Fact of the Week: Tariffs Would Reduce R&D Investment Returns in High-Tech Manufacturing by Up to 50 Percent

January 22, 2019

(Ed. Note: The “Innovation Fact of the Week” appears as a regular feature in each edition of ITIF’s weekly email newsletter. Sign up today.)

Ten percent tariffs would reduce R&D investment returns in high-tech manufacturing by up to 50 percent.

Source: Bettina Peters, Mark J. Roberts, and Van Anh Vuong, “Firm R&D Investment and Export Market Exposure,” ZEW Discussion Papers, No. 18-047, Leibniz Centre for European Economic Research (ZEW).

Commentary: That tariffs put a damper on R&D investments is straightforward: Firms absorb some of the increased input costs, reducing profits and thus the funds available to invest. But tariffs also undercut R&D at a much deeper level. By reducing the exposure firms face to foreign markets, tariffs limit the potential gains from innovation, thereby lowering the returns from investing in R&D.

A new study uses data from Germany to model this process for high-tech manufacturing sectors. It finds that a 10 percent tariff on imports would reduce the returns to R&D investments by between 7 and 10 percent, more than off-setting the gains from a potential increase in sales due to reduced foreign competition. This effect would compound drastically if foreign markets responded with equivalent tariffs on German exports. It would reduce the long-run returns from R&D by 28 to 50 percent and decrease overall productivity by 2 percent.