Strategic trade policy, intellectual property rights protection, and North–South trade

Abstract

In this paper, we analyze the issue of optimal tariffs when the Northern and Southern firms compete in quantities in an imperfectly competitive Northern market and there are potentially varying degrees of intellectual property rights (IPR) violation by the South. IPR violation is reflected through the leakage of technological knowledge (“spillovers”) from the Northern to the Southern firm creating unit cost reduction. It is shown that optimal tariffs in this framework are always higher than in the simple duopoly model since they serve here not only as profit shifting devices but also as instruments that influence domestic innovative activity, generate scale economies and countervail the IPR violation of the South. The other notable difference from the standard duopoly model is that positive tariffs may be desirable from the world welfare point of view.