In recent trade policy debates it is often argued that temporary protection
stimulates innovation. This paper shows that the validity of the argument
depends on the perceived credibility of protection policy. If it is suspect
ed that temporary protection will be removed early should innovation occur
before its terminal date, the protected firm invests less in R&D than it do
es under free trade. If it is expected that protection will be extended sho
uld no innovation have occurred by its terminal date, investment falls belo
w the free-trade level, and eventually to zero, as the terminal date is app
roached.