Technology Gap and Endogenous Conflict: A North-South Trade Dynamic Mode

Xiyan Gong

Economics Working Paper Archive from Levy Economics Institute

Abstract: This paper investigates the endogenous mechanism by which decentralized technological imitation in Southern countries transitions from catch-up to competitive conflict with the North. Integrating intermediate goods variety into a North-South trade model with Balance of Payments (BOP) constraints, we demonstrate that uncoordinated, profit-driven investment by Southern firms often exceeds the BOP constraint. While conventional theory suggests this tightens BOP constraints causing stagnation, our framework reveals that unexpected technological progress alters Northern import elasticity, thereby relaxing external constraints and enabling sustained over-investment. However, this excessive imitation redistributes Northern profit shares, triggering endogenous tariff retaliation and technological containment. The model illustrates two types of trade dynamics depending on the strength of animal spirits, import elasticities, and tariffs: a two-stage path ending in the middle-income trap, or a three-stage path achieving catch-up.

Keywords: North-South Model; Technology Gap; Trade Dynamics; BOP Constraint (search for similar items in EconPapers)
JEL-codes: F13 F43 O33 (search for similar items in EconPapers)
Date: 2026-06
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