Lerner Symmetry Research Articles

International Sanctions and Limits of Lerner Symmetry

After a wave of globalization, trade wars and financial sanctions again become frequent tools of international policymaking, leading to an increased interest in the consequences and effectiveness of international sanctions. Itskhoki and Mukhin (2022b) show that Lerner symmetry provides an important benchmark with import and export sanctions equivalent in terms of their effects on allocations and welfare. This abstracts from several practical issues, including the timing of sanctions, interactions between trade and financial restrictions, and the effects of sanctions on the financial sector. We incorporate these features to study their implications and emphasize points of departure from Lerner symmetry.

The Trade Policy Collision of Our Times: China’s Subsidies Encounter Abba Lerner and David Ricardo

This note takes a contrarian position on the significance of China’s subsidies, which are generally viewed as intractable and damaging to the rules-based system. It considers the implications of Lerner Symmetry for the aggregate effect of China’s subsidies and the implications of comparative advantage for the differential effects across industries, in a context where the effective differential tax burdens are unknown, as indeed is also the case with differential effects of tax and subsidy regimes in the rest of the world. It concludes that the net effect of China’s subsidies is much less than commonly supposed and that differential effects that may be damaging can be handled, as they have been in the past, through tools available under the WTO Agreement.

Lerner Symmetry: A Modern Treatment

Which policies are protectionist and which ones are not? The Lerner Symmetry Theorem establishes that import tariffs and export taxes are equally protectionist. In this paper we provide a modern treatment of this classical result, highlighting the importance of multinational firms, global imbalances, and imperfect competition. Under perfect competition, the result follows from the separability of consumption and production across countries, ruling out tourism and some forms of multinational firms, but not others. Though we do not require trade balance, the role of initial assets is subtle: our result rules out foreign ownership of domestic assets, but does not constrain domestic ownership of foreign assets. Under imperfect competition, our result effectively rules out all multinational firms. We conclude by discussing the implications for border adjustment taxes. (JEL D41, D43, F13, F14, F23)

The macroeconomic effects of trade tariffs: Revisiting the Lerner symmetry result

We study the robustness of the Lerner symmetry result in an open economy New Keynesian model with price rigidities. While the Lerner symmetry result, i.e. the absence of allocative and trade-flow effects of an equally-sized 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 an unilaterally imposed border adjustment tax can prevent any sizable adverse real or nominal effects.

The Global Macroeconomics of a Trade War. The Eagle Model on the US-China Trade Conflict

We study the global macroeconomic effects of tariffs using a multiregional, general equilibrium model, EAGLE, that we extend by introducing US tariffs against Chinese imports into the US, and subsequently Chinese tariffs against US imports into China, consistent with recent trade policies by the US and the Chinese governments. We abstract from tariffs on goods exported from the euro area, focusing on a US-China trade war. A unilateral tariff from the US against China dampens US exports in line with the Lerner Symmetry theorem but global output contracts. Global output contracts even further after China retaliates. The euro area benefits from this trade war. These European trade diversion benefits are caused by cheaper imports from China and improved competitiveness in the US. As price stickiness in the export sector in each region increases, the negative effects of tariffs in the US and China are mitigated, but the positive effects in the euro area are then also dampened.

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The Global Macroeconomics of a Trade War: The EAGLE Model on the US-China Trade Conflict

We study the global macroeconomic effects of tariffs using a multiregional, general equilibrium model, EAGLE, that we extend by introducing US tariffs against Chinese imports into the US, and subsequently Chinese tariffs against US imports into China, consistent with recent trade policies by the US and the Chinese governments. We abstract from tariffs on goods exported from the euro area, focusing on a US-China trade war. A unilateral tariff from the US against China dampens US exports in line with the Lerner Symmetry theorem but global output contracts. Global output contracts even further after China retaliates. The euro area benefits from this trade war. These European trade diversion benefits are caused by cheaper imports from China and improved competitiveness in the US. As price stickiness in the export sector in each region increases, the negative effects of tariffs in the US and China are mitigated, but the positive effects in the euro area are then also dampened.

Endogenous trade policy in general equilibrium: An interaction of redistribution rule, trade openness, and labor market condition

Using a general equilibrium framework, the paper derives trade policy endogenously for a small country. It shows that, contrary to the existing literature, a lobbying industry is not guaranteed trade protection; it may even face trade taxes. Besides lobbying, trade policy depends on other factors such as the trade revenue distribution rule, income distribution across groups, trade openness, factor substitutability in production, industry employment size, and labor market flexibility. The paper also shows that the observed phenomenon of government preference for import tariffs over export subsidies—a long overdue puzzle—is an inherent outcome of lobbying equilibrium. It also shows that trade policies such as import tariffs and export taxes that have the same impact on economic market—Lerner symmetry (1936)—are driven by the same forces in the political market.

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

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.

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

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.

The Asymmetric Lerner Symmetry Theorem

This paper discloses two mistakes in Lerner's symmetry theorem. He has confused the debit and credit of his accounting, for his export tax is actually a subsidy. He has confused the exchange relation. This paper also hints on the source of these mistakes.

HOW LARGE ARE THE IMPACTS OF CARBON MOTIVATED BORDER TAX ADJUSTMENTS?

This paper discusses the size of impact of carbon motivated border tax adjustments on world trade and welfare. We report numerical simulation results which suggest that impacts on welfare, trade, and emissions will likely be small. This is because proposed measures use carbon emissions in the importing country in producing goods similar to imports rather than carbon content in calculating the size of barriers. Moreover, because border adjustments involve both tariffs and export rebates, it is the differences in emissions intensity across sector rather than emissions level which matters. Where there is no difference in emissions intensities across sectors, Lerner symmetry holds for the border adjustment and no relative effects occur.

Trade taxes and international investment

Abstract This paper demonstrates that international investment disturbs the conventionally understood equivalence between import tariffs and export taxes. Fundamentally, remittances to foreigners introduce an additional pecuniary channel between countries so that two‐good Lerner Symmetry generally will not hold. Moreover, because tariffs subsidize investors in the local import competing sector while export taxes can extract rent from foreign investors in the export sector, the pattern of international investment will influence government preferences over trade policy instruments as well as levels. Notably, trade tax symmetry is restored by introducing a third policy tool in the form of a direct a tax on international remittances.

'Currency Manipulation' and World Trade

Central bank intervention in foreign exchange markets may, under some conditions, stimulate exports and retard imports. In the past few years, this issue has moved to center stage because of the foreign exchange policies of China. China has regularly intervened to prevent the RMB from appreciating relative to other currencies, and over the same period has developed large global and bilateral trade surpluses. Numerous public officials and commentators argue that China has engaged in impermissible manipulation, and various proposals for stiff action against China are now pending on Capitol Hill. This paper clarifies the theoretical relationship between exchange rate policy and international trade, and addresses the question of what content can be given to the concept of manipulation as a measure that may impair the commitments made in trade agreements. The analysis goes to the proper relationship between IMF obligations and WTO obligations and to the question whether trade measures can be an appropriate response to exchange rate policies. Our conclusions are at odds with much of what is currently being said in Washington. For example, it is often asserted that China's currency policies have real effects that are equivalent to an export subsidy. In fact, however, if prices are flexible the effect of exchange rate intervention parallels that of a uniform import tariff and export subsidy, which will have no real effect on trade, an implication of Lerner's symmetry theorem. With prices, the real effects of exchange rate intervention and the translation of that intervention into trade-policy equivalents depend critically on how traded goods and services are priced. We show how the effects differ, according to whether exporters invoice in the local currency of the producer, in the currency of the buyer, or in a vehicle currency such as dollars. The real effects of China's policies are thus potentially quite complex, are not readily translated into trade-policy equivalents, and are dependent on the time frame over which they are evaluated (because prices are less sticky over a longer time frame). Accordingly, we are skeptical about many of the policy responses now under consideration in Washington both on economic and legal grounds.

Trade Imbalances, International Investment, and a Limitation of Lerner's Symmetry Theorem

This paper sounds a caution to international trade economists, demonstrating that the equilibrium trade imbalances implied by most models of international investment disturb the symmetry between import tariffs and export taxes found by Lerner (1936). When trade is unbalanced, Lerner's equivalence result holds only when (i) trade tax revenue is redistributed among consumers, (ii) neither the import tariff nor the export tax would be prohibitive, and (iii) the value of trade imbalance at world prices is invariant to instrument choice. The last condition implies that Lerner symmetry generally will not obtain in many otherwise standard trade models with international investment, since remittances to foreign investors - a source of permanent trade imbalances- typically depend on both relative and absolute local prices, and thus on the government's choice of trade tax instrument. Endogenizing trade policy only exacerbates the asymmetry, since international investment influences government preferences over trade policy instruments as well as levels. Notably, Lerner symmetry can be resurrected by introducing a third policy tool in the form of a direct a tax on international investment returns. Future work therefore should either reinstate Lerner symmetry by adopting investment taxes, or at very the least, acknowledge the trade tax asymmetry inherent to models with international investment.

On Mixed Strategies for Development

The paper investigates whether mixed trade strategies of import substitution and export promotion, if permanently or temporarily applied, can generate pro‐tradables movements in the real exchange rate. Static and dynamic general‐equilibrium modeling with a nontradables sector and alternative types of tradables is used to explore real exchange rate responses to uniform and nonuniform trade policy interventions. The paper shows that uniform, permanent interventions are neutral, having no impact on the equilibrium real exchange rate. The real exchange rate effect of temporary uniform interventions is, however, in general ambiguous when prices and incomes are fully endogenized. The breakdown of Lerner symmetry or of neutrality following uniform temporary interventions does not mean that intended promotion of tradables necessarily results in a pro‐tradables movement in the real exchange rate.

Optimal export taxes in a multicountry framework

This paper extends the optimum export tax analysis to multicountry partial (PE) and general equilibrium (GE) frameworks, using a computable general equilibrium (CGE) model of the global cocoa market. Analyzing myopic optimum, Nash optimum and Nash revenue maximizing taxes, we show that optimum and revenue maximizing taxes obtained in the GE framework differ from their PE counterparts, as they are determined not only by the elasticity of the residual demand curve facing the country, but by domestic supply conditions as well. Second, not only are Nash revenue maximizing taxes higher than Nash optimum taxes in the GE, but, paradoxically, the society attains a higher level of welfare under Nash revenue maximizing taxes than under Nash optimum taxes. Finally, we show that the frequent use of Lerner symmetry [Lerner, A.P., 1936. The symmetry between import and export taxes. Economica 11, 306–313.] in the policy-oriented analysis of optimum export taxes is not warranted.

Optimal Export Taxes in a Multicountry Framework

Using a computable general equilibrium model of the global cocoa market we analyze optimal export taxes in a multicountry framework. We show that Lerner's symmetry theorem for uniform taxes does not carry to the case of intraindustry trade with non-uniform taxes. Import liberalization in other sectors leads to a decrease, rather than an increase, in the optimal export tax on cocoa. We also show that, because the elasticity of domestic cocoa supply is not constant, the partial equilibrium definition of the optimal export tax does not hold in a general equilibrium model.