Free trade and the greening of domestic industry (original) (raw)

Strategic Environmental Policy under Free Trade with Transboundary Pollution

Review of Development Economics, 2011

We analyze the effects of trade liberalization on environmental policies in a strategic setting when there is transboundary pollution. Trade liberalization can result in a race to the bottom in environmental taxes, which makes both countries worse off. This is not due to the terms of trade motive, but rather the incentive, in a strategic setting, to reduce the incidence of transboundary pollution. With command and control policies (emission quotas), countries are unable to influence foreign emissions by strategic choice of domestic policy; hence, there is no race to the bottom. However, with internationally tradable quotas, unless pollution is a pure global public bad, there is a race to the bottom in environmental policy. Under free trade, internationally nontradable quotas result in the lowest pollution level and strictly welfare-dominate taxes. The ordering of internationally tradable quotas and pollution taxes depends, among other things, on the degree of international pollution spillovers. JEL classification codes: F18, Q56, H23, D62.

Trade and commodity taxes as environmental instruments in an open economy

Journal of Economic Studies, 2020

PurposeIn a simple reciprocal dumping model of trade, this study scrutinizes the strategic role of trade and commodity taxes as environmental instruments when consumption of an imported product generates pollution. The results suggest that for sufficiently small values of the marginal disutility from pollution, commodity taxes can be preferred over import tariffs, and compared to the case of trade policies, free trade can be welfare dominating even for higher values of the marginal disutility from pollution when commodity taxes are used strategically as environmental instruments.Design/methodology/approachThe authors employ a reciprocal dumping model of trade.FindingsA sufficiently high marginal disutility from pollution (or sufficient asymmetries between the countries in terms of their marginal disutility from pollution) may jeopardize bilateral trade, especially if countries are given the option to set tariffs freely for imported goods (consumption of which generate environmental ...

The Effect of Free Trade on Pollution Policy and Welfare

2003

In this paper I consider a small economy facing accession to a trade agreement. Before accession the government has control over trade and environmental policy. After accession it retains control over environmental policy but has to allow free trade. Through the analysis I highlight an effect of free trade neglected in the literature so far. Adoption of free trade shifts the economic incidence of pollution tax from consumers onto producers of the polluting good. Under fairly plausible conditions, this change in incidence can reduce the distortion in pollution tax. Even though the choice of accession is influenced by special interest groups, I find that accession can be accompanied by an improvement in pollution policy and an increase in aggregate welfare.

Managed Trade, Trade Liberalisation and Local Pollution

Advances in Economic Analysis & Policy, 2004

The current paper addresses the relationship between trade and endogenous pollution levels, with a focus different from the previous literature. The mechanism linking pollution and trade here is that trade policy provides the home government with a credible threat that helps motivate domestic firms to adopt cleaner technologies. This credible threat comes from the fact that the government has a greater incentive to protect a clean industry than to protect a very polluting one. In that sense, the existence of trade helps reduce domestic pollution compared to what would prevail in a situation of autarky. On the other hand, a commitment to free trade would be counterproductive: it removes the government’s ability to credibly threaten lower levels of protection. In fact we show that any trade liberalization hurts the welfare of the home country. In terms of world welfare, moderate trade liberalization is helpful, but only as long as it does not affect the technology choices of the firms...

Trade competition and domestic pollution: A panel study, 1980���2003

2010

This research note examines whether trade competition abets regulatory races in the environmental area+ To analyze trade competition, we develop a new measure, structural equivalence, which assesses competitive threats that a country faces from other countries whose firms export the same products to the same destination countries+ Employing this new measure, we analyze air pollution intensity~sulfur dioxide or SO 2 ! and water pollution intensity~biochemical oxygen demand or BOD! for a panel of 140 countries for the time period 1980-2003+ We find that trade competition is a significant predictor of water pollution intensity among structurally equivalent countries+ We then test separately whether trade competition abets upward and downward regulatory races+ We find that in the case of water pollution, countries respond symmetrically to downward and upward races, that is, they follow their structurally equivalent competitor countries both when they ratchet down their regulations and when they ratchet up regulations+ In the case of air pollution, however, countries are responsive to downward policy changes only in competitor countries+ This research note develops a new measure of trade competition, structural equivalence, and tests it in the context of the trade-environment debate+ 1 This measure captures competition among countries that export similar products to the same overseas markets+ We outline a new way to think about trade competition because much of the trade-environment literature tends to incorrectly equate trade competition with trade salience, the trade to gross domestic product~GDP! ratio+ Not

Environmental policy and trade under non-competitive markets: Directions for developing economies

Privredna izgradnja, 2003

This paper is only a first step towards an understanding of the effects of strategic environmental policy. Even the simple framework developed here provides interesting insights. As the precedent analysis has made clear, the optimal pollution policy under domestic distortions can be decomposed into a "domestic output effect", a "trade effect", and a "pollution effect". The "domestic output effect" captures the change in welfare coming from a change in domestic firms sale, the "trade effect" captures the change in welfare coming from a change in the level of imports, while the "pollution effect" captures the negative effect on welfare of domestic emissions. Then, the optimal pollution policy can imply a tax or subsidy for the domestic industry, which will depend on the specific characteristics of a given economy. This result emphasizes the idea, as is well known, that the outcomes for the case of one distortion do not hold i...

Strategic Pollution Control under Free Trade

Resource and Energy Economics, 2021

This paper designs a reciprocal dumping model to address the control of industrial pollution between two trading partners. Firms generate transboundary pollution from production and environmental taxes represent the pollution control instrument. We ask whether environmental taxes implemented in a non-cooperative setting are more stringent than the globally efficient level. Relative to the globally efficient case, we find in the linear Markov Perfect Nash Equilibrium (MPNE) context that the tax rate for both countries is smaller and individual emissions are larger. However, these results may not hold in the non-linear MPNE case depending on market structure and environmental conditions. Unlike the symmetric equilibrium case, the tax rates are always discontinuous under asymmetric MPNEs. The asymmetric equilibrium scenario can give rise to higher individual payoffs relative to the symmetric equilibrium case.

The Demands for Environmental Regulation and for Trade in the Presence of Private Mitigation

2008

We study the demands by individuals of varying incomes for regulation of both the environment and of trade in the equilibrium a small open economy with two tradable goods, one of which is polluting. Differences in the ability of individuals to afford private mitigation of the adverse consequences of pollution is a central feature of the analysis. Private mitigation leads to an endogenous, unequal distribution of the health-related consequences of pollution across groups in a manner consistent with epidemiologic studies. We show how trade in the presence of private mitigation may polarize the interests of rich and poor with respect to the stringency of regulation, and why the relationship between individual interests and income in equilibrium cannot be well understood by applying a simple normal good argument. Indeed, even in cases where trade has the potential to benefit everyone, we argue that the poor may oppose trade openness because of a concern that laxer environmental regulation will then be imposed in the interest of richer citizens. We explain why heterogeneity in the intensity of preferences, and not just in their direction, is likely to play a role in the determination of collective choices with respect to public policy. We conclude by drawing out some implications of the analysis for the study of the political economy of the environment-trade-welfare nexus.