DP4690 Tariff Protection, Intellectual Property Rights and North-South Trade with Perfect Price Flexibility
We study a North-South trade situation in which prices are perfectly flexible and knowledge spills over from Northern to Southern firms. In a partial equilibrium setup we analyse the role of tariffs in preventing technological leakages and their impact on domestic (Northern) consumers and producers. We show that, unlike in conventional results, tariff protection preserves or raises consumer?s welfare relative to free trade. Moreover, tariff protection keeps foreign (Southern) firms out of the market, and therefore, R&D becomes appropriable. Even though the innovation level remains the same as under free trade, total industry efficiency increases.