North-South trade liberalization and factor reallocations between manufacturing and R&D

Abstract

This paper presents a dynamic North-South model of the product cycle, with the aim of assessing the welfare effects of liberalizing trade and strengthening intellectual property rights. We show that the conclusions depend strongly on the relative size of the Southern market and the resulting pricing strategies applied by Southern firms. If the Southern market is small enough relative to that of the North, trade liberalization leads to positive level effects on welfare for both country blocks, although it has neither short- nor long-term bearing on growth and technological diffusion. However, when the size of the Southern economy is similar to or larger than that of the North, gradual trade liberalization may induce factor reallocations between R&D and manufacturing production that could be detrimental to growth and welfare.