Tariffs and Innovation in a Schumpeterian Economy with North-South Technology Transfer

This paper develops a North-South quality-ladder model with northern innovative R&D, southern adaptive R&D and imitative R&D to analyze the effects of tariffs on innovation, technology transfer, relative wage and welfare. We find that increasing southern tariff decreases the relative wage between the North and the South permanently, increases the technology transfer rate permanently and decreases the northern innovation rate temporarily. In contrast, increasing northern tariff increases the relative wage permanently, decreases the technology transfer rate permanently and either increases or decreases the northern innovation rate, depending on the size of the North-South labor ratio. Moreover, we calibrate this model to the US-China data to perform a quantitative analysis. We find that imposing tariff in the home country yields welfare gain in itself and yields welfare loss in the foreign country. When both countries impose tariffs simultaneously, they can benefit from the welfare gains. The numerical results are consistent with the analytical policy implications.