The Macroeconomic Effects of Trade Tariffs: Revisiting the Lerner Symmetry Result
60 Pages Posted: 2 Jan 2018
Date Written: December 2017
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 change in 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. Deviations from symmetry, however, do not necessarily imply an impact on global output and are often limited to a redistribution of production and consumption across countries. 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 sizable adverse real or nominal effects.
Keywords: Border Adjustment Tax, Import Tariffs and Export Subsidies; Lerner Condition, Incomplete and Complete Markets, New Keynesian open-economy model, Trade War
JEL Classification: E52, E58
Suggested Citation: Suggested Citation