The Impact of Permanent and Temporary Import Surcharges on the U.S. Trade Deficit
Lawrence H. Goulder
This paper uses analytical and simulation models to study the impact of
temporary and permanent import surcharges on the U.S. balance of trade. The
analytical model of a two-country, two-commodity, two-period endowment economy
brings out the intersectoral and intertemporal substitution effects generated
by import surcharges. This model shows that the trade balance impact of these
initiatives is ambiguous in sign even under restrictive assumptions. We
therefore apply a simulation model to gauge the effects under realistic values
for parameters. The simulation model differs from others that have analyzed
import surcharges in combining sectoral disaggregation with an integrated
treatment of current and capital account transactions. The combination is made
possible by the model's attention to both intra- and intertemporal aspects of
household and producer decisions.
Simulations are performed under different assumptions about the sources of
the U.S. trade deficits and the timing of the surcharge. In each case,
surcharges strengthen the trade balance in the short run but worsen
subsequently. The results highlight the usefulness of analyzing the crade
balance effects of commercial policies with a dynamic framework that
incorporates intertemporal balance of payments constraints.
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