Technology spillovers embodied in international trade: Intertemporal, regional and sectoral effects in a global CGE framework

International technology spillovers can be categorised in two types: disembodied and embodied. Disembodied international technology spillovers are the flow of ideas that take place without the exchange of commodities. Examples of disembodied spillovers are present through workers’ mobility, students exchange programs, international conferences and journals. Embodied international technology spillovers are linked to the exchange of goods, particularly capital goods. The use of new equipment in the manufacturing and industrial sectors is considered an important source of technological progress and thus of economic growth. The degree of embodied technological spillovers is related to the level of capital imports, absorptive capacity, education, and knowledge stocks among other determinants. These in turn may depend on country specific policies. Trade within different classes of goods leads to different degrees of knowledge spillovers because technology intensity varies across sectors, leading to different degrees of embodied technology. Technology spillovers are neither automatic nor costless but they require adoption capabilities, e.g. human capital and indigenous research capacity. The absorptive capacity of a country is related to its economic, human, and technological development. This paper analyses the relationship between trade, technology, and the environment using a multi-sector and multi-region dynamic recursive CGE model. In this context, the main objectives of the paper are: i) to include endogenous factor-biased technical change based on trade flows in a CGE model, particularly for energy and capital, ii) to analyse the implications of specific spillovers embodied in trade of capital goods (machinery and equipment), and iii) to highlight the implications of accounting for indirect effects induced by spillovers. The paper models embodied spillovers based on international trade of capital goods. The main vehicles of spillovers are machinery and equipment (M&E) commodities. In particular, we consider the endogenous relationship between M&E imports and energy-biased technical change as well as capital-biased technical change. Estimates of the factor-biased technical change due to capital goods imports are drawn from Carraro and De Cian (2012). The model has been calibrated taking into account the influence of machinery and equipment imports only in capital and energy-biased technical change. This study takes advantage of a global trade database to implement spillovers by specifying technology source and destination regions. This allows modelling trade-embodied knowledge transfers in order to analyse the net effects of climate policy both in developed (technology source) and developing (technology recipient) regions. We find that explicitly modelling trade spillovers reveals significant effects thanks to the transmission mechanisms underlying imports of capital commodities. We then assess the net contribution of modelling trade spillovers within three policy scenarios. The aggregated net effects of spillovers are rather small confirming findings from previous studies. However, we identified important international and intersectoral redistribution effects due to technology transfers represented as embodied spillovers.