can not affect world prices, can use
safeguards to insure themselves against international price shocks. In their multi-sector model,
imposing a safeguard in the face of a negative world price shock improves national welfare by
improving the welfare of the import-competing sector.
An alternative set of arguments for why safeguards are needed in a trade agreement is that they
improve national welfare for politically powerful countries or that they improve the welfare of
politically powerful agents in politically powerful countries. Without the participation of these
powerful countries, the agreement might not be formed. These papers founded on strong
Page 10
assumptions about redistribution3 do not try to explain why safeguards are needed in a trade
agreement. Instead, they offer explanations for why safeguards are included in trade agreements.
Several theoretical papers (Matsuyama, 1990; Miyagiwa and Ohno, 1995, 1999; Crowley, 2006)
explore how safeguards benefit import-competing firms that are technologically behind their
foreign competitors. These papers examine the consequences of using a tempossrary safeguard to
induce domestic firms to adopt newer, more efficient production technologies.
Note that redistribution in political economy models can be a redistribution from a weak or impoverished group
to a strong or wealthy group.
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CHAPTER- 3
DISCRIMINATORY IMPACT
The Uruguay Round Agreement on Safeguards (AS) represents an effort to improve the
safeguards process and thereby encourage countries to choose this option over antidumping and
gray-area measures such as bilaterally negotiated export restraints. In contrast to antidumping,
which is designed to protect domestic firms from injury due to unfair trade, safeguards provide
Temporary relief to domestic industries that suffer serious injury due to fairly traded imports.
In contrast to antidumping and gray-area measures, safeguards are intended to limit imports
across the board rather than from particular exporters, and the AS explicitly reaffirms the
principle of most-favored-nation (MFN) treatment in application of safeguards. However, the AS
also authorizes explicit discrimination among exporters in specified circumstances. Moreover,
implementation of safeguards (SG) according to the procedures laid out in the AS may entail
implicit discrimination among exporters to the SG-protected market.
The nondiscriminatory treatment of trading partners, known as most-favored-nation (MFN)

treatment, was a fundamental principle of the original GATT system (Article I) and has been
carried over into the World Trade Organization. Its continuing appeal reflects both political and
economic-efficiency considerations. Yet exceptions to MFN treatment profoundly affect trade
among members of the WTO. GATT Article XXIV permits the formation of preferential, i.e.,
discriminatory, trading arrangements among groups of countries, and such arrangements now
constitute an important feature of national trade policy. Special and differential treatment of
developing countries, including the Generalized System of Preferences, became an element of
the GATT system in 1971, as membership expanded beyond the original rich mans club of the
early postwar period to include many newly independent nations. The Tokyo Round negotiations
enlarged the scope of this differential and more favorable treatment, and the Uruguay Round
agreements likewise incorporated special terms for developing countries.
Page 12
GATT/WTO-sanctioned relief from import competition is likewise subject to rules that entail
discrimination among trading partners. With regard to injurious unfair trade, permitted remedies
(antidumping duties or other arrangements, countervailing duties) are applied only to those
import suppliers found to sell below fair value or to benefit from government subsidies.4
Action on unfair trade is thus inherently selective, i.e., discriminatory. GATT rules on safeguards
allow temporary protection of sectors experiencing serious injury due to fairly traded
imports5.Because affected exporters are not alleged to have violated any norm, GATT/WTO
safeguard rules impose a more stringent injury test than in the case of unfair trade (serious versus
material injury) and also require compensation of exporting countries in some cases. Moreover,
because there is less focus on the source of the imports, safeguard measures are generally
assumed to apply equally to all import sources and thus to be consistent with the MFN principle
of the GATT/WTO system.6
Economists believe these remedies often target exporting nations that have recently increased
competitiveness in
the relevant industry, and especially countries lacking the capacity to retaliate in kind. Blonigen and Bown
(2003)
find evidence that threat of retaliation affects U.S. antidumping activity.
5Originally designed as an escape clause to allow temporary re-protection of an import-competing industry
that suffers unforeseen damage due to trade liberalization, safeguard protection has become increasingly
available to any industry that can demonstrate serious injury due to competing imports, even when the
competing imports have not benefited from a recent improvement in market access. An escape clause in the
modern sense was introduced in the U.S. Reciprocal Trade Agreements Act of 1934 (Jackson 1997, 179).
Recent U.S. safeguards have been initiated under Section 201 of the Trade Act of 1974.
4
For example, Leidy (1995, 29), in a paper critical of the broad use of antidumping, cites the GATT safeguards
provision (Article XIX) as a preferred means of defusing protectionist opposition to trade liberalization through
temporary protection on a most-favored-nation basis in sectors experiencing serious injury.
Page 13
CHAPTER-4
ARTICLE XIX AND THE AGREEMENT ON SAFEGUARDS
International commitments to limit import protection in specific industries typically include the
conditions under which countries may restore protection for the same industries. Under Article
XIX of the GATT (Emergency Action on Imports of Particular Products), a country is allowed to
take safeguard actions when imports seriously injure or threaten serious injury to the competing
domestic sector. Article XIX also specifies that affected exporters may request compensation for
loss of market access. Hoekman and Kostecki (2001) suggest two distinct motives for including
an escape clause in the GATT/WTO system: as insurance and as a safety valve. The insurance
motive reflects that without such provisions, governments may be reluctant to sign trade
agreements leading to substantial liberalization. Including an escape A related paper is Prusa
(2001), which investigates the trade-diversionary impact of discriminatory antidumping
measures on non-named exporters of the product targeted by an antidumping measure. clause
may thus facilitate liberalization of trade by encouraging negotiators to be bolder in their offers
of concessions. The safety valve motive reflects that governments may later feel pressure to
renege on certain negotiated liberalization commitments. By legalizing some backsliding under
carefully specified circumstances, an escape clause can protect the integrity of the remainder of
the agreement and therefore improve the overall durability of a liberal trade regime.
However, few countries actually appealed to Article XIX in coping with fairly traded but
injurious imports. During the GATT period, the United States and other countries opted instead
to negotiate bilateral trade restrictions outside the framework of the GATT or, especially more
recently, to apply GATT-sanctioned antidumping measures.7 These preferred remedies could be
applied selectively to a few trading partners, thus obviating any need for even the appearance of
MFN treatment of exporters. Moreover, use of dumping action rather than safeguards eliminated
Thanks to elastic legal criteria for dumping, most injurious imports can be labeled successfully as unfair. An OECD
review of antidumping cases in Australia, Canada, the European Union, and the United States concluded that in 90
percent of cases where imports were found to be unfairly priced under antidumping rules, the goods would be
considered fairly priced under domestic antitrust or competition policy (Finger 1998, 13).
Page 14
any requirement of compensation for affected exporters8 and had the political appeal of
attributing the domestic industrys problems to unfair foreign competition.
The Uruguay Round Agreement on Safeguards added specificity to the ambiguous language of
Article XIX in a number of key areas9. Some elements of the agreement are largely procedural,
including clarification of the injury requirement and timing and duration of safeguard protection,
and establishment of a monitoring body (the WTO Committee on Safeguards) to which members
must report safeguard actions. An important substantive changein rules is that bilateral
arrangements such as voluntary export restraints (VERs) and orderly marketing agreements
(OMAs) are explicitly prohibited (Article 11.1b).
Under the AS, countries may implement safeguard protection through tariffs, quotas, or tariffrate quotas (TRQs). The empirical analysis below suggests that inclusion of quotas and TRQs
along with tariffs as allowable instruments has important implications for the distribution of the
economic impact of safeguard protection across affected exporters. A second important change
in rules concerns compensation for exporters affected by safeguard actions. Specifically, a
country facing an absolute import surge is no longer required to offer compensation for the first
three years that a safeguard is in effect. Ceteris paribus, this change should make safeguards
relatively more attractive in comparison with alternative means of obtaining relief from injurious
imports, especially antidumping.10
Our results indicate that the impact of SG action on a given exporter depends on the specific
form of the safeguard policy. A SG implemented through a quota tends to preserve historical
market shares more than a SG implemented as a tariff. When a SG is implemented as a tariff,
countries that have recently increased market share gain at the expense of other suppliers, while
a quota tends to have the opposite effect. Although we are not able to compare these results to
the hypothetical case of a purely MFN SG, it seems safe to conclude that SG implementation
8
In contrast, use of VERs encouraged affected exporters to form cartels and also provided compensation in the
form of quota rents.
9
Reform of safeguards was also a goal in the Tokyo Round. This effort failed because of disagreement on several
issues, notably including discriminatory application of safeguard measures (Jackson 1997, 209). On the concerns
that motivated the Uruguay Round negotiation on safeguards and details of the final agreement, see Bown and
Crowley (forthcoming) and references cited there.
10
For a discussion of these and other economic incentives affected by Uruguay Round reforms to safeguards,
antidumping, and dispute settlement under the WTO, see also Bown (2002).
Page 15
through a tariff comes closer to achieving nondiscriminatory results. We also find evidence that
formal exceptions for developing countries and PTA partners do allow these countries to gain
market share on average, although the estimated effect is larger for PTA partners than for
developing countries. Nonetheless, the departure from MFN treatment intended to shelter new
developing-country suppliers from the full effect of SG action appears to have been effective at
least in qualitative terms.
While we have not addressed the issue explicitly here, Bown and McCulloch (2003) also
document evidence that safeguards have a discriminatory impact on the exit response of new
entrants, when compared to the exit response rate of earlier new entrants that were not faced
with a safeguard and when compared to other small, but historically present, suppliers that were
also faced with the imposition of a safeguard.
Because the form of a SG policy is key to its impact across suppliers, a logical follow-up study
would investigate the political-economy determinants of the SG-imposing countrys decision to
initiate a safeguard and its choice of SG policy. The markets in which the 14 SG actions were
taken had experienced recent increases in the number of supplying countries, not just in the total
value of competing imports. However, such an analysis requires a comparison set of otherwise
similar markets in which no SG was subsequently imposed in order to determine whether the
increased number of suppliers played a significant role in the decision to apply safeguards. Data
from our cases also suggests that the timing of new supplier entry may play a role in the choice
of SG instrument. When the new entry occurs in the year immediately prior to initiation of the
SG, use of a non-tariff measure with market shares based on historical averages favors
established suppliers over new entrants. However, if the new entry occurred two or three years
before initiation of the SG, non-tariff measures would no longer be expected to differ
significantly from tariffs in their relative impact on established versus new suppliers.
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CHAPTER-5
THE
POSITIVE
ECONOMICS
OF
SAFEGUARDS
MEASURES
AND
ITS
IMPLICATIONS
Having criticized the Appellate Body for its failure to provide sensible guidance for the use of
safeguards, I now turn to the considerably harder task of offering some guidance myself. I will
stipulate that the analysis is somewhat speculative and may ultimately rest on premises that
others find unacceptable, but it is the sort of exercise that cannot be avoided if a rational
safeguards regime is to evolve.
I suggested earlier that the situation confronting WTO members in their use of safeguards is
somewhat analogous to the early days of American antitrusta statute existed on the books, but
it was so vague that it befell the courts to make sense of it and to give it meaningful content
through the years. After a long evolution, American antitrust policy has largely yielded to the
Chicago School argument that it should promote economic efficiency, a principle that now
pervades judicial opinions and decisions by enforcement authorities.
Unfortunately, any efforts to pursue the same end in the safeguards area would be at best
problematic. Safeguards measures involve the imposition of trade protection for industries that
have difficulty competing with their foreign counterparts.24 They delay the contraction of
industries in which comparative advantage is lacking, reducing the gains from trade and the
overall prosperity of the trading community. Viewed narrowly, such protection is surely a source
of economic inefficiency.
From a normative economic standpoint, therefore, it is tempting to say that safeguard measures
are undesirable. The gains from trade will be larger and, a fortiori, the distortions that result from
the protection of inefficient industries will be smaller, when troubled industries are allowed to
contract at a rate dictated by the market in the face of more efficient foreign competition. If this
observation is correct, however, a puzzle arises from a positive economic standpointwhy does
the WTO system provide for safeguard measures if they are undesirable? Put differently, if trade
negotiators are able to reduce ordinary tariffs and quotas through reciprocal commitments, why
have they not also agreed to eliminate inefficient safeguards actions to protect troubled
industries?
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24For now, I will put to the side the possibility that nations imposing safeguards measures will
compensate affected trading partners by lowering other trade barriers at the same time, or that
affected trading partners may retaliate by raising trade barriers of their own. Plainly, the
overall welfare economics of safeguards actions turns importantly on whether they are
accompanied by other such changes in the trade policies of WTO members. Note that the WTO
Safeguards Agreement encourages but does not clearly require compensation, and affords no
authority for retaliation during the first three years of safeguards measures if they meet certain
conditions. See WTO Safeguards Agreement, Article 8.
Commentators have suggested three types of answers to this puzzle. One is the suggestion that
safeguard measures can be justified as a device for compensating the losers from trade
liberalization. Another is the suggestion that safeguard measures may be economically efficient
after all, at least in a second-best sense, perhaps as a response to certain adjustment costs in
declining industries. The third is the suggestion that safeguard measures serve a valuable
political function even if they are unproductive from the standpoint of conventional welfare
economics. I will briefly review these ideas in this section, and suggest that only the third is at all
convincing. I then discuss its possible implications for the interpretation of WTO law.
A. Safeguards as Compensation
Economic commentators broadly agree that the case for free trade is compelling, but concede
that the distributional consequences of trade liberalization are uneven. Some groups will benefit,
and others will lose, even if the aggregate effect is positive. Putting it slightly differently, trade
liberalization is efficient in the Kaldor-Hicks sense, but by itself is not a Pareto improvement.
Accordingly, it is sometimes suggested that a mechanism for compensating some of the groups
disadvantaged by trade concessions is required, and that safeguards may provide such a
mechanism.25
I reject this theory as an explanation for safeguard measures in the WTO/GATT system on
several grounds. First, trade protection is an extremely costly and clumsy device for
compensating the losers from trade liberalization. To a great extent, it may simply line the
pockets of diversified shareholders in protected industries, doing little for individuals whose job
have been sacrificed for the broader public good. Targeted unemployment and retraining
Page 18
programs seem a much more tailored response, providing income and transition assistance to
those who plausibly require it.
Second, and related, it is not clear that safeguard measures will compensate for trade-related
dislocation in any meaningful sense. Depending on how they are implemented, they may simply
postpone the burden of dislocation rather than reduce itthe discussion below of safeguards and
the adjustment cost problem will have more to say about this issue.
Finally, it seems clear from the text of Article XIX that safeguards were not conceived as a
general compensation mechanism. They were to be employed only when unforeseen
developments led to import-related dislocation. In perhaps most cases, however, the dislocation
associated with trade liberalization is quite expectable, and indeed it is the anticipated
competitive advantage from trade concessions that leads exporters to encourage their political
officials to secure better access to foreign markets. If distributional equity were the goal of
safeguards, I can see no reason why measures to achieve it should be limited to the situations in
which dislocation was unforeseen.
B. Efficiency Rationales for Safeguards
Restoring Competitiveness- Industries seeking protection in the form of safeguard measures
rarely portray themselves as suffering an inevitable long-term decline. Rather11, they usually
claim that they are viable industries besieged by foreign competition, and seek a respite to restore
their competitiveness. They commonly suggest that additional capital investments are needed
to that end, and that a period of higher prices supported by trade protection is needed to permit
them to raise the internal capital necessary for such investments.
Economists typically regard such arguments as highly suspect. If investments to restore
competitiveness are really justified in the sense that they yield a positive net present value, why
do the capital markets not finance them without any need for trade protection? Implicitly, the
argument for protection to restore competitiveness rests on some capital market imperfection that
interferes with the ability of firms to raise external capital, thereby necessitating an infusion of
internal capital. It is not clear why such capital market imperfections should arise. Moreover,
11
See Jackson, Davey & Sykes, at 611. See also Deardorff (1987).
Page 19
even if capital markets imperfections exist, the logical government response would not likely be
protective tariffs or similar measures. A superior policy would be to subsidize borrowing by the
firms in question, to the extent of removing any unjustified premium in the cost of capital to the
industrythis policy would allow worthwhile investments to be financed through borrowing,
without introducing the deadweight costs of protectionism. Finally, nothing in WTO law or
national law on safeguard measures requires any demonstration of capital market imperfections
as a predicate to them.
Accordingly, notwithstanding the rationale offered for safeguard measures by many of the
industries that seek them, it is difficult to imagine that the function of safeguards in the WTO
system is to address capital market imperfections that stand in the way of valuable investments to
restore competitiveness. In the main, industries that are declining due to import competition
are inefficient, and an exit of resources from those industries is generally desirable. Any
additional investments in such industries that are economically justified can and will be made
without a period of trade protection.
Adjustment Costs- An efficiency rationale for safeguard measures that has received somewhat
greater credence from economic commentators is the possibility that they may afford a sensible
way to address adjustment costs in declining industries. This thesis is put forward recently in
Horn and Mavroidis (2003), and to some degree by Sykes (1990). Horn and Mavroidis focus on
the costs of unemployed factors of production (most notably labor), and suggest that measures to
slow the pace of industry contraction may, under certain conditions, reduce these costs. They
begin by acknowledging that nothing is gained by a safeguards measure that simply postpones
the costs of adjustment without reducing them, incurring the economic costs of protectionism in
the process. But it is possible to imagine that protection can reduce adjustment costs and not
merely postpone them. As an example, they posit a declining industry in which 12,000 workers
will lose their jobs each month. They further imagine that suitable positions for those workers
will open up in another industry, but only at the rate of 6,000 per month. By slowing the rate of
layoffs in the declining industry to 6,000 per month in this scenario, safeguard measures can
avoid the unemployment that results when 12,000 laid-off workers a month have only 6,000 new
jobs open to them.
Page 20
Horn and Mavroidis concede that such problems will only arise under limited conditions. In
particular, why do workers in the declining industry suffer unemployment12 if they have no
alternative job opportunity, rather than taking whatever wage cuts are necessary for them to
retain their positions? And if the supply of unemployed workers to other industries is greater
than the demand at current wages, why do wages in other industries not fall to accommodate
more hires? In a well-functioning labor market with wage flexibility, unemployment should
reflect an efficient period of job search rather than an inefficient idling of resources. But there
are reasons why wage adjustments may not clear the labor market efficiently. Horn and
Mavroidis note the possibility that labor unions may resist wage cuts. Another possibility is that
government safety net programs provide income subsidies that discourage workers from seeking
new jobs as quickly as they might. One can perhaps imagine other reasons, and thus it is
certainly possible in theory that industries may contract too quickly and that measures to slow
the rate of contraction may be useful, other things being equal.
It would not necessarily follow that safeguard measures are the best policy response, however, as
Horn and Mavroidis also acknowledge. Various other policy instruments might be employed to
address the problem, such as subsidies to encourage the hiring of the unemployed. But all
instruments are imperfect, and it is perhaps conceivable that measures to protect a declining
industry that slow its rate of contraction may at times be the best option.
Does this possibility afford a convincing account of the safeguards provisions in WTO law? In
my judgment, the answer is no. The reason, quite simply, is that nothing in the structure of the
safeguards rules (or in the laws that implement them at the national level) limits safeguard
measures to circumstances in which they might usefully slow the process of contraction. Sykes
(1990) makes the point that U.S. law permits safeguards in a far broader set of circumstances,
and it is clear that WTO law does as well. Neither body of law requires any showing that an
industry is exhibiting inefficiently high levels of unemployment of labor or any other factor of
production, much less evidence that temporary protection can do more than merely postpone the
problem
12
Haveman, Jon D., Usha Nair Reichert and Jerry G. Thursby (2003). How Effective are Trade Barriers? An
Empirical Analysis of Trade Reduction, Diversion and Compression, The Review of Economics and Statistics 85 (2):
480-485.
Page 21
CHAPTER-6
THE POLITICAL RATIONALE FOR SAFEGUARDS
A more convincing explanation for the role of safeguard measures in the WTO/GATT system, in
my view, proceeds from a contractarian perspective blended with political economy. A formal
model developing this analysis in greater detail may be found in Sykes (1991).
The analysis begins with the proposition that the political officials who enter trade agreements,
much like the parties to private contracts, seek to use the agreements to promote their mutual
welfare. For most such officials, their welfare metric is a political one, and they will seek to
design trade agreements that enhance their political fortunes by attracting voters, campaign
contributions, or other manifestations of political support. Such political gains from trade
agreements result in the main from market access commitments that benefit domestic exporters
and lead them to reward the officials who obtain those commitments. To some extent as well,
officials reap political benefits when imports become cheaper for politically efficacious
consumers and consuming industries. These benefits must be balanced against the political costs
of trade agreements, however,
Which stem primarily from reduced barriers to imports and the attendant opposition to trade
agreements from import-competing industries An ideal trade agreement from the standpoint of
political officials will maximize the net political gains relative to political costs, allowing the
officials to achieve their Pareto frontier.
Just as the parties to private contracts face uncertainty about the future, so do the officials who
become parties to trade agreements. It is accordingly necessary for them to contemplate trade
concessions under conditions where the political costs and benefits to them are somewhat
unpredictable. A first-best contingent contract would provide for the revocation or
modification of any trade commitments that prove to be a net detriment after uncertainty
resolvesthat is, anytime the political costs of a concession to the party that makes it prove
greater than the political benefits it confers on other parties13. It is difficult to specify in advance
13
26This rough characterization can be made more precise in a formal modelin any contract that achieves the
Pareto frontier for political officials, a shadow price exists that allows the welfare of each official to be compared
to that of the others. A first-best trade agreement would provide for the revocation of any trade concession
Page 22
all of the circumstances in which this problem may arise, however, and so the parties to trade
agreements must develop other strategies for facilitating the modification of the bargain as new
information comes to light. One option, of course, is simply to renegotiate, and the WTO/GATT
system has always contained legal provisions for renegotiation. Another strategy is to provide
authority for the revocation of modification of concessions in specified classes of cases where
concessions have become a net burden politically.
Concessions can prove quite burdensome on officials in importing nations when an importcompeting industry is in severe decline. It is a commonplace that declining industries invest
more resources in the pursuit of protection and often secure it (witness steel and textiles in the
United States). This phenomenon has a clear economic explanation. Declining industries have
made sunk investments on which the rates of return are generally below competitive levels.
Consequently, if they are able to obtain protection, much of the increase in the rate of return will
be retained by existing firmsno new entry will occur until returns exceed the competitive level.
In addition, declining industries tend to exhibit significant unemployment, with workers
forfeiting their returns (quasi-rents) to industry-specific human capital investments. They will
lobby aggressively for policies that restore those quasi-rents, and the prevalence of unemployed
workers may also make the broader population more sympathetic to protective measures. These
considerations suggest an explanation as to why Article XIX affords assistance to industries that
exhibit serious injury.
The fact that an industry is in serious decline, however, is insufficient to explain why a trade
agreement would permit importing nations to afford new protection to it. The costs of such
measures to other parties must also be taken into account, in particular the costs to adversely
affected exporters and the political officials that represent them. The circumstances where
restraints on exports do relatively less damage to exporters (and their political representatives)
are, not surprisingly, much the opposite of those in which
This rough characterization can be made more precise in a formal modelin any contract that
achieves the Pareto frontier for political officials, a shadow price exists that allows the welfare
of each official to be compared to that of the others. A first-best trade agreement would
which, ex post, causes one official to lose more welfare than the others gain from it, converting the welfare of each
official into a common metric using the proper shadow prices. See Sykes (1991).
Page 23
provide for the revocation of any trade concession which, ex post, causes one official to lose
more welfare than the others gain from it, converting the welfare of each official into a common
metric using the proper shadow prices. See Sykes (199)
Import-competing industries lobby most heavily for protectionthe harm will likely be the
smallest when exporters are prosperous and expanding. Restrictions on exports can then be
absorbed without reducing rates of return to exporters much, if at all, below competitive levels,
and may simply discourage new entry that would have dissipated supra competitive returns
anyway. Likewise, restrictions on exports can typically be absorbed under these circumstances
without producing significant unemployment, and the attendant political pressures to address it
noted above.
These observations suggest an explanation for why Article XIX requires increased imports as a
predicate to safeguard measures, since circumstances in which imports are increasing into the
nation contemplating safeguards can serve as a rough marker for instances in which the exporters
responsible for the increase are prospering. But that correspondence is surely imperfect. Imports
may be rising for a number of reasons that do not necessarily reflect circumstances in which the
exporters are prosperous. The additional requirements found in the original text of Article XIX
to the effect that the increase in imports must represent the unforeseen consequences of a trade
concessiontend to ensure a better fit with the cases in which safeguards will yield net political
benefits. The unforeseen developments requirement makes clear that Article XIX was only
meant to facilitate the withdrawal of concessions that prove unexpectedly harmful politically,
consistent with the idea that safeguards exist to address the problem of contractual uncertainty.
And the requirement of linkage between increased imports and a trade concession tends to ensure
that the exporters who will be harmed by safeguards are prospering. For if their exports are
growing with unexpected rapidity as a result of a trade concession, chances are they are doing
well.
To be sure, such conditions are not the only ones where net political benefits may arise from
protection. The logic here suggests that net benefits may result any time that unexpected
developments produce the combination of a severe decline in an import-competing industry,
along with growth and prosperity for its foreign competitors. The next section will suggest how
these conditions may arise from other events, and thereby suggest some possible guidance for the
Page 24
proper use of safeguards when imports surges cannot be linked to the unexpected effects of a
trade concession.
This line of analysis also provides an explanation as to why Article XIX should be designed to
provide temporary rather than permanent protection for declining industries. Declining industries
will tend to become a less potent political force for protection over time as long as protection
does not induce new investment. As exiting physical and human capital depreciates, the quasirents on sunk investments that are lost due to foreign competition will diminish and the political
demand for protection will decline. Protection that is temporary, and that phases out over time, is
thus a politically savvy response to the problem of declining industries. It addresses the political
exigencies in the short term, but allows the joint political benefits of reciprocal trade agreements
to be realized in the long term.
In sum, the contractarian perspective suggests that Article XIX was simply a device for dealing
with the political uncertainty associated with the original GATT agreement, defining
circumstances in which the temporary suspension of concessions was jointly optimal in a
political sense for the officials that entered the GATT. I believe that this perspective allows us to
explain all the important features of Article XIX(1)the serious injury requirement, the
requirement of increased imports, the requirement that the increase be unforeseen and
attributable to a trade concession, and the requirement that safeguard measures be temporary. On
this account, there is no clear or necessary connection between safeguards actions and the
promotion of economic welfare or efficiency as conventionally defined, and it should then come
as no surprise that efficiency explanations for safeguards are unconvincing.
Nevertheless, as argued in Sykes (1991), it is possible that Article XIX is welfare enhancing, for
two reasons. First, by allowing officials to reduce the danger that trade concessions will prove a
net political detriment after the fact, they become more willing to make them the costs of
protection under Article XIX ex post, therefore, must be balanced against the additional trade
concessions that it facilitates ex ante. It is not clear, and probably not knowable, whether the net
welfare impact in this respect is positive or negative. Second, the welfare consequences of
Article XIX also depend importantly on the extent to which nations negotiate trade compensation
following safeguards actions, or instead engage in trade retaliation. The former possibility
Page 25
obviously ameliorates or eliminates adverse welfare consequences, while the latter possibility
exacerbates them.
Page 26
CHAPTER-7
CONCLUSION
Our results indicate that the impact of SG action on a given exporter depends on the specific
form of the safeguard policy. A SG implemented through a quota tends to preserve historical
market shares more than a SG implemented as a tariff. when a SG is implemented as a tariff,
countries that have recently increased market share gain at the expense of other suppliers, while a
quota tends to have the opposite effect. Although we are not able to compare these results to the
hypothetical case of a purely MFN SG, it seems safe to conclude that SG implementation
through a tariff comes closer to achieving nondiscriminatory results. We also find evidence that
formal exceptions for developing countries and PTA partners do allow these countries to gain
market share on average, although the estimated effect is larger for PTA partners than for
developing countries. Nonetheless, the departure from MFN treatment intended to shelter new
developing-country suppliers from the full effect of SG action appears to have been effective at
least in qualitative terms. While we have not addressed the issue explicitly here, Bown and
McCulloch (2003) also document evidence that safeguards have a discriminatory impact on the
exit response of new entrants, when compared to the exit response rate of earlier new entrants
that were not faced with a safeguard and when compared to other small, but historically present,
suppliers that were also faced with the imposition of a safeguard.
Because the form of a SG policy is key to its impact across suppliers, a logical follow-up study
would investigate the political-economy determinants of the SG-imposing countrys decision to
initiate a safeguard and its choice of SG policy. The markets in which the 14 SG actions were
taken had experienced recent increases in the number of supplying countries, not just in the total
value of competing imports. However, such an analysis requires a comparison set of otherwise
similar markets in which no SG was subsequently imposed in order to determine whether the
increased number of suppliers played a significant role in the decision to apply safeguards. Data
from our cases also suggests that the timing of new supplier entry may play a role in the choice
of SG instrument. When the new entry occurs in the year immediately prior to initiation of the
SG, use of a non-tariff measure with market shares based on historical averages favors
established suppliers over new entrants. However, if the new entry occurred two or three years
Page 27
before initiation of the SG, none tariff measures would no longer be expected to differ
significantly from tariffs in their relative impact on established versus new suppliers.
Page 28
BIBLIOGRAHPHY
Baldwin, Robert E. and Jeffrey W. Steagall (1994) An Analysis of ITC Decision in

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Fit: Competition from Low Wage Countries and the (Uneven) Growth of U.S.
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Journalof International Economics, 60 (2): 249-273.
Bown, Chad P. (2002) Why are Safeguards under the WTO so Unpopular? World
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Bown, Chad P. (forthcoming) Trade Disputes and the Implementation of Protection

under the GATT: An Empirical Assessment, Journal of International Economics.
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Appleton, P. Macrory and M. Plummer, Dordrecht: Kluwer. Bown, Chad P. and Rachel
McCulloch (2003) Nondiscrimination and the WTO Agreement on Safeguards,
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International Development Working Paper 5910 and Accompanying CD-Rom, March.
Page 29
Finger, J. Michael, ed. (1993). Antidumping: How It Works and Who Gets Hurt. Ann
Arbor: University of Michigan Press.
Finger, J. Michael (1998) GATT Experience with Safeguards: Making Economic and
Political Sense out of the Possibilities that the GATT Allows to Restrict Imports. Policy
Research Working Paper 2000. Washington, DC: World Bank, Development Research
Group, October.
Hansen, Wendy and Thomas Prusa (1995) The Road Most Taken: the Rise of Title VII
Protection. The World Economy 18 (2): 295-313.
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Trade Barriers? An Empirical Analysis of Trade Reduction, Diversion and
Compression, The Review of Economics and Statistics 85 (2): 480-485.
Hoekman, Bernard M. and Michael M. Kostecki (2001) The Political Economy of the
World Trading System: The WTO and Beyond. (2nd edition) New York: Oxford
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Irwin, Douglas A. (2002) Causing Problems? The WTO Review of Causation and Injury
Attribution in U.S. Section 201 Cases. Dartmouth College manuscript, November.
Page 30

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UNIVERSITY OF PETROLEUM AND ENERGY STUDIES

COLLEGE OF LEGAL STUDIES

INTERNATIONAL ECONOMIC LAW

PROJECT: AGREEMENT ON SAFEGUARDS

Submitted by: MR.

AJEET SINGH VERMA

The nondiscriminatory treatment of trading partners, known as most-favored-nation (MFN)

Baldwin, Robert E. and Jeffrey W. Steagall (1994) An Analysis of ITC Decision in

Bown, Chad P. (forthcoming) Trade Disputes and the Implementation of Protection

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