Rising trade frictions over the past decade have intensified debate about their long-term implications for global economic growth. What began as targeted policy interventions has evolved into a sustained period of elevated tariffs between major trading partners, raising concerns that trade policy may shape not only short-term trade flows but also long-run productivity and welfare. A prominent example is the current tariff relationship between the United States and China. The United States now applies tariffs averaging 66.4 per cent on Chinese exports, far above its overall average rate of 19.3 per cent. In comparison, China has responded with retaliatory tariffs averaging 58.3 per cent on US exports, compared with its broader average of 21.1 per cent. Such measures disrupt established trade patterns and create incentives that may fundamentally alter where firms produce, invest, and innovate.

Beyond their immediate effects, tariffs can influence the geographical distribution of economic activity, an aspect that plays a critical role in long-term growth. Decisions about where industries locate are closely linked to firm-level investment, knowledge spillovers, and innovation dynamics. Trade barriers can encourage firms to relocate production or shift innovative activities across borders, thereby reshaping industrial structures in ways that persist over time. Despite its importance, this spatial dimension of trade policy has received relatively limited attention in the literature, which has often focused on aggregate outcomes rather than the mechanisms linking tariffs, industry location, and productivity growth.

This gap is addressed by economists Colin Davis of the Institute for the Liberal Arts at Doshisha University and Ken-ichi Hashimoto of the Graduate School of Economics at Kobe University. Their study adapts a two-country theoretical framework to analyse how national tariff policies influence long-run productivity growth through changes in industry location and firm investment behaviour. Building on a model they previously developed, the authors integrate international trade, industrial organisation, and endogenous productivity growth. Professor Davis notes that their work draws on more than a decade of theoretical research into the deep economic mechanisms linking innovation, industrial structure, and long-term growth, with the recent resurgence of tariffs providing a timely and relevant policy application.

The model features two countries and two industries and allows productivity growth to emerge endogenously from firms’ investment and innovation decisions. Using this framework, the researchers examine how unilateral import tariffs affect the spatial distribution of industries, the incentives for innovation, and overall welfare. Numerical simulations are used to evaluate welfare effects under different structural conditions. A key finding is that similar tariff policies can lead to very different growth outcomes across countries, depending on their existing industrial structures. By altering where industries and innovative activities are located, tariffs can either support or undermine long-run productivity growth, helping to explain why trade policies often produce heterogeneous effects across economies.

The study, published in Volume 154 of Economic Modelling in January 2026 after appearing online in November 2025, offers important practical insights. It identifies testable mechanisms—such as firm relocation, knowledge spillovers, and changes in innovation incentives—that can be explored using empirical data on trade policy and productivity. The authors argue that research building on this framework could inform better-designed trade and industrial policies over the coming decade. As Professor Davis concludes, applying this approach empirically can deepen understanding of the long-term consequences of trade interventions and help foster more stable economic conditions and improved outcomes for firms, workers, and consumers.

More information: Colin Davis et al, Asymmetric tariffs and productivity growth in an endogenous market structure, Economic Modelling. DOI: 10.1016/j.econmod.2025.107383

Journal information: Economic Modelling Provided by Doshisha University