Will Technological Progress Cure the "Advanced Technology Products" Trade Account Deficit?

In the debate about United States subsidies of private sector R&D, it is sometimes argued that the state of our technology is closely related to our current account deficits, particularly in what has been called the "Advanced Technology Products" (ATP) trade account. The corollary is that taking appropriate actions to increase research and development activities will both improve our technology and reduce the size of the ATP trade account deficit. The paper exams this proposition in a two-country two-firm intra-industry trade model, where firms play a two-stage quality-quantity game. The primary result of the paper is that if, as compared to its trading partners, the United States has about the same demand function but higher production costs then increases in R&D are likely to reduce an ATP trade account deficit. If, on the other hand, both costs and the value customers place on the product are high in the United States as compared to its trading partners, then increases in R&D are likely to increase the size of the ATP trade account deficit.