Why Import Tariffs are Identical to Export Taxes

Proponents of import tariffs would quickly criticize the imposition of export taxes. But both these policies are basically identical.

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Photo by Christine Roy on Unsplash

On April 2nd, the US announced large global tariffs, with some estimates suggesting an effective tariff rate of 34% (weighted average tariff rate on all imports), which would be historically unprecedented. There are many reasons given for enacting tariffs. One common one is that import tariffs will reduce the trade deficit. However, economics research, all the way from 1936, shows us why this is unlikely to be the case.

The Lerner Symmetry Result

One of the more unique and counter-intuitive economic results was established by Lerner in 1936. Lerner (1936) demonstrated that import tariffs have the exact same outcome on the economy as export taxes (a fee imposed on any good/service that is being exported paid by the exporter). This may be surprising – after all, how can a policy on imports have the same effect as a policy on exports?

General Equilibrium

When thinking about imports and exports, we often think about the ‘partial’ effect. In other words, if a tariff is imposed on a set of goods, say steel, we often only consider what will happen to steel production domestically. However, this ignores what will happen in the rest of the economy, the ‘general’ effect. 

The reason why import tariffs and export taxes (i.e. the Lerner symmetry) have the same impact is due to this ‘general’ equilibrium effect. To understand the mechanism, it will be easiest with an example.

Trade and Production

Arendelle imports 100 fruit from Northuldra and produces 50 fruit domestically. Arendelle also exports 60 jams to Northuldra. Suppose Arendelle imposes a 20% tariff on fruits from Northuldra. Naturally, fruit imports from Northuldra will fall since fruit is now more expensive. Suppose imports fall to 80 fruits. To offset this fall in fruit imports, domestic fruit production goes up from 50 to 70 fruits. However, in order to produce more of this fruit, some workers that were previously making jam, now help with fruit production. This results in jam production falling to 40 jams. Thus, Arendelle now produces 70 fruit, imports 80 fruit and exports 40 jams.

Now imagine, Arendelle imposes an export tax on jams. Since these jams are now more expensive, Northuldra will buy fewer jams. This means Arendelle’s jam production falls from 60 to 40 jams. Since there are now fewer jam producing workers, the fruit sector can hire them, resulting in an increase in fruit production from 50 to 70. Since there’s more domestic fruit production, fruit imports will fall from 100 to 80. 

Identical Outcomes

The main conclusion from the above example is that the production split between fruits and jams in Arendelle is the exact same. That is, import tariffs and export taxes yield the exact same outcome for the economy, meaning that import tariffs and export taxes are ultimately the same policy. 

Refreshing the Lerner Symmetry Result

Costinot and Werning (2018) refreshed and formalized the Lerner symmetry result to determine under which economic assumptions the result holds.¹ The main assumption needed for the Werner result to hold perfectly (i.e. import tariffs are identical to export taxes) is about how multinational firms behave. It is worth noting that around a third to a half of global trade happens within multinational companies (companies with global affiliates, which are all commonly controlled).

The key (and plausible assumption) is that each affiliate in the multinational firm has to behave in an ‘independent’ manner. That is, each firm in the multinational makes their own optimal decisions given the local prices. Under this condition, the Lerner symmetry result can be shown mathematically to hold.

If, on the other hand, certain shared firm resources like CEO time are limited and used by all subsidiary firms, then the Lerner symmetry result may fail. This is because import tariffs and export taxes may change how much time the CEO devotes to each subsidiary, resulting in different production outputs.²

Short-Term vs Long Term

Lerner Symmetry is a long-run feature. That is, the equivalence between import tariffs and export taxes only occurs after the economy adjusts in the long run. In our example above, it might take several years for the workers to switch jobs from jam production to fruit production. In the short run, the impact of import tariffs or export taxes may be different in terms of production outcomes in a country (i.e. how many fruits or jams we produce).

Lerner Symmetry – Thinking in ‘General’

The Lerner Symmetry result teaches us how important it is to think about the economy and economic agents more broadly. If we just focus on the import sector and imports, it is tempting to think that an import tariff could be beneficial and may reduce the trade-deficit. However, thinking about the wider economy – in a general equilibrium setting – we see that import tariffs will often re-allocate from export producing sectors, resulting in no impact on the trade deficit. 

We have touched on the concept of thinking more broadly about the economy and economic participants in a variety of settings – mainly in the context of why voters may often ‘demand bad policy’. Moreover, outcomes of policies are often misjudged when the general response of economic participants aren’t factored in (several such examples are listed in our article here). Beliefs around the impact of tariffs also fall into this trap.

Some Questions from Readers

Can tariffs reduce the trade deficit?

As can be seen from our example above and the Lerner Symmetry result, tariffs are unlikely to have any significant impact on the trade deficit. Tariffs, however, reduce the overall volume of trade (imports + exports fall). But the trade deficit will likely continue to remain at similar levels.

Should countries impose ‘retaliatory’ tariffs?

Tariffs are often framed as a retaliatory measure towards ‘unfair’ economic actions of others. In the context of the recent US tariffs, many countries are considering their own tariffs on US products. First, from an economic standpoint, these tariffs will harm the country imposing them. Moreover, as we saw in our example above, exports from the US will naturally decline after the US imposed tariffs. Thus, countries, even without placing retaliatory tariffs, will reduce their demand for US goods.

If a country does place tariffs, the tariffs that are least harmful to the economy are final goods tariffs as they do not distort the decision by producers to make goods.

Should we be concerned?

Predicting/forecasting what will numerically happen to the US economy is a complex endeavor and beyond the scope of the research papers I cover. However, the fact that the tariffs have been placed on all countries suggests there will be a measurable impact. 

The impact of tariffs on a country will primarily be driven by what is the next best alternative. For example, if lumber from Canada has a 10% tariff placed on it, but lumber from Mexico is only 5% more expensive than Canadian lumber (absent tariff), then US producers will buy more Mexican lumber, paying only 5% more rather than 10%. However, since the US tariffs are on all countries, there is no substitute (Mexican lumber for Canadian lumber). This means the cost of production will almost go up exactly by the tariff amount. This makes the tariffs much more costly.

At the same time, thanks to decades of economic research, certain other dangers that can come from such a tariff shock might be better controlled. For example, financial markets, which can often fail during such shocks (bank runs when people are worried about a bank’s asset position, failing insurance companies that are unable to payout claims since their assets lost value), are more likely to be protected today thanks to various mechanisms and institution back-stops. This makes financial market failure much less likely than a hundred years ago.

Are tariffs inflationary?

For the answer to this question please see our previous article.

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1. The original result was done via a geometric analysis:

2. There is one more caveat regarding the Lerner Symmetry result considered by Costinot and Werning and not Lerner - assets and wealth. When including assets, import tariffs and export taxes can lead to a differential impact on asset prices. Import tariffs for example increase domestic asset prices, meaning foreigners who own domestic assets may see their wealth increase under import tariffs.