The Impact of Permanent and Temporary Import Surcharges on the U.S. Trade Deficit

Abstract

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.