Gradual trade liberalization in a North–South model of the product cycle

The catchup and convergence of some developing countries with the Western hemisphere is a major experience in modern history. In this paper we investigate the impact on welfare and convergence of a gradual decay in trade costs within a North–South, product cycle setting. In contrast to the existing literature on product cycles with expanding-product-variety models, we explore analytically the consequences of a gradual globalization at any level of initial trade costs. It is proved that convergence only arises if the size and R&D productivity of the South is sufficiently small, relative to the North. Furthermore, lower trade costs are shown to be always beneficial to both the South and the North, under all relevant parameter values.