The Macroeconomic Effects of Trade Tariffs: Revisiting the Lerner Symmetry Result

Abstract

We study the robustness of the Lerner symmetry result in an open economy New Keynesian model with price rigidities. While the Lerner symmetry result of no real effects of a combined import tariff and export subsidy holds up approximately for a number of alternative assumptions, we obtain quantitatively important long-term deviations under complete international asset markets. Direct pass-through of tariffs and subsidies to prices and slow exchange rate adjustment can also generate significant short-term deviations from Lerner. Finally, we quantify the macroeconomic costs of a trade war and find that they can be substantial, with permanently lower income and trade volumes. However, a fully symmetric retaliation to a unilaterally imposed border adjustment tax can prevent any real or nominal effects.

Protectionism and the Business Cycle

“…37 At the same time, higher tari¤s reduce aggregate real income (expenditure reduction). 38 The reason is again a combination of macroeconomic and microeconomic forces. At the macro level, the increase in the price of imports makes investment in physical capital-which combines both Home and Foreign goods-more costly.…”

“…For instance, see Barattieri's (2014) analysis of global imbalances and asymmetric trade integration in goods versus services, or Cacciatore's (2014) study of trade integration and labor market dynamics with heterogeneous …rms and labor market frictions. Farhi, Gopinath, and Itskhoki (2014) pioneered a literature that investigates the ability of policymakers to deliver devaluation-consistent dynamics under a ‡exible exchange rate by using …scal policy tools, and a budding literature is exploring the macroeconomic consequences of combinations of trade policy instruments (tari¤s-cum-subsidies) or of the border adjustment proposal (Barbiero, Farhi, Gopinath, and Itskhoki, 2017;Erceg, Prestipino, and Ra¤o, 2017;Lindé and Pescatori, 2017). We restrict attention to tari¤s (which would be legal to impose under WTO rules in the context of antidumping procedures) as the benchmark trade policy tool, and-when the exchange rate is …xed-we do not design tari¤ setting to generate dynamics that mimic any feature of a devaluation.…”

Intellectual Property, Tariffs, and International Trade Dynamics

“…We add to this literature by exploring the interaction between trade policy and IPR protection in the context of global supply chains. Barbiero et al (2017), Barattieri et al (2018), Erceg et al (2017), Farhi et al (2014), and Linde and Pescatori (2017) are some notable examples that explore the effect of trade policy instruments on macroeconomic dynamics, though none focus directly on innovation.…”

BAT Signals from Asset Markets: Estimating the U.S. Dollar Response to a Destination-Based Cash-Flow Tax

“…In contrast, the model in Barbiero, Farhi, Gopinath and Itskhoki (2018) implies that the dollar appreciates by almost as much as the tax adjustment. Finally, Linde and Pescatori (2017) finds that the amount of exchange rate appreciation is conditional on a number of modeling assumptions. Given the differences in model-derived results, empirical evidence regarding the responsiveness of the dollar would be helpful.…”