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International Trade, Foreign Investment, and the Environment

In: Handbook of Environmental Economics


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  • Rauscher, Michael


The 1990s produced a large literature on foreign trade and the environment, including both theoretical and empirical contributions. The paper surveys this literature. It starts by looking at the traditional Heckscher-Ohlin type models of international trade and then moves to noncompetitive models and the strategic use of environmental policy in open economies. A shorter section is devoted to public-choice approaches to environmental policy. Moreover, the paper deals with factor mobility and interjurisdictional competition, with intertemporal issues such as renewable resources and foreign indebtedness, with the empirical evidence, and with institutional issues related to the World Trade Organization and international environmental agreements.Basically three questions are addressed from different points of view:- Are trade liberalisation and increased factor mobility good or bad for the environment?- Are there larger incentives to relax environmental policies if economies are more open?- Do we have to expect a race towards the bottom in environmental regulation if trade and international factor movements are liberalised? The answers to all these questions are ambiguous. Since many of the recent contributions to the theoretical literature model second-best worlds, in which the environmental externality is only one of several distortions of the economy, the results depend crucially on the nature of the other distortions. This survey paper gives an overview of this literature and explains the contradictory results. On the empirical side, the results are inconclusive as well. The link between environmental policies on the one hand and international trade and factor movements on the other is much weaker than one might have expected given the intensity and controversy of the policy debate at the turn of the century. Based on the theoretical results and on the empirical evidence, the paper finally tries to identify promising areas of future research. In spite of much progress made in the last decade, much remains to be done.

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This chapter was published in:

  • K. G. Mäler & J. R. Vincent (ed.), 2005. "Handbook of Environmental Economics," Handbook of Environmental Economics, Elsevier, edition 1, volume 3, number 3, June.
    This item is provided by Elsevier in its series Handbook of Environmental Economics with number 3-27.

    Handle: RePEc:eee:envchp:3-27

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    Cited by:
    1. Riveiro, Dolores, 2008. "Environmental policy and commercial policy: The strategic use of environmental regulation," Economic Modelling, Elsevier, vol. 25(6), pages 1183-1195, November.
    2. Quiroga, Miguel & Sterner, Thomas & Persson, Martin, 2009. "Have Countries with Lax Environmental Regulations a Comparative Advantage in Polluting Industries?," Working Papers in Economics 412, University of Gothenburg, Department of Economics.
    3. Ottar MÆstad, 2006. "Environmental Policy and Public Revenue with International Capital Mobility," International Tax and Public Finance, Springer, vol. 13(1), pages 43-58, January.
    4. Harvey E. Lapan & Shiva Sikdar, 2011. "Strategic Environmental Policy under Free Trade with Transboundary Pollution," Review of Development Economics, Wiley Blackwell, vol. 15(1), pages 1-18, 02.
    5. Astrid Fritz Carrapatoso, 2008. "Environmental aspects in free trade agreements in the Asia-Pacific region," Asia Europe Journal, Springer, vol. 6(2), pages 229-243, June.
    6. Yasuyuki Sugiyama & Muneyuki Saito, 2009. "Ecological dumping under foreign investment quotas," Journal of Economics, Springer, vol. 98(2), pages 137-153, November.
    7. Sturm, Daniel & Ulph, Alistair, 2002. "Environment, trade, political economy and imperfect information: a survey," Discussion Paper Series In Economics And Econometrics 0204, Economics Division, School of Social Sciences, University of Southampton.
    8. Jota Ishikawa & Toshihiro Okubo, 2010. "Environmental Standards under International Oligopoly," Global COE Hi-Stat Discussion Paper Series gd10-141, Institute of Economic Research, Hitotsubashi University.
    9. Hattori, Keisuke, 2007. "Strategic Voting for Noncooperative Environmental Policies in Open Economies," MPRA Paper 6333, University Library of Munich, Germany.
    10. Claustre Bajona & David L. Kelly, 2005. "Trade and the Environment with Pre-existing Subsidies: A Dynamic General Equilibrium Analysis," Working Papers 0603, University of Miami, Department of Economics, revised 01 Mar 2006.
    11. Joachim Fünfgelt & Günther G. Schulze, 2011. "Endogenous Environmental Policy when Pollution is Transboundary," Working Paper Series in Economics 196, University of Lüneburg, Institute of Economics.
    12. Claustre Bajona & David Kelly, 2006. "Free trade agreements and the environment with pre-existing subsidies," 2006 Meeting Papers 306, Society for Economic Dynamics.
    13. Alexander Haupt, 2000. "Environmental Product Standards, International Trade and Monopolistic Competition," International Tax and Public Finance, Springer, vol. 7(4), pages 585-608, August.
    14. Peter Michaelis & Thomas Ziesemer, 2012. "The Impact of Policy Diffusion on Optimal Emission Taxes," Discussion Paper Series 318, Universitaet Augsburg, Institute for Economics.


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