Why Are Safeguards Needed in a Trade Agreement?

Abstract

This paper reviews the theoretical and empirical literature on the use of safeguards in a trade agreement. It then analyzes the available data on the use of safeguards by WTO members to examine two hypotheses in the economics literature, that safeguards improve welfare by facilitating tariff reductions and that safeguards improve welfare by providing insurance against adverse economic shocks. I find that countries which undertook larger tariff reductions during the Uruguay Round conducted more safeguards investigations after the WTO was established. This suggests that the presence of a safeguard clause in the WTO agreement may have facilitated greater tariff reductions during the Uruguay Round. I find no evidence that safeguards are used more intensively by countries exposed to more aggregate economic uncertainty. It thus seems unlikely that safeguards provide insurance against aggregate economic shocks.