Tariffs and Technology Transfer through an Intermediate Product

We examine the relationship between tariffs and technology transfer from the North to the South in an oligopolistic model. Technology is embodied in a key component which only the North firm can produce. Interestingly, a decrease in the tariff on the final good as well as an increase may induce technology transfer. If the South subsidizes the final-good production or imports of the intermediate good, technology transfer is also facilitated. However, the welfare effects are different between tariffs and subsidies. Our analysis suggests that the South should take pro-competitive policies to induce technology transfer and enhance welfare.