Rising trade frictions over the past decade have sparked urgent questions about their long-term impact on global economies. The U.S. now applies tariffs of 66.4% on Chinese exports, which is higher compared to the average rate of 19.3%, while China retaliates with a 58.3% import tariff on U.S. exports, higher than the average rate of 21.1%. These frictions not only disrupt regular trade flow, but also have long-term economic impacts. The geographical location of the market involved also plays an important role and is often influenced by tariff models. However, this aspect is often understudied and poorly understood.
Economists Professor Colin Davis from the Institute for the Liberal Arts, Doshisha University, Japan, and Professor Ken-ichi Hashimoto from the Graduate School of Economics, Kobe University, Japan, address this gap by adapting a two-country model to understand how a national tariff policy influences productivity growth through the link between industry location patterns and firm-level investment. While talking about the motivation behind this study, Prof. Davis mentioned, "Prof. Hashimoto and I have spent more than a decade conducting theoretical research on the impact of the structure and geographic location of industry on long-run productivity growth. Our work has focused on understanding the deep economic mechanisms linking innovation, industrial organization, and growth over time." The two-country framework used in this study was previously developed by the authors. Prof. Davis added, "The recent resurgence of import tariffs in global trade policy provided a timely and compelling real-world application for our framework. It offered an opportunity to use tools we had developed over many years to shed light on an active policy debate and to better understand the long-term growth consequences of trade interventions. In that sense, this project grew naturally out of our ongoing research agenda while responding to an important contemporary policy question." The study was made available online on November 3, 2025, and was published in Volume 154 of the journal Economic Modelling on January 1, 2026.
The study utilizes the model of industry location, international trade, and endogenous productivity growth with two industries and two countries. The researchers have examined how unilateral import tariffs affect industry location patterns and productivity growth, and have considered the implications for welfare. They have also conducted numerical evaluations of the welfare effects of tariff policies.
The study explains why similar trade policies can lead to very different growth outcomes across countries. It provides a theoretical framework for understanding how unilateral tariff policies can affect long-run productivity growth by reshaping the location of industries and innovative activities. The results also suggest that the growth and welfare effects of tariffs depend critically on a country's existing industrial structure, implying that similar policies may have very different outcomes across economies.
The study has multiple practical applications. The model identifies specific mechanisms, such as firm relocation, knowledge spillovers, and changes in innovation incentives, that can be tested using data on trade policy, industrial composition, and productivity. Over the next 5 to 10 years, similar research studies on tariffs could significantly influence government perspectives on trade policy, innovation, and economic growth. By elucidating the impacts of tariffs on trade flows, industry location, and innovation, this framework can enhance economic policymaking. Improved trade and industrial policies can lead to higher productivity, increased innovation, and stronger economies, potentially avoiding policies that hinder growth or lower living standards.
Well-designed policies can support job creation in innovative sectors and improve wage growth in the long run. "Empirical studies, applying this framework, can yield insights into the long-term effects of trade interventions, fostering stable economic conditions and better outcomes for the firms, as well as the workers and consumers involved," concluded Prof. Davis.
About Professor Colin Davis from Doshisha University, Japan
Dr. Colin Davis is a Professor at Doshisha University, Japan. He obtained his Ph.D. degree from Hokkaido University, Japan, in 2006. His primary research interests focus on understanding how the structure and geographic organization of industry affect long-run economic growth. He has received research grants from the Japan Society for the Promotion of Science. He teaches courses on microeconomics, macroeconomics, economic growth, and international economics. He has published 26 articles to date. He is an affiliated member of the Japanese Economic Association, the Japan Association for International Economics, and the International Economics and Finance Society Japan.
About Professor Ken-ichi Hashimoto from Kobe University, Japan
Dr. Ken-ichi Hashimoto is a faculty member at Kobe University, Japan. He completed his doctoral research at Osaka University, Japan. His research field comprises international macroeconomics and macroeconomic dynamics. He has received research funding for this work on international macroeconomic dynamic analysis of industrial structural change and labor market imperfections. He has collaborated with researchers from different universities and has 36 published articles to date. He has presented his work in multiple national and international seminars and has also conducted workshops discussing his work in details.
Funding information
This research was financially supported by the Joint Usage/Research Center at ISER (Osaka University) and KIER (Kyoto University), and the Japan Society for the Promotion of Science: Grants-in-Aid for Scientific Research 20K01631, 25K05077, and 25K05086.
