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Tariffs and Foreign Direct Investment in a Dynamic North–South Model

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  • TATSURO IWAISAKO
  • HITOSHI TANAKA

Abstract

This paper examines how import tariffs by a developed country (the North) and a developing country (the South) affect innovation and foreign direct investment (FDI) using a quality ladder model. We show that a Northern import tariff raises the relative wage of Northern labor, but impedes innovation and FDI. This may worsen Northern welfare. By contrast, a Southern import tariff raises the relative wage of Southern labor and promotes innovation and FDI. This can improve Southern welfare. These imply that the South has a stronger incentive than the North to impose an import tariff, which is consistent with actual observation.

Suggested Citation

  • Tatsuro Iwaisako & Hitoshi Tanaka, 2026. "Tariffs and Foreign Direct Investment in a Dynamic North–South Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 58(5), pages 1495-1524, August.
    • Handle: RePEc:wly:jmoncb:v:58:y:2026:i:5:p:1495-1524
    DOI: 10.1111/jmcb.13221
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