Tariffs and innovation in a Schumpeterian economy with North–South technology transfer

Abstract This article develops a North–South quality-ladder model with northern innovative R&D, southern adaptive R&D, and imitative R&D to analyse the effects of tariffs on innovation, technology transfer, relative wage, and welfare. We find that increasing the 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 the 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 labour ratio. Moreover, we calibrate this model to the US-China data to perform a quantitative analysis. We find that imposing a tariff in the home country yields a welfare gain for itself and a welfare loss in the foreign country. The numerical results are consistent with the analytical policy implications.