A Rationale for Infant-Industry Protection and Gradual Trade Liberalization

A two-final-good, one-primary-factor, small–open endogenous growth model is constructed based on R&D. The model yields two steady states with different growth rates as potential equilibria. Depending on history and the external environment, the economy may fall into the poverty trap in free trade. However, a temporary trade policy can release the economy from the poverty trap. Moreover, the optimal trade policy is gradual trade liberalization with the rate of protection kept to a minimum.