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

A majority of the theoretical literature on trade and the environment supports the view that greater openness causes a weakening in environmental regulation. In this paper we argue that a domestic import-competing industry can bene…t from an pollution tax borne by its consumers. We show that this pollution tax can be similar to a traditional trade barrier (such as a tari¤) as it can raise the price received by the domestic industry. Given an open economy we highlight conditions under which domestic producers prefer a higher consumer-based pollution tax than is socially optimal. In contrast, when the economy is closed, we …nd that producers prefer an pollution tax that is lower than socially optimal. Domestic producers turn 'green,' only when faced with import competition. Our aim through this paper is not to argue that free trade is always good for pollution policy. Instead we present an example that emphasizes the importance of understanding the speci…c pollution problem, and policy instrument used before drawing any conclusions on the e¤ects of free trade on pollution policy.