Quantitative Assessments of
U.S. Safeguards on Steel Products
Hiro Leea,*
Research Institute for Economics and Business Administration
Kobe University, Kobe 657-8501, Japan

Dominique van der Mensbrugghe
The World Bank, Washington, DC 20433, USA

July 2004

Abstract
In March 2002, the United States imposed temporary safeguard measures on 11 steel
products in the forms of higher tariffs and tariff-rate quotas. Using a dynamic computable
general equilibrium (CGE) model, we evaluate the effects of U.S. safeguards on economic
welfare, real GDP, steel trade, and sectoral output and average cost of the United Statesand its trading partners, with particular attention to those of Japan, China, Korea andTaiwan. The results suggest that the U.S. welfare marginally increased during the twoyears when the safeguards were in effect because of an improvement in the terms of trade.
By contrast, the safeguards had a small negative impact on U.S. real GDP. Japan, Korea
and Taiwan incurred some welfare losses, but they were extremely small. China did not
suffer any welfare losses. U.S. steel imports from the Northeast Asian countries declinedby 9-25 percent, but those from the NAFTA partners and other countries on the exclusion
list increased by 10-11 percent, largely offsetting the reductions in the total U.S. steel
imports. The safeguards caused output contraction in the steel-consuming industries in the
United States and output expansion in those industries in Japan, Korea and Taiwan, butthese effects were again extremely small. These results suggest that the impact of U.S.
safeguards was minimal.
JEL classification: F13; F14
Keywords: Safeguards, steel, CGE modela Corresponding author. E-mail: hlee@rieb.kobe-u.ac.jp; tel.: +81-78-803-7023; fax: +81-78-803-7059.
* We would like to thank William E. James, Oleksandr Movshuk, and particularly Eric D. Ramstetterfor helpful comments on an earlier version. We are solely responsible for any errors that remain.

1

1.

Introduction
In the last three and a half decades, the U.S. steel industry has been protected by avariety of import relief measures, including voluntary restraint agreements (VRAs), thetrigger price mechanism (TPM), and antidumping and countervailing duties. The
imposition of safeguard measures in March 2002 on 11 steel product categories in theforms of higher tariffs and tariff-rate quotas (TRQs)1 was the latest of a series of U.S.
protection of its steel industry and escalated the efforts of the U.S. government to restrict
steel imports.2 The safeguards were not imposed on the NAFTA trading partners (Canada
and Mexico), nor the great majority of developing countries. Some of the developing
countries that were not exempted included China, Korea and Brazil, which are major steel
producers in the world.3 The U.S. government intended to impose the safeguard measures
for a period of three years, but in May 2003 the World Trade Organization (WTO) dispute
panel ruled that these measures were in violation of WTO rules and in November 2003 theWTO Appellate Body upheld the major findings of the panel ruling.4 In December 2003
the United States decided to terminate the safeguard measures.
The recent U.S. protection policy might have temporarily reduced its steel imports
from the Northeast Asian countries, the European Union (EU) and other non-exempt
countries. At the same time, the U.S. action has harmed its automobile, heavy equipment,
construction and other steel-consuming industries by raising the cost of intermediate input(e.g., Francois and Baughman, 2001; USITC, 2003). Hufbauer and Goodrich (2003)
estimate that the safeguards increased the average domestic steel price in the United States

1 In the tariff-rate quota scheme, a given tariff rate is applied to imports up to a specified quantity (i.e.,the quota), and then a higher tariff rate is applied to imports over the quota.
2 Detailed information on Section 201 of the Trade Act of 1974 (Global Safeguard Investigations) isavailable at the U.S. International Trade Commission (USITC) website (http://www.usitc.gov/us201.
htm).
3 While safeguards are imposed only on slabs and flat products for Brazil, theses are Brazil’s major

exported steel products.
4 The countries/regions that challenged the U.S. measures to the WTO were the European Union (EU),

China, Japan, Korea, Switzerland, Norway, New Zealand and Brazil. Claims made by the complainants
are provided in World Trade Organization (2003).

2

by 3.3 percent. Francois and Baughman (2001) suggest that the provision of import relief
remedies for steel would impose cost of $1.9-4.0 billion a year on consumers and reduce
U.S. national income by $500 million to $1.4 billion a year. U.S. steel producers would
gain $242-496 million, but these gains would not re-establish the U.S. steel industry to be
profitable. USITC (2003) estimates that the effect of the safeguards using a static singlecountry computable general equilibrium (CGE) model and finds that the aggregate effectranges from a welfare gain of $65.6 million to a welfare loss of $110.0 million, with acentral estimate of a welfare loss of $41.6 million. It also estimates that the capital incomeof the steel industry would increase by $240 million (3.03 percent) and that of the steelconsuming industries would decrease by $601 million (0.01 percent).
Using a dynamic multi-country CGE model, we evaluate the effects of U.S.
safeguards on economic welfare, real GDP, steel trade, sectoral output and unit cost of theUnited States and its trading partners, with particular attention to those of Japan, China,
Korea and Taiwan, over the period 2002-2005. Unlike the model used by USITC (2003)
that can only evaluate the aggregate and sectoral effects within the United States, ourmodel can assess the effects on U.S. trading partners. In addition, by using a dynamic
model, we can more accurately specify the safeguard duties that are different between thefirst and second year. The next section provides the trends in U.S. steel imports by trading
partners during the 1970-2001 period. An overview of the model is given in section 3,
followed by a brief description of the scenario in section 4. Assessments of generalequilibrium effects of the U.S. safeguards are provided in section 5. The final section
summarizes the main findings of this paper.

2.

Trends in U.S. Steel Imports by Trading Partners, 1970-2001
Figure 1 provides the trends in the shares of U.S. steel imports from selected

trading partners over the period 1970-2001. Several noticeable trends are readily
observable from this figure. First, the share of U.S. steel imports from Japan declined
drastically from about 50 percent in 1976 to under 10 percent in 2000-2001. The decline in
the Japanese share over the 1976-92 period were largely attributable to two factors: (1) the
introduction of TPM from 1978-82, where minimum reference prices for imported steel

3were instituted, 5 and (2) VRAs were in effect from 1984-1992. Second, the share ofimports from the EU also declined significantly – from 45 percent in 1971 to 26 percent in2001. Third, although Korea’s steel exports to the United States increased rapidly during
the 1970-83 period, its exports to the U.S. relative to other trading partners showed a slightdownward trend during 1983-1997 before recovering in 1998-2001. Fourth, China, now
the world’s largest steel producer in tonnage, started to export its steel to the United Statesin the mid-1980s, but the share has remained relatively small (1-4 percent in 1990-2001).

Figure 1: Shares of U.S. Steel Imports by Trading Partners, 1970-2001(percent)
55
50
45
40
35
30
25
20
15
10
5
0
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Japan

Korea

China

TaiwanEU-15 (a)Can+Mex (b)BrazilCIS (c)Notes:(a) Austria, Belgium, Denmark, Finland, France, Germany, Great Britain, Greece, Ireland, Italy,
Luxembourg, Netherlands, Portugal, Spain, and Sweden.
(b) Canada and Mexico.
(c) CIS countries are Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kyrgyz
Republic, Latvia, Lithuania, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, andUzbekistan.
Source: Organisation for Economic Cooperation and Development (various years).

5 Crandall (1981, p. 114) estimated that given the 15 percent increase in relative import prices of steel

in 1978-1979 the TPM could have reduced the share of U.S. imports in total steel consumption from 18
percent to 13 percent.

4

Fifth, Taiwan started exporting steel to the United States in the mid-1970s after China
Steel began production in 1974, and it accounted for 1-4 percent of U.S. imports during
1978-2001. Finally, U.S. imports from Japan and Korea surged in 1998 as these countries
tried to shift large shares of their exports to the United States when demand in Asia
tumbled. However, largely because of the dramatic increase in U.S. antidumping suits inlate 1998, particularly against imports from Japan, U.S. imports from Japan and Korea
declined rapidly in 1999 (James and Parsons, 2003). Over the 1980-2001 period, theshares of U.S. steel imports from Japan, Korea, China and Taiwan declined from 46
percent in 1980 to 30 percent in 1990 and 20 percent in 2001.
Given the shares of U.S. imports from Northeast Asian and European countries
have declined over time, which countries have been able to increase the market shares in
the United States? As Figure 1 clearly indicates, U.S. steel imports from Canada and
Mexico have increased significantly since the mid-1980s. The NAFTA partners accounted
for over 25 percent of U.S. import share in 2001, up sharply from 12 percent in 1985. The
share of imports from Brazil increased from 3 percent in 1980 to 8 percent in 2001,
whereas the share of CIS countries (primarily Russia, Ukraine and Kazakhstan) rapidly
increased from under 1 percent in 1992 to 10 percent in 1998, before falling considerably
in the subsequent years.6 Overall, the clear trends of increasing shares of U.S. imports
from the NAFTA partners and Brazil and decreasing shares of the imports from theNortheast Asian countries and the EU have been revealed.

3.

Overview of the Model
The model used in this study is a dynamic global CGE model developed by van der

Mensbrugghe (2001). In the base model, all sectors are assumed to be perfectlycompetitive and operate under constant returns to scale. However, we later relax theseassumptions by specifying imperfect competition and increasing returns to scale in thesteel industry. Production in each sector is modeled by a series of nested CES production
functions, which are intended to represent the different substitution and complementarity
relations across various inputs in each sector. The CES nests for production archetype in

6 The sharp drop in U.S. imports from Russia in 1999 might be caused by a sharp increase in its

antidumping petitions and Russia’s export restraint agreement with the United States.

5

Figure 2: Production Nesting in the Manufacturing and Services Sectors

XP: Output

σp

ND: Aggregate intermediate demand

VA: Value added plus energy

σ=0σv

XAp: Intermediate demandσ

AL: Labor demand

HKTE bundle

σl

m

σe

XD: Demand fordomestic goods

XMT: Aggregate
import demand

Unkilledσ

Skilled

XEp: Energy
bundleHKT bundle

σ ep

w

WTF: Demand byregion of origin

By type of energy

σhHighlyskilledKT bundleσk

By region of origin…

6

CapitalSector-specificfactorFigure 2 (continued)
Definition of variables and parameters:
XP:
Output (by vintage)
ND:
Demand for aggregate non-energy intermediate demand
VA:
Demand for labor, capital, energy, and sector-specific factor bundle
XAp:
Demand for (Armington) intermediate goods (excluding energy)
XD:
Demand for domestically produced intermediate goods
XMT:
Aggregate import demand for intermediate goods
WTF:
Demand for imported intermediate goods by region of origin
AL:
Demand for aggregate labor (excluding ‘highly’ skilled)
HKTE:
Demand for human and physical capital, energy, and sector-specific factor bundle
XEp:
Demand for aggregate energy bundle
HKT:
Demand for human capital, physical capital, and sector-specific factor bundle
KT:
Demand for physical capital and sector-specific factor bundle
σp:Elasticity of substitution between ND and VA
Elasticity of substitution between AL and HKTE
σ v:
Elasticity of substitution between unskilled and skilled laborσl:Elasticity of substitution between XEp and HKTσ e:
Elasticity of substitution between different type of energy
σep:
σh:Elasticity of substitution between KT and highly skilled labor
Elasticity of substitution between physical capital and sector-specific factor
σ k:Note: The sector-specific factor includes land in agricultural sectors and the resource base in the coal, crudeoil, natural gas, and mining sectors.

goods and services other than crops and livestock are depicted in Figure 2. At the top nest,
production is formed by the combination of aggregate intermediate demand other thanenergy (ND) and value added plus energy (VA). The second nest consists of two nodes.
The first node decomposes aggregate intermediate demand into sectoral demand for goods
and services. The second node decomposes VA between demand for labor (L) and demandfor human capital, physical capital, energy and sector-specific factor composite (HKTE).
The third and subsequent nodes are decomposed by a similar fashion, as illustrated in
Figure 2.
Labor can have three different skill levels: unskilled, skilled and highly skilled.
The first two are substitutable and combined in a CES aggregation function as a single
labor bundle. Highly skilled labor is combined with capital to form a physical plus humancapital bundle.
In each period, the supply of primary factors—capital, labor and land—is generally
predetermined. The supply of land is assumed to be sensitive to the contemporaneous
price of land, however. Land is assumed to be partially mobile across agricultural sectors.
Thus rates of return are sector-specific, but sectoral land supply reacts to changes in7

relative rates of return. Some of the natural resource sectors also have a sector-specificfactor whose contemporaneous supply is price sensitive. The model includes adjustment
rigidities. An important feature is the distinction between old and new capital goods. In
addition, capital is assumed to be partially mobile, reflecting differences in themarketability of capital goods across sectors. Labor and population growth are exogenous.
Labor within each skill category is perfectly mobile across sectors.
All income generated by economic activity is assumed to be distributed toconsumers. A single representative consumer (or household) allocates optimally his/her
disposable income among the consumer goods and saving. The consumption/saving
decision is static: saving is treated as a good and its amount is determined simultaneouslywith the demands for the other goods. The price of saving is set arbitrarily equal to theaverage price of consumer goods. Investment is driven by aggregate saving, or the sum ofhousehold, government and foreign savings. We assume that foreign saving is exogenous
and that the ratio of government expenditures to GDP remains constant in each region
over time.
Products are differentiated by region of origin and modeled as imperfect substitutes.
On the import side, this is reflected by the implementation of the so-called Armington
assumption, where a constant elasticity of substitution (CES) specification is used toincorporate imperfect substitution of imported goods with respect to domestically
produced goods. A symmetric specification is used to model export supply, the latter being
implemented with constant elasticity of transformation (CET) functions. Trade measures
are fully bilateral and include both export and import taxes/subsidies. Trade and transport
margins are also included; therefore world prices reflect the difference between FOB andCIF pricing.
The model is calibrated to a given baseline from 1997 to 2005. The per capita GDP
growth rates are broadly consistent with the World Bank’s forecast. Productivity iscalibrated in the baseline to achieve the desired GDP trends. Several assumptions
underline the calibration of productivity. Agricultural productivity is exogenous, userdetermined and varies across regions. Manufacturing productivity growth is assumed to behigher than services productivity growth. An economywide productivity factor is8calibrated to achieve the given GDP target, and productivity growth is assumed to belabor-augmenting.

Table 1: Regional and Sectoral Aggregation
A. Regional Aggregation
Countries/Regions

Corresponding economies/regions in the GTAP database

United States
Japan
China
Korea
TaiwanASEANaEU-15

United StatesJapan
China, Hong Kong
Korea
TaiwanIndonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam
Austria, Belgium, Denmark, Finland, France, Germany, Great Britain, Greece,
Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden
Canada, Mexico
Australia, New Zealand, Switzerland, Rest of European Free Trade Area
BrazilCentral America and the Caribbean, Colombia, Peru, Venezuela, Rest ofAndean Pact, Argentina, Chile, Uruguay, Rest of South America
Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kyrgyz Republic,
Latvia, Lithuania, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine,
Uzbekistan
Hungary, Poland, Rest of Central European Associates
All the other economies/regions

Canada and Mexico
Other OECD
BrazilRest of Latin America
Former Soviet Union

Cent. and E. Europe
Rest of the world
B. Sectoral Aggregation
Sectors

Corresponding commodities/sectors in the GTAP database

Agriculture
EnergyAgriculture, forestry, fishing
Coal, oil, gas, petroleum and coal products, electricity, gas manufacture anddistribution
Minerals
Food products, beverages and tobacco products
Textiles, wearing apparel, leather products
Chemical, plastic and rubber products
Iron and steel
Nonferrous metals
Metal products
Machinery
Electronic equipment
Motor vehicles and parts
Other transport equipment
Wood products, paper products, publishing, non-metallic mineral products,
other manufactures
Construction
Sea transport, air transport, transport n.e.s.
Trade, communication, financial services, other services

Minerals
Processed foodTextiles and apparel
Chemical products
Iron and steel
Nonferrous metals
Metal products
Machinery
Electronic equip.
Motor vehicles
Other transp. equip.
Other manufactures
Construction
Transport services
Other servicesaIn the GTAP database, Brunei, Cambodia, Laos, and Myanmar are aggregated into the rest of the world.
Source: GTAP database, Version 5.

9

Most of the data used in the model come from version 5 of the GTAP database,which provides 1997 data on input-output, value added, final demand, bilateral trade, tax
and subsidy data for 66 regions and 57 sectors.7 For the purpose of the present study, thedatabase is aggregated into 14 regions and 17 sectors as shown in Table 1. The regional
detail focuses on Northeast Asian steel producers as well as other major U.S. trading
partners in steel. The sectoral detail focuses on steel and its downstream industries, such as
metal products, general machinery, motor vehicles, other transport equipment andconstruction.
In the alternative specification, we model the steel industry to be imperfectlycompetitive by introducing a price markup over average cost. Increasing returns arecalibrated to a cost disadvantage ratio given by

CDR =AC − MC FC
=
AC
TC

(1)

where AC, MC, FC and TC are average, marginal, fixed and total costs, respectively. For
illustrative purpose, we set both the price markup and cost disadvantage ratio to be 5
percent.
Two caveats should be borne in mind when we evaluate the effects of U.S. steel
protection in the next section. First, as noted above, we later relax the assumptions ofperfect competition and constant returns to scale for the steel industry, but imperfectcompetition is based on a simple specification where the price markup is exogenous.
Although it is more realistic to assume that there are strategic interactions among the firms,
it is extremely difficult to model them in a general equilibrium framework. Second, themodel assumes full utilization of capital, which is probably not a reasonable assumption.
There appears to be significant overcapacity of steel production in many countries.8 Whencapital is fully utilized, an increase in output of steel raises the rental rate of capital,

7 See Dimaranan and McDougall (2002) for detailed descriptions of the GTAP database, version 5.
8 Hufbauer and Goodrich (2001) suggest that world steel overcapacity has often exceeded 20 percent of

production during the past 30 years.

10thereby increasing the marginal cost of production in the steel industry. By contrast, whencapital is considerably underutilized, an increase in output is unlikely to raise the rental
rate of capital. In other words, the greater the extent of underutilization of capital, thesmaller will be an increase in the marginal cost (or the larger will be a reduction in themarginal cost under increasing returns to scale) resulting from an expansion of output.
Thus, the costs of protection are likely to become lower in countries where steel output
increases, whereas they are likely to become higher in countries where steel output
contracts.

4.

Policy Scenario
Table 2 summarizes U.S. safeguard measures for 11 categories of steel products.

The initial decision was to impose TRQs on slabs and higher duties on the other 10
product categories for a period of three years starting in March 2002. Then the quota limit
on slabs would be increased and the tariff rates on the other product categories would be
reduced progressively each year. For example, tariffs of 30 percent in 2002, 24 percent in
2003, and 18 percent in 2004 were to be imposed on certain finished flat products (plate,

Table 2: U.S. Safeguard Measures by Product Category
Product category
1 Slab2 Finished flat products (plate, hotrolled sheets, cold-rolled sheets,
coated sheets)
3 Hot-rolled bar
4 Cold-finished bar
5 Rebar
6 Certain welded tubular products
7
8
9
10
11

Carbon and alloy fittings andflanges
Stainless steel bar
Stainless steel rod
Stainless steel wire
Tin mill products

MeasuresFirst year
Second year
5.4 million short tons with
5.9 million short tons withover-quota tariff of 30%
over-quota tariff of 24%

30％ tariff

24％ tariff

15％ tariff

12％ tariff

13％ tariff

10％ tariff

15％ tariff

12％ tariff

8％ tariff
30％ tariff

7％ tariff
24％ tariff

Source: U.S. Trade Representative (2002).
Note: 1 short ton equals 0.90718 metric tons.

11hot-rolled sheets, cold-rolled sheets and coated sheets), hot-rolled bar, cold-finished bar
and tin mill products.9 However, because the safeguards were terminated in December
2003, the measures for the first two years are listed in Table 2.
In order to assess the consequences of the safeguard measures, it is necessary tocompute their tariff equivalents on U.S. imports of iron and steel [Standard International
Trade Classification (SITC) sector 67] because the GTAP database does not provide dataon more disaggregated steel products. We compute an increase in the tariff rate on steel
imports from region r as follows:∆t r ,t = ∑ θ r ,i ∆t i ,t(2)

iwhere ∆tr,t is the average increase in the U.S. tariff rate on imports of iron and steel fromregion r in year t, θr,i is the share of r’s steel product category i in total U.S. steel imports
from region r in 2000, and ∆ti,t is the increase in the tariff rate on product i in year t.

Table 3: Increases in the U.S. Tariff Rates on Iron and Steelresulting from the Safeguard Measures (percent)Exporting region

2002

2003

Japan
China
Korea
TaiwanASEAN
EU-15
Canada and Mexico
Other OECD
BrazilRest of Latin America
Former Soviet Union
Cent. and E. Europe
Rest of world

7.5
5.2
10.3
9.3
1.2
8.3
0.0
6.3
2.6
0.0
5.9
0.0
0.0

6.0
4.2
8.3
7.5
1.0
6.7
0.0
5.0
2.1
0.0
4.7
0.0
0.0

Sources: U.S. Trade Representative (2002), Organisation for Economic
Cooperation and Development (various years), and the authors’ calculations.

9 Over-quota shipments on slabs were imposed the same tariff rates as these product categories. See

U.S. Trade Representative (2002).

12

Estimates of increases in the U.S. tariff rates on iron and steel (SITC 67) resulting
from its safeguard measures are provided in Table 3. For slabs we assumed that tariff
equivalents of TRQs were 2 percent in the first year and 1.5 percent in the second year. It
is worth noting that most developing and transitional countries were on the exclusion list.
However, China, Korea, Taiwan and Malaysia were included in the safeguard action. For
certain products, some developing and transitional countries were included: Brazil forslabs and flat products; India, Thailand and Romania for carbon flanges; Moldova, Turkey
and Venezuela for rebar; and Thailand for welded pipe.

5.

Quantitative Assessments of the U.S. Safeguards
In sections 5.1-5.3 below, the effects of the U.S. safeguards are evaluated using thebase model with the assumptions of perfect competition and constant returns to scale in allindustries. In section 5.4, we relax these assumptions for the steel industry and compare
the results obtained under increasing returns with those obtained under constant returns.

5.1. Effects on Economic Welfare and Real GDP
Aggregate welfare gains and losses summarize the extent trade distortions arehindering growth prospects and the ability of economies to use the gains to help those
whose income could potentially decline. We compare the U.S. safeguard scenario with thebaseline situation for the years 2002-2005. Economic welfare is measured by Hicksian
equivalent variation (EV), which represents the income consumers would be willing toforego to achieve post-policy well-being (up) compared to baseline well-being (ub) at
baseline prices (pb):() (EV = E p b , u p − E p b , u b)(3)where E represents the expenditure function to achieve utility level u given a vector of
prices p (superscript b represents baseline levels, and p the post-reform levels). The model
uses the extended linear expenditure system (ELES), which incorporates savings in the
consumer’s utility function (Lluch, 1973; Howe, 1975). The ELES expenditure function iseasy to evaluate at each point in time.

13

The welfare results are summarized in Table 4. For the years 2002 and 2003 when
the safeguards were in place, U.S. welfare was estimated to be $161-192 million higher
than in the baseline where no safeguards were imposed. However, after the safeguard
measures were terminated, U.S. welfare would become slightly lower than in the baseline(–$34 million in 2004 and –$31 million in 2005). Although not shown in the table,
detailed results indicate that the changes in the terms of trade played the principal role inthese welfare changes. A relatively large size of the U.S. steel market implies that a
reduction in U.S. steel imports resulting from the safeguard duties would lower the world
price of steel. As a result, the terms of trade for the United States and other net importersof steel improved while those for net exporters of steel deteriorated during the time when
the safeguards were in place. In other words, the burden of the new U.S. tariffs waspartially born by foreign producers.10

Table 4: Effects of the U.S. Safeguards on Economic Welfare(Deviations in equivalent variations from the baseline in respective years)
Absolute changes (US$ million in 1997 prices)

United States
Japan
China
Korea
TaiwanASEAN
EU-15
Canada and Mexico
Other OECD
BrazilRest of Latin America
Former Soviet Union
Cent. and E. Europe
Rest of world
World total

Percent changes

2002

2003

2004

2005

in 2003

192.2
-88.8
7.7
-59.7
-13.3
2.0
-240.4
76.6
-16.9
-4.4
3.1
-58.4
16.1
11.4
-172.7

160.8
-76.8
5.9
-53.7
-13.0
1.6
-214.4
64.0
-14.5
-3.9
2.2
-48.7
13.3
9.1
-168.0

-33.7
-7.0
0.0
-5.0
-2.8
0.4
-16.1
3.6
-1.0
-0.6
-0.5
-1.1
0.0
0.2
-63.5

-30.5
-6.2
0.1
-4.6
-2.5
0.3
-14.6
4.6
-1.1
-0.6
-0.7
-1.3
0.0
-0.2
-57.4

0.0018-0.00220.0005-0.0123-0.00420.0003-0.0032
0.0068-0.0019-0.0006
0.0003-0.0071
0.00500.0006-0.0006

Source: Simulation experiments.

10 In his theoretical investigation, Johnson (1954) suggests a positive correlation between country size

and the optimal tariff rate.

14

As expected, most of the non-exempt countries incurred welfare losses. According
to our results, the EU was the biggest loser in absolute terms with a reduction in its EV by$214-240 million in 2002-2003, followed by Japan ($77-89 million), Korea ($54-60
million) and the former Soviet Union ($49-58 million). In percentage terms, Korea
incurred the greatest loss of 0.012 percent while Japan and Taiwan’s welfare fell by 0.0030.004 percent compared with the baseline values in 2003. China did not suffer any welfare
losses because its exports to the United States were quite small and it has been a net
importer of steel.
In contrast to most of the non-exempt countries, economic welfare of the exempt
countries increased during the U.S. impositions of safeguard measures on steel imports
from the non-exempt countries. In particular, Canada and Mexico experienced increases intheir EV of $64-77 million in 2002-2003. This resulted from increases in their steel
exports to the United States, thereby stimulating overall demand, as well as from an
improvement in their terms of trade.

Table 5: Effects of the U.S. Safeguards on Real GDP(Deviations from the baseline in respective years)
Absolute changes (US$ million in 1997 prices)

United States
Japan
China
Korea
TaiwanASEAN
EU-15
Canada and Mexico
Other OECD
BrazilRest of Latin America
Former Soviet Union
Cent. and E. Europe
Rest of world
World total

Percent changes

2002

2003

2004

2005

in 2003-118.1
-33.0
2.3
-13.2
-2.4
4.2
-52.3
14.9
-1.8
-1.5
-5.8
-7.2
3.3
5.6
-205.0-117.0
-28.2
2.5
-13.8
-3.4
4.0
-50.9
13.5
-2.4
-1.6
-4.9
-7.8
3.1
5.3
-201.7

-37.0
-6.6
1.1
-7.0
-3.4
0.6
-17.6
7.1
-1.7
-0.8
-1.0
-1.9
0.2
-0.3
-68.3

-35.6
-6.4
1.0
-6.8
-3.2
0.5
-16.9
7.8
-1.7
-0.8
-1.1
-2.1
0.2
-0.3
-65.5

-0.0012-0.0006
0.0002-0.0024-0.0009
0.0005-0.0006
0.0011-0.0002-0.0002-0.0006-0.0009
0.00090.0002-0.0006

Source: Simulation experiments.

Table 5 summarizes the impact of the safeguard measures on real GDP. Most
notably, real GDP of the United States was estimated to be $117-118 million lower in15

2002-2003 than in the baseline. This suggests that an increase in output of steel was morethan offset by reductions in output of other goods and services in the United States. In
percentage terms, the reduction in U.S. real GDP in 2003 was only 0.001 percent. For
Japan, Korea and Taiwan, reductions in their real GDPs were smaller than the reductionsin their EVs, as were for the EU, other OECD countries, Brazil and the former Soviet
Union. In contrast, gains in real GDPs for Canada and Mexico, Central and Eastern
Europe and the rest of the world were smaller than the gains in their EVs.
Overall, the effects of U.S. steel protection on economic welfare and real GDP
were estimated to be extremely small. This might be partly caused by the fact that thevolume of imports affected by the U.S. protection is quite small relative to the world trade,
but it also highlights how small the steel industry is in economic terms. The results mightalso explain why there are relatively few complaints about the costs of protectionism inthe steel industry.

5.2. Effects on Trade Flows
Table 6 presents trade flow adjustments in steel resulting from the U.S. impositionof safeguards. Figures are given in percent deviations from the baseline scenario for theyear 2003. To what extent Northeast Asian and other non-exempt countries’ steel exports
to the United States were reduced? Would steel exports of the NAFTA partners and othercountries on the exclusion list increase? Would major Northeast Asian steel exporters,such as Japan and Korea, increase their exports to the EU and East Asian markets tocompensate for the reductions in their market shares in the United States? Answers tothese questions are of particular interests to policy makers.
The percentage changes in U.S. steel imports by trading partner are highly
correlated with the changes in the U.S. tariff rates on steel imports summarized in Table 3.
The tariff equivalents of the U.S. safeguard measures were estimated to be highest in
Korea, followed by Taiwan, the EU, Japan, other OECD, the former Soviet Union and
China. The projected percent reductions in U.S. imports relative to the baseline in 2003
were largest (in absolute terms) for Korea (–25%), followed by Taiwan (–22%), the EU

16

Table 6: Changes in Trade Flows in Steel resulting from the U.S. Safeguards (Percent deviations from the baseline in 2003)
Exporting region

Importing region
UnitedStatesUnited StatesJapan
China (incl. HK)
Korea
TaiwanASEAN
EU-15
Canada and Mexico
Other OECD
BrazilRest of Latin America
Former Soviet Union
Cent. and E. Europe
Rest of worldWorld-16.56-9.32-24.68-21.695.42-19.17
10.31-12.79-0.14
10.52-11.45
10.55
10.53
-5.86

Japan

China,HK

Korea

TaiwanEU-15

Canada,MexicoOther
OECD

Rest of
world

World

-0.68

-0.55
-0.02
-0.03
0.04
0.00
-0.01
0.01
-0.23
0.00
-0.05
-0.04
0.08
-0.02
-0.03
0.00

-0.95
-0.42
-0.43

-0.68
-0.15
-0.16
-0.09

-0.82
-0.23
-0.24
-0.20
-0.23
-0.29
-0.21
-0.46
-0.21
-0.07
-0.24
-0.09
-0.22
-0.24
-0.21

0.42
0.96
0.95
1.01
0.97
0.96
0.98
0.74
0.97
0.93
0.93
1.05
0.96
0.94
0.64

-0.63
-0.09
-0.10
-0.03
-0.08
-0.08
-0.07
-0.30
-0.08
-0.12
-0.11
0.00
-0.09
-0.10
-0.08

-0.50
0.04
0.03
0.09
0.05
0.05
0.06
-0.17
0.05
0.01
0.01
0.13
0.04
0.02
0.04

-0.05
-1.36
-0.21
-1.90
-0.65
0.12
-1.46
0.81
-1.15
-0.01
1.14
-1.28
0.11
0.57
-0.82

-0.16
-0.09
-0.13
-0.14
-0.12
-0.36
-0.14
-0.18
-0.17
-0.06
-0.15
-0.16
-0.14

-0.41
-0.41
-0.40
-0.63
-0.41
-0.45
-0.44
-0.33
-0.42
-0.43
-0.47

-0.14
-0.12
-0.36
-0.13
-0.18
-0.17
-0.05
-0.14
-0.16
-0.16

Source: Simulation experiments.

17

(–19%), Japan (–17%), other OECD (–13%), the former Soviet Union (–11%) and China(–9%), the exactly same order as the increases in the U.S. tariff rates on steel by trading
partner.
The exclusions of the NAFTA partners and most developing and transitionalcountries imply that the price of imports from these countries relative to the price ofimports from the non-exempt countries for U.S. steel consumers declined in 2002-2003.
This led to increases in U.S. imports from Canada and Mexico, Latin America except
Brazil, Central and Eastern Europe and the rest of the world by 10-11 percent, thus largely
offsetting the fall in the total U.S. steel imports.11
According to our results, the U.S. safeguards did not induce the Northeast Asian
countries to increase their exports to the EU or East Asian markets. Instead, their exports
to Canada and Mexico increased slightly. Other than U.S. imports, adjustments in bilateral
trade flows were extremely small. In the aggregate, the U.S. steel imports were estimatedto decline by 5.9 percent (the last row of Table 6). The total steel exports of Japan, China,
Korea and Taiwan fell by 1.4, 0.2, 1.9 and 0.7 percent, respectively, whereas those of
Canada and Mexico, Latin American other than Brazil, Central and Eastern Europe andthe rest of the world increased by 0.8, 1.1, 0.1 and 0.6 percent, respectively (the lastcolumn of Table 6). Thus, although the safeguards affected U.S. bilateral trade with its
trading partners significantly, their effect on global trade was limited.

5.3. Effects on Sectoral Output and Average Cost
The impact of the U.S. safeguard measures is expected to vary significantly acrosssectors. In particular, the industries that use steel intensively as an intermediate input arelikely to be adversely affected by the safeguard duties. To what extent the steel-consuming
industries in the United States and the Northeast Asian countries have been affected by the
U.S. safeguards is of great concerns to policy makers in these countries.

11 Although the safeguard duties were imposed on imports of the designated steel products from

Malaysia and those of carbon flanges from Thailand, tariff equivalents of the safeguard measures for
the ASEAN countries were quite low. Thus, the relative price of imports from ASEAN also declined,
and the resulting effect on U.S. steel imports from ASEAN was positive.

18

Table 7 provides real output results for the year 2003 on steel and major steelconsuming industries—metal products, general machinery, motor vehicles, other transport
equipment and construction—resulting from the temporary safeguards. Real output ofsteel in the United States was estimated to increase by 1.2 percent, whereas that of Canada
and Mexico would increase by 2.1 percent, mainly driven by a sharp increase in theexports to the United States. The contraction in output of Northeast Asian producers wasvery small, ranging from –0.1 percent (China) to –0.8 percent (Korea).

Table 7: Changes in Output of Steel and Related Industries resulting from the U.S. Safeguards(Percent deviations from the baseline in 2003)

United States
Japan
China
Korea
TaiwanASEAN
EU-15
Canada and Mexico
Other OECD
BrazilRest of Latin America
Former Soviet Union
Cent. and E. Europe
Rest of world
World total

Iron and
steel

Metal
products

GeneralMachineryMotorvehiclesOther trans.
equipment

Construction

1.258-0.280-0.053-0.763-0.3400.072-0.6582.113-0.300-0.0030.264-0.7040.189
0.167-0.027-0.126
0.027
0.035
0.078
0.161
0.073
0.036
0.195
0.032
0.012
0.024
0.021
-0.0060.019
0.001-0.142
0.080
0.021
0.139
0.087
0.063
0.087
-0.154
0.070
0.019
0.019
0.059
-0.0010.010
0.006-0.117
0.077
0.000
0.067
0.034
-0.0080.035-0.1460.009
0.011-0.0080.032-0.022-0.008-0.010-0.102
0.061
0.018
0.157
0.070
0.056
0.106
-0.1590.047
0.016-0.031
0.089
0.033
0.020
-0.006-0.007-0.0050.000-0.024-0.0180.000-0.0060.018-0.005-0.002-0.003-0.0060.001
0.001-0.005

Source: Simulation experiments.

According to our results, the U.S. safeguards caused output contractions in themetal products, general machinery, motor vehicles, other transport equipment andconstruction sectors in the United States although the impact on these industries was
extremely small. By contrast, it led to output expansions in the steel-consuming industries
other than construction in Japan, China, Korea and Taiwan, even though the impact wasagain very small.
The effects on output of the steel-consuming industries were largely attributable tochanges in their average costs. Table 8 presents the effects on average costs of steel andthe downstream industries resulting from the U.S. safeguards. In the United States, theaverage costs of steel-consuming industries rose mainly because the price of steel
19increased. On the contrary, the average costs of the same industries in the non-exempt
countries fell. Had the United States covered a much wider range of steel products or set
considerably higher tariff rates, they might have lead to significant deteriorations in theinternational competitiveness of U.S. steel-consuming industries.

Table 8: Changes in Average Costs of Steel and Related Industries resulting from the U.S. Safeguards(Percent deviations from the baseline in 2003)

United States
Japan
China
Korea
TaiwanASEAN
EU-15
Canada and Mexico
Other OECD
BrazilRest of Latin America
Former Soviet Union
Cent. and E. Europe
Rest of world
World total

Iron and
steel

Metal
products

GeneralMachineryMotorvehiclesOther trans.
equipment

Construction

0.137-0.003-0.001-0.013-0.006-0.005-0.0100.051-0.0070.003
0.002-0.028-0.004
0.000
0.009

0.121
-0.008-0.001-0.020-0.007-0.003-0.0100.050-0.0070.003
0.010-0.029-0.002
0.000
0.007

0.105
-0.015-0.002-0.045-0.011-0.005-0.0190.089-0.0130.007
0.022-0.058-0.004
0.001
0.004

0.052
-0.008-0.001-0.021-0.006-0.001-0.0100.044-0.0070.003
0.011-0.028-0.004
0.000
0.002

0.038
-0.0060.000-0.020-0.0010.000-0.0060.045-0.0060.004
0.010-0.030-0.001
0.001
0.002

0.030
-0.008-0.001-0.024-0.0070.000-0.011
0.052-0.0070.003
0.012-0.030-0.0010.001
0.001

Source: Simulation experiments.

5.4. Increasing Returns to Scale
In any CGE models, simulation results are sensitive to the assumptions of themodel. For example, previous studies (e.g., Harris, 1984; Brown and Stern, 1989; Francois
and Roland-Holst, 1997) have shown that the gains from trade liberalization could besignificantly larger when some of the sectors are characterized by imperfect competitionand scale economies. Thus, the costs of the U.S. safeguards are likely to become higher if
we relax the assumptions of perfect competition and constant returns to scale (CRS) andinstead incorporate imperfect competition and increasing returns to scale (IRS) into themodel.
Table 9 summarizes the results on economic welfare, real GDP, and U.S. steel
imports under CRS and IRS in the steel industry. In the latter case, a 5 percent pricemarkup over average cost and the cost disadvantage ratio (see equation 1) of 5 percent are20

introduced in the steel industry. In all the other industries, we still maintain theassumptions of perfect competition and CRS.

Table 9: Effects of the U.S. Safeguards under Constant Returns and Increasing Returns
in the Steel Industry (Percent deviations from the baseline in 2003)
Economic welfare(millions of 1997 US$)RegionUnited States
Japan
China
Korea
TaiwanASEAN
EU-15
Canada and Mexico
Other OECD
BrazilRest of Latin America
Former Soviet Union
Cent. and E. Europe
Rest of world
World total

Real GDP(millions of 1997 US$)U.S. imports of steel(percent)

CRS

IRS

CRS

IRS

CRS

IRS

160.8
-76.8
5.9
-53.7
-13.0
1.6
-214.4
64.0
-14.5
-3.9
2.2
-48.7
13.3
9.1
-168.0

220.2
-97.4
1.6
-70.7
-17.4
0.9
-306.7
111.5
-19.5
-4.2
4.7
-66.5
15.9
15.6
-211.8-117.0
-28.2
2.5
-13.8
-3.4
4.0
-50.9
13.5
-2.4
-1.6
-4.9
-7.8
3.1
5.3
-201.7

-56.6
-40.1
-0.7
-29.2
-6.9
3.9
-136.9
52.5
-6.9
-1.7
-2.2
-24.6
5.8
12.7
-231.2-16.56-9.32-24.68-21.695.42-19.17
10.31-12.79-0.14
10.52-11.45
10.55
10.53
-5.86

-20.33-11.49-29.54-26.07
6.74-23.11
12.69-16.04-0.34
13.00-14.34
12.99
12.97
-6.98

Note: CRS is the base model with perfect competition and constant returns to scale in all industries, whereas
IRS introduces a 5 percent price markup over average cost and the cost disadvantage ratio of 5 percent in thesteel industry.
Source: Simulation experiments.

As expected, the magnitudes of changes in economic welfare are generally larger
under IRS than under CRS. An absolute change in steel output becomes greater whenmarginal cost declines with output. Thus, in countries where steel output expands (e.g., theUnited States, Canada and Mexico), larger increases in steel production have a positiveeffect on real GDP even though the change in real GDP is still negative in the UnitedStates because of output contractions in the steel-consuming sectors. Combined with the
improvements in the terms of trade for these countries, the welfare gains would becomelarger for the United States and the countries that were exempted from the U.S.

21

safeguards.12 By contrast, in countries where steel output contracts (e.g., Japan, Korea,
Taiwan and the EU), greater reductions in steel output have a negative effect on real GDP.
Combined with the deteriorations in the terms of trade for most of these countries, thewelfare losses would become greater for most of the non-exempt countries. Because
additional losses in economic welfare and real GDP are greater than additional gains inthese variables under IRS, the world as a whole would incur greater welfare and real GDP
losses from the U.S. safeguards when the steel industry is characterized by imperfectcompetition and IRS (the last row of Table 9).
Changes in U.S. imports of steel by trading partner are also magnified under IRS.
For example, the reductions in imports from the Northeast Asian countries would increase
from 9-25 percent under CRS to 11-30 percent under IRS. Similarly, U.S. imports from
Canada and Mexico would increase from 10 percent to 13 percent.

6.

Concluding Remarks
This paper has provided quantitative assessments of the temporary U.S. safeguards

in 2002-2003 using a 14-region, 17-sector dynamic CGE model. The results suggest thatthe effects of the safeguards on economic welfare, real GDP, trade flows, and real output
of steel and the downstream industries were very small. According to our results, the U.S.
welfare marginally increased during the two years when the safeguards were in effectbecause of an improvement in its terms of trade. By contrast, U.S. real GDP was estimatedto decline by $117-118 million in 2002-2003 largely because an increase in the price ofsteel would reduce output of the steel-consuming industries. Japan, Korea and Taiwan
incurred some welfare losses, but they were extremely small in percentage terms. China
did not suffer any welfare losses as its exports to the United States were very small and it
experienced a small improvement in the terms of trade. The reductions in real GDP were
negligible for Japan, Korea and Taiwan as the expansions of the steel-consuming
industries almost offset the contraction of the steel industry.

12 Using a partial equilibrium imperfect-competition model of the U.S. steel industry, Harris (1994) has

shown that tighter quotas under VRAs could lead to an improvement in the U.S. welfare.

22

U.S. steel imports from the Northeast Asian countries declined by 9-25 percent,and those from the EU, other OECD countries and the former Soviet Union fell by 11-19
percent. However, U.S. imports from the NAFTA partners and other countries on the
exclusion list increased by 10-11 percent, largely offsetting the reductions in the total U.S.
steel imports. Real output of steel in the United States was predicted to increase by 1.3
percent, whereas that of Northeast Asian producers contract by 0.1-0.8 percent. Canada
and Mexico would realize a relatively large gain in real output, mainly driven by a sharp
increase in their exports to the United States. The effects on output of the steel-consuming
industries are negative in the United States and positive in the Northeast Asian countries,
but they are extremely small. Under the alternative specification where the steel industry
was characterized by imperfect competition and increasing returns to scale, the effects
became larger, but still extremely small in percentage terms. These results suggest that the
impact of the U.S. safeguards was minimal.
The magnitudes of our results are significantly smaller than those obtained by
Francois and Baughman (2001), who estimated that U.S. GDP would fall by $500 million
to $1.4 billion. This was because they evaluated the effects of the imposition of 9.2-20.7
percent tariffs on steel imports, which were of much higher tariff rates than used in ourstudy. They also included only Canada and Mexico on the exclusion list although the great
majority of developing countries were excluded from the U.S. safeguards.
In this paper, we attempted to estimate the impact of the temporary safeguards thatwere in effect in 2002-2003. Thus, no attempts were made to assess the effects of theprotection of U.S. steel industry that existed prior to 2002, which were much more
substantial and long-lasting. The effects of the safeguards were likely to be extremely
small as we estimated, but the past U.S. protection policies might have had substantial
effects on the bilateral trade flows in steel, as well as the efficiency and competitiveness ofthe steel and the steel-consuming industries in the United States and Northeast Asia.

23

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25