DP15804 Innovation and Trade Policy in a Globalized World

Author(s): Ufuk Akcigit, Sina T. Ates, Giammario Impullitti
Publication Date: February 2021
Date Revised: February 2021
Keyword(s): economic growth, innovation policy, Open economy, trade policy
JEL(s): F13, F43, F60, O40
Programme Areas: International Trade and Regional Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15804

What is the role of innovation policy in open economy? We address this question employ- ing a new innovation-driven growth model with two large open economies at different stages of development. We examine the implications of the U.S. Research and Experimentation Tax Credit, introduced in 1981, and alternative protectionist policies. Key findings are: First, the tax credit generates substantial gains over medium and long horizons. Second, protectionist measures generate large dynamic losses by distorting the firms' innovation incentives. Third, the optimal R&D subsidy decreases in trade openness. Fourth, the optimal unilateral import tariff is zero for all policy horizons.