DP12534 The Macroeconomic Effects of Trade Tariffs: Revisiting the Lerner Symmetry Result

Author(s): Jesper Lindé, 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, Trade War
JEL(s): E52, E58
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12534

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.