Trade War and Technology Rivalry

We develop a dynamic multi-country trade model with trade-related technology diffusion and endogenous R&D to quantify the impacts of trade policies and trade wars on innovation, technology rivalry, and welfare. We estimate the model using data on trade and patent citations and validate it in the context of U.S. export controls on China. Counterfactual analysis yields three main results. First, U.S. export controls on China reduce technological progress in both countries: China experiences a sharp contraction in knowledge inflows, while the U.S. faces a decline in R&D. Second, trade-driven diffusion and endogenous innovation substantially amplify the technological and welfare gains in the U.S. and losses in other major economies from the 2025 Liberation Day tariffs. Third, U.S. optimal tariffs on China, under varying geopolitical concerns, reflect a trade-off between curbing technology diffusion to China and sustaining U.S. innovation.