Effects of Trade Policy on Technology Adoption and Investment

Abstract

This paper studies the consequences of trade policy for the adoption of new technologies. It develops a dynamic international trade model with two sectors. Workers in manufacturing decide if new technologies are used, capital owners then choose investment. We analyze three different arrangements: free trade, tariffs, and quotas. In the model, free trade or low tariffs guarantee that the most productive technology available will be used. In contrast, under a quota or high tariffs the most productive technology available will not be used at all times. Further, in the latter case investment, capital-labor ratio and GDP per capita are smaller than in the former one.