Import taxes (destination-based cash-flow taxes) in a general equilibrium trade model.

In the United States, the election of Donald Trump has raised the probability of the advent of some sort of import tax--either simple tariffs, or destination-based cash-flow taxes. Some proponents of these taxes, for example, the United States House Republican Task Force on Tax Reform, have argued that they will boost exports and curtail imports.  On the other hand, many economists have argued that the effects of these taxes on imports and exports would be neutralized, at least in the long run, by exchange rate adjustments. The reasoning seems to be that, in the long run, purchases of imports and sales of exports must be equal (see, for example, Alan D. Viard, "Keynes at the Border?" April 15, 2009, The American Enterprise Institute).  That is, the trade balance must be zero and with exports and imports depending only on relative prices, this implies a unique equilibrium relative price of imports vis a vis exports.  Hence, any change in import taxes must be offset by a corresponding change in export prices to maintain the equilibrium relative price.  Of course, in actual economies, capital flows are not zero.  In this paper we analyze the effects of an import tax in the context of an overlapping-generation general equilibrium model with imports, exports, non-traded goods, and capital flows.  As a benchmark case we consider perfect capital mobility and rational expectations. We show that neutralization of the effects of an import tax occurs only under restrictive assumptions unlikely to apply to actual economies, even in the long run when capital flows are zero.