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OPTIMAL TARIFFS IN A TWO-COUNTRY R&D-BASED GROWTH MODEL

Published online by Cambridge University Press:  07 June 2021

Hamid Beladi ,
Ping-ho Chen ,
Hsun Chu ,
Ching-chong Lai  and
Ting-wei Lai
Hamid Beladi
Affiliation:
University of Texas at San Antonio
Ping-ho Chen
Affiliation:
Tunghai University
Hsun Chu*
Affiliation:
Tunghai University
Ching-chong Lai
Affiliation:
Institute of Economics, Academia Sinica National Cheng Chi University National Sun Yat-Sen University
Ting-wei Lai
Affiliation:
National Cheng Chi University
*
Address correspondence to: Hsun Chu, Department of Economics, Tunghai University, No. 1727, Sec. 4, Xitun Dist., Taiwan Boulevard, Taichung, 40704 Taiwan. e-mail: [email protected]. Phone: +886-4-23590121 #36119.
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Abstract

This paper examines the effect of a tariff on long-run growth and welfare in a two-country innovation-led growth model. We show that although raising the home country’s tariff reduces the growth and GDP of the foreign country, it will backfire by depressing R&D and growth of the home country. The Nash equilibrium tariffs can be positive, and they are larger when the government expenditure is more beneficial to private production and/or when the productivity of innovation is higher. The presence of positive Nash equilibrium tariffs provides a theoretical explanation for why countries have incentives to implement a tariff policy regardless of its negative effect on growth. Finally, the Nash equilibrium tariffs are higher than the globally optimal tariffs, that is, the levels that maximize the joint welfare of both countries.

Keywords

Optimal tariffsEconomic growthR&DTrade in intermediate goods
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 8 , December 2022 , pp. 2216 - 2246
Copyright
© Cambridge University Press 2021

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Footnotes

The authors are deeply grateful to an associate editor of this journal and two anonymous referees for their insightful comments, which substantially improved the paper. The authors would also like to thank Chien-yu Huang, Wei-chi Huang, Chih-hsing Liao, and Po-yang Yu, who provided us with helpful suggestions in relation to earlier versions of this article. Financial support from the Ministry of Science and Technology is gratefully acknowledged (Grant No. MOST 107-2410-H-029-003-MY2). Any shortcomings are the authors’ responsibility.

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