My ECONS102 class covered international trade this week (hence the flurry of posts on the theme of trade this week). One aspect that we briefly touch on is the Lerner Symmetry Theorem, named for the American-British economist Abba Lerner, which suggests that a tax (tariff) on imports is exactly equivalent to a tax on exports. As luck would have it, Scott Sumner posted yesterday on exactly that topic:
Fortunately, there is a way of making this deeply counterintuitive concept much more intuitive. You may recall from Econ101 that a tax has an identical impact regardless of whether it is legally placed on the seller or the buyer. If Congress writes a law imposing a 23-cent tax on gasoline, it makes no difference whether Congress specifies that the tax is to be paid by the retailer, or whether they specify that the tax is to be paid by the consumer. If you are confused by this distinction, think about the difference between gasoline taxes (paid by the retailer and incorporated into the sticker price) and sales taxes (paid by the consumer and not incorporated into the sticker price.) Either way, the result is the same.
Now imagine that international trade is actually, you know . . . trade. That is, imagine a system of barter. Countries give up valuable goods and in return receive other valuable goods from other countries. In that case, both a 10% import tariff and a 10% export tax are simply two methods of taxing international trade. They represent a 10% tax on the transaction of exchanging one good for another. It makes no difference whether the tax is formally imposed on the importer or the exporter, just as it makes no difference whether a gasoline tax is formally imposed on the seller or the buyer.
I have two other ways that I explain the Lerner Symmetry Theorem to my class. The first explanation comes from Henry Hazlitt's book Economics in One Lesson (which I reviewed here). This explanation goes like this: If a New Zealand exporter exports goods in exchange for foreign currency, then they end up with a handful of foreign currency. They can't spend that foreign currency in New Zealand. The only thing they can then do with that foreign currency is to buy goods overseas (now, or in the future, or trade the currency to someone else who will buy goods overseas now or in the future). If they buy goods, then they end of with a bunch of goods overseas, and in order to consume those goods they would need to import them. If they trade the currency for New Zealand dollars, then those New Zealand dollars must have come from someone overseas who had sold some goods to a New Zealander in exchange for New Zealand dollars (that is, imports). Either way, those earnings from exports get effectively spent on imports. Similarly, if a New Zealand importer buys goods overseas, then people overseas now have New Zealand dollars. The only thing they can then do with those New Zealand dollars is to buy New Zealand exports (now, or in the future, or trade the currency to someone else who will buy New Zealand exports now or in the future). If they buy New Zealand goods, then they end of with a bunch of goods in New Zealand, and in order to consume those goods they would need to export them. If they trade the New Zealand dollars for foreign currency, then that foreign currency must have come from someone in New Zealand who had sold some goods to a foreigner in exchange for foreign currency (that is, exports). Either way, those earnings from New Zealand imports get effectively spent on New Zealand exports.
The second explanation comes from this post last year by Kimberley Clausing and Maurice Obstfeld (both from the Peterson Institute for International Economics). The explanation goes like this: If a trade barrier makes imported goods more expensive, domestic firms in that industry will produce more. Those firms demand more labour, making labour more expensive in that industry, but also in other industries, including export industries. More expensive labour therefore raises the costs of production in export industries, which decreases supply and the quantity of exports.
So there you have it. There are several ways that we can explain intuitively how the Lerner Symmetry Theorem could hold - by noting the equivalence with a domestic excise tax, by explaining what happens with the currency, or by thinking about what happens in the labour market.
Sumner's post explains the Lerner Symmetry Theorem in a bit more detail, and I did appreciate the shout-out to the robustness of the demand and supply model to a violation of the strict assumptions of perfect competition (which is a point that I make in my other class, ECONS101).
[HT: Marginal Revolution]
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