Is the Lerner symmetry theorem "true"?

Question

It says that an export tax is equivalent to an import tariff. Lerner (1936) demonstrated this in a standard two good general equilibrium model. Essentially, both policies tilt relative prices in the same way. Werning has recently shown the result generalizes in various microeconomic directions. But for virtually all politicians it would seem absurd advice that if they can't get away with import tariffs, set an export tax which is just as good and won't trigger retaliation etc. Could the politicians be right?

Answer 1

The paper by Costinot and Werning you seem to allude to above does not just generalize Lerner's result, it also shows when the conclusion of the theorem can fail. In particular, multinational firms can only be incorporated under fairly restrictive assumptions. I'm curious where your information about politicians comes from, btw.

Comments

Sorry, I missed the attribution to Costinot.

It is true that CW find that in the presence of multinationals, equivalence may sometimes break down. Even in these cases, when import tariffs and export taxes are not identical, overall effects of both are similarly protectionist, at least in the model. Yet the WTO rules do not discipline the use of export taxes (as opposed to subsidies) and it is rare for countries to use them (a recent exception is use by China on intermediate goods used in goods imported into China, in effect an import tariff). I claim this is because policymakers of all stripes do not see import tariffs and export tariffs as in any way substitutes. The debates around the Hawley-Smoot tariff bill of 1929 never suggested that we could do just as well with an export tax, which would avoid the retaliation that made the policy so counterproductive. Indeed amongst non-economists retaliation is the main reason that tariffs are opposed. It is implicit that if only we could get away with them, we would benefit from tariffs. I am sure Trump would say, fake theorem.

So it does seem to me that there is something missing from the model. It is probably macroeconomics. Import tariffs increase aggregate home demand and an export tax decreases it. In a full employment model with flexible wages and prices aggregate demand is irrelevant, but this is not the world we live in.

Lerner symmetry is a great result. It is surprising even to economists. For practical short-term purposes, export and import taxes are neither perfect nor imperfect substitutes but opposites.