The Macroeconomic Effects of Trade Policies

We study the macroeconomic effects of trade policies that are often described as equivalent, namely a uniform increase in import tariff and export subsidy (IX), a value-added tax increase accompanied by a payroll tax... [ view full abstract ]

We study the macroeconomic effects of trade policies that are often described as equivalent, namely a uniform increase in import tariff and export subsidy (IX), a value-added tax increase accompanied by a payroll tax reduction (VP), and a border-adjustment of corporate profit taxes (BAT). Using a dynamic New Keynesian open-economy framework, we show that BAT and IX policies are generically equivalent, but VP is not as nominal price rigidities shift the incidence of the value-added tax. The unilateral implementation of BAT or IX increases domestic output, appreciates the exchange rate, and reduces output abroad, whereas the unilateral implementation of VP is contractionary. The three policies are equivalent and have no allocative effects with permanent tax changes and producer currency pricing.