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Per-Capita Income as a Determinant of International Trade and Environmental Policies

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  • Markusen, James R.

Abstract

International trade policy analysis has tended to focus on the production side of general equilibrium, with policies such as a tariff or carbon tax affecting international and internal income distributions through a Heckscher-Ohlin nexus of factor intensities and factor endowments. Here I move away from this structure to focus on demand, preferences, and endogenous policy in a trade/environment setting by assuming a high income elasticity of demand for environmental quality. I show how both non-cooperative and cooperative abatement policies in a two-country (rich and poor) setting are affected by non-homotheticity. I examine “issue linking” in international bargaining, in which one country is both large and rich, and hence has both a high tariff and a high abatement effort in a non-cooperative equilibrium. Several cooperative bargaining agreements are computed under alternative assumptions about linking or separating trade and environment negotiations. A final exercise considers “policy leakage”, in which one country has an incentive to reduce its optimal abatement effort when the other country increases its effort. The paper will also introduce many readers to a new solver in GAMS for a class of problems referred to as MPECs: mathematical programming with equilibrium constraints. This problem class has wide applications in economics, including solving for multiple optimal tax rates to provide public goods, redistribute income, internalize externalities, exploit monopoly power in trade and so forth, when the underlying general-equilibrium model is a set of constraints on the optimization problem.

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Bibliographic Info

Paper provided by Graduate School of Economics, Hitotsubashi University in its series Discussion Papers with number 2013-06.

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Length: 23, [10] p.
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:hit:econdp:2013-06

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  1. Copeland, Brian R. & Taylor, M. Scott, 2005. "Free trade and global warming: a trade theory view of the Kyoto protocol," Journal of Environmental Economics and Management, Elsevier, vol. 49(2), pages 205-234, March.
  2. Justin Caron & Thibault Fally & James R. Markusen, 2012. "Skill Premium and Trade Puzzles: a Solution Linking Production and Preferences," NBER Working Papers 18131, National Bureau of Economic Research, Inc.
  3. Ignatius J. Horstmann & James R. Markusen & Jack Robles, 2001. "Multi-Issue Bargaining and Linked Agendas: Ricardo Revisited or No Pain No Gain," NBER Working Papers 8347, National Bureau of Economic Research, Inc.
  4. Brian R. Copeland & M. Scott Taylor, 2003. "Trade, Growth and the Environment," NBER Working Papers 9823, National Bureau of Economic Research, Inc.
  5. Fernando Broner & Paula Bustos & Vasco M. Carvalho, 2012. "Sources of Comparative Advantage in Polluting Industries," NBER Working Papers 18337, National Bureau of Economic Research, Inc.
  6. Lisandro Abrego & Carlo Perroni & John Whalley & Randall M. Wigle, 1997. "Trade and Environment: Bargaining Outcomes from Linked Negotiations," NBER Working Papers 6216, National Bureau of Economic Research, Inc.
  7. Markusen, James R, 1975. "Cooperative Control of International Pollution and Common Property Resources," The Quarterly Journal of Economics, MIT Press, vol. 89(4), pages 618-32, November.
  8. Hunter, Linda, 1991. "The contribution of nonhomothetic preferences to trade," Journal of International Economics, Elsevier, vol. 30(3-4), pages 345-358, May.
  9. Markusen, James R, 1986. "Explaining the Volume of Trade: An Eclectic Approach," American Economic Review, American Economic Association, vol. 76(5), pages 1002-11, December.
  10. Markusen, James R & Wigle, Randall M, 1989. "Nash Equilibrium Tariffs for the United States and Canada: The Roles of Country Size, Scale Economies, and Capital Mobility," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 368-86, April.
  11. Abrego, Lisandro, et al, 2001. "Trade and Environment: Bargaining Outcomes from Linked Negotiations," Review of International Economics, Wiley Blackwell, vol. 9(3), pages 414-28, August.
  12. B�rd Harstad, 2012. "Buy Coal! A Case for Supply-Side Environmental Policy," Journal of Political Economy, University of Chicago Press, vol. 120(1), pages 77 - 115.
  13. Yi-Bin Chiu, 2012. "Deforestation and the Environmental Kuznets Curve in Developing Countries: A Panel Smooth Transition Regression Approach," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 60(2), pages 177-194, 06.
  14. Conconi, Paola & Perroni, Carlo, 2002. "Issue linkage and issue tie-in in multilateral negotiations," Journal of International Economics, Elsevier, vol. 57(2), pages 423-447, August.
  15. John P. Tang, 2010. "Pollution Havens and the Trade in Toxic Chemicals: Evidence from U.S. Trade Flows," Working Papers 10-12, Center for Economic Studies, U.S. Census Bureau.
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