The Macroeconomic Effects of Trade Tariffs: Revisiting the Lerner Symmetry Result
IMF Working Papers, July 7, 2017
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- The Macroeconomic Effects of Trade Tariffs: Revisiting the Lerner Symmetry Result
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Bibliographic details
- Authors: Jesper Lindé, Andrea Pescatori
- Published: July 7, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484306116.001
Core findings
- The Lerner symmetry result—that a combined import tariff and export subsidy have no real effects—holds up approximately across a number of alternative assumptions in an open economy New Keynesian model with price rigidities.
- Quantitatively important long-term deviations from Lerner arise under complete international asset markets.
- Direct pass-through of tariffs and subsidies to prices and slow exchange rate adjustment can generate significant short-term deviations from the Lerner result.
- A trade war induces substantial macroeconomic costs: permanently lower income and permanently lower trade volumes.
- A fully symmetric retaliation to a unilaterally imposed border adjustment tax can prevent any real or nominal effects.
Model context and mechanisms
- Framework: open economy New Keynesian model with price rigidities.
- Mechanisms producing deviations from Lerner symmetry highlighted:
- Complete international asset markets → important long-term deviations.
- Direct pass-through of tariffs/subsidies to prices → significant short-term deviations.
- Slow exchange rate adjustment → significant short-term deviations.
- Policy interaction: symmetric retaliation can neutralize effects of unilateral border adjustment taxes.
Policy implications and recommendations
- Unilateral imposition of border adjustment taxes risks real and nominal disturbances unless met by fully symmetric retaliation.
- Policymakers should account for the structure of international asset markets when assessing long-term effects of trade policy.
- Consideration of price pass-through and exchange rate dynamics is crucial for short-term impact assessment of tariffs and subsidies.
- Trade wars can cause persistent losses in income and trade volumes; avoiding or de-escalating retaliatory cycles is important to limit permanent damage.
Key statistics and publication metadata
- Pages: 54
- Volume: 2017
- Issue: 151
- Series: Working Paper No. 2017/151
- DOI: https://doi.org/10.5089/9781484306116.001
- Stock No: WPIEA2017151
- ISBN: 9781484306116
- ISSN: 1018-5941
- Publication date listed: July 7, 2017
- Authors: Jesper Lindé, Andrea Pescatori
- Subject tags: Exchange rates, Export subsidies, Foreign exchange, Imports, International trade, Real exchange rates, Tariffs, Taxes
- Keywords: Border Adjustment Tax, Complete Markets, exchange rate appreciation, Exchange rates, Export Subsidies, Global, home economy, home import, import price net, import sector, import tariff, import tariff hike, Import Tariffs, Imports, Incomplete Markets, Lerner Condition, New Keynesian open-economy model, PCP export price, price distortion, Real exchange rates, steady state import share, tariff case, Tariffs, trade share, Trade War, WP
Source: IMF Working Paper — "The Macroeconomic Effects of Trade Tariffs: Revisiting the Lerner Symmetry Result", Jesper Lindé and Andrea Pescatori, Working Paper No. 2017/151.
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