Free trade and the burden of domestic policy

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Free trade and the burden of domestic policy

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Sumeet Gulati

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Sumeet Gulati

Abstract

Consider a small economy facing accession to a exogenously defined trade agreement. Before accession, the government controls trade and pollution policy. After accession, it retains control over pollution policy, but must allow free trade in all goods. This is a choice many governments face while joining trade agreements today. They decide whether greater market access to other members is more valuable than control over trade policy. I ask two questions. All else being equal what happens to environmental policy after accession? Second, what affects the choice of accession and how does this choice impact aggregate welfare? I show that a loss in control over trade policy alters the political incentives determining environmental policy. Before accession, producers can transfer a portion of their burden of environmental regulation to consumers through price increases. After accession the same regulation is borne entirely by producers. Owing to the change in burden, there exist plausible conditions under which the adoption of free trade can lead to more stringent environmental regulation, a reduction in the preferential treatment of special interest groups, and an increase in aggregate welfare.

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Publisher Info
Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 41 (2008)
Issue (Month): 3 (August)
Pages: 817-837
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Handle: RePEc:cje:issued:v:41:y:2008:i:3:p:817-837

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Find related papers by JEL classification:
F18 - International Economics - - Trade - - - Trade and Environment
Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounting
Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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This page was last updated on 2009-12-21.

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