Economic theories of
trade agreements identify a number of potential linkages between trade
liberalization and the subsequent re-imposition of import protection under
safeguard exceptions. To our knowledge, this paper is the first product-level
study to explicitly investigate the link between liberalization and the
subsequent re-imposition of such protection. We overcome endogeneity problems
by exploiting tariff-cut heterogeneity across products within India, a
country that underwent a major exogenous tariff reform program in the early
1990s and subsequently became a frequent user of new safeguard and antidumping
import restrictions. First, we provide structural estimates from a Grossman and
Helpman (1994) model modified to examine determinants of Indian antidumping and
safeguard use, and we find that products with larger tariff cuts between 1990
and 1997 are associated with an increase in new import protection in the early
2000s. Second, estimates from a reduced-form model confirm these results and
suggest that they are economically important – i.e., a one standard deviation
increase in the size of the tariff cut away from the mean increases the
predicted probability by almost 50% of such new protection. Third, we find
heterogeneity in the size of the effect across sectors as tariff cuts are an
important determinant of such new protection within the steel, iron and paper
industries, but not within industrial chemicals, for which there is strong
evidence of retaliatory or collusive effects. Combined, our results are
consistent with the theory that access to such policy exceptions dilutes the
potential commitment device role played by trade agreements. The results also
provide one explanation for separate estimates in the literature that the magnitude
of import reduction associated with India's use of antidumping is
similar to the initial import expansion associated with its tariff reform.
Finally, we interpret the implications of our results for the burgeoning
research literature examining the effects of liberalization on India’s
micro-level development.