Author: Meredith Crowley, Chicago Fed

Author: Meredith Crowley, Chicago Fed.

Paper: Opening and Closing Technology Gaps under Safeguard Tariffs

Abstract:

This paper looks at the role that a safeguard tariff may play in altering

the outcomes of a technology adoption race played by competing firms in

different countries. I show that applying a safeguard tariff with broad

country-coverage and temporary, but fixed duration enables an importing

country to achieve multiple policy objectives. First, in the face of

increased imports from a foreign firm with a better technology, the

safeguard tariff reduces the surge of imports from the firm with the

better technology. Second, when the better foreign technology is

transferable, but costly, temporary protection with a credible

termination date provides an incentive to the importing country's firm to

accelerate its adoption of the new technology. Thus, the safeguard tariff

closes one technology gap - that between the firm in the importing

country and foreign firm that precedes it in technology adoption. Third,

by broadly restricting imports from all foreign countries, the safeguard

tariff reduces the benefit of technology adoption for firms in foreign

countries that do not yet have the better technology. Therefore, the

safeguard tariff opens a second technology gap by delaying adoption of

the better technology in foreign countries. This paper provides an

explanation for why US trade law and the GATT permit the use of safeguard

tariffs for controlling unexpected import surges.

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