Agglomeration and non-agglomeration countries and the growth effects of protectionist trade policies

The objective of this study is to examine the influence of unilateral tariffs on the world growth rate within a two-country endogenous growth model. In this model, firms are mobile internationally, while knowledge spillover in research and development (R&D) is local. In our model, four aspects are emphasized: the positive effects of a unilateral increase in one-country tariffs, namely the intrasector substitution effect and the international redistribution effect, and the negative effects of one-country tariff increases, namely the intersector substitution effect and the real income effect. Accordingly, the net growth effect of a unilateral tariff increase in one country is contingent upon the relative strength of these four conflicting pressures. The primary conclusion of this analysis is as follows: a unilateral tariff increase in the agglomeration country has the effect of increasing the world growth rate through the greater concentration of firms in that country. This finding is contrary to the prevailing view in the existing endogenous growth literature, where a negative growth effect is typically observed as the standard result.