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

Author(s): Jesper Lind� and Andrea Pescatori

Publication Date: December 2017

Keyword(s): Border Adjustment Tax, Import Tariffs and Export Subsidies, Incomplete and Complete Markets, Lerner Condition, New Keynesian open-economy model and Trade War

Programme Area(s): International Macroeconomics and Finance

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 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.

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Bibliographic Reference

Lind�, J and Pescatori, A. 2017. 'The Macroeconomic Effects of Trade Tariffs: Revisiting the Lerner Symmetry Result'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12534