Comment

Abstract

Any well-trained economist is tempted to say that this question is not well posed, or that neither statement is really true, or something like that. But this is meant to be a psychological gauge of one’s predispositions, not an analytic exercise. So humor me and write down your answer. I will get back to it in a minute. Now, back to border taxes. There is no doubt in my mind that the broad issue addressed in this paper is an important one. In Washington policy circles, a common argument is that Europe’s value-added taxes (VATs) are adverse to American trade interests. After all, the European VAT taxes imports and exempts exports. From the mercantilist perspective that (unfortunately) dominates public discussion of trade, what could be worse that a policy that encourages American imports and hurts American exports? Needless to say, Washington policy circles are not dominated by PhD economists steeped in general equilibrium theory and the Lerner symmetry theorem. I recall one conversation I had about this issue with a colleague when I worked in the Bush administration. He was not an economist, but rather an Ivy League-educated lawyer. He was a smart guy with a lot of experience in the policy and politics of international trade negotiations. I told him that economists don’t view value added taxes thatway, that equilibrium exchange rates adjust to ensure that these border taxes do not impede trade. I recall his response: “Yeah, I have had a lot of econ-