Tariffs and Foreign Direct Investment in a North South Product Cycle Model

Tatsuro Iwaisako and Hitoshi Tanaka
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Hitoshi Tanaka: FacultyofEconomics,Hokkai-GakuenUniversity

No 20-08, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: This paper theoretically examines how import tariffs by a developed country(theNorth)and a developing country(theSouth)affect innovation,foreign direct investment(FDI),wages,and welfare using a North?South quality ladder model.We show that a Northern import tariff raises the relative wage of Northern labor to Southern labor,but impedes innovation and FDI.Because of the decrease in innovation and increased prices,this may worsen Northern welfare.By contrast,a Southern import tariff raises the relative wage of Southern labor to Northern labor and promotes innovation and FDI. As a result,it can improve Southern welfare.These results imply that the North has a weaker incentive than the South to impose an import tariff,and this is consistent with actual experience.

Keywords: foreign directinvestment; innovation; intellectualpropertyrightsprotection (search for similar items in EconPapers)
JEL-codes: F43 O33 O34 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2020-05
New Economics Papers: this item is included in nep-int
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