Tariffs, Endogenous Growth, and the Direction of Capital Flows

Abstract

This paper incorporates tariffs into a two-country endogenous growth model to analyze the growth effects of a unilateral increase in a tariff rate in each country given global knowledge spillovers in research and development. This paper shows that a unilateral increase in the tariff rate of one country lowers the world rate of growth under certain conditions. In addition, this paper shows that if the home countrys initial capital stock is smaller (larger) than the foreign countrys initial capital stock, then net capital flows occur from the foreign (home) country to the home (foreign) country.