Countries that wish to erect trade barriers have a variety of instruments at their disposal. In addition to tariffs and quotas, countries can offer tax relief, low interest financing, reduced regulation, and other subsidies to domestic industries facing foreign competition. In a trade agreement, countries typically agree to reduce not only tariffs, but also subsidies. We consider the effect of a free trade agreement on pollution emissions. We show that while reducing tariffs may indeed increase output and pollution, reductions in some subsides required by the trade agreement reduce pollution in general equilibrium for reasonable parameter values. Reducing subsidies has three effects on pollution: (1) reducing subsidies to firms reduces pollution-causing capital accumulation, (2) if subsidized firms are more pollution intensive, then reducing subsides moves capital and labor from more to less pollution intensive firms, and (3) reducing subsidies concentrates production in more productive firms, increasing output and thus pollution. We derive straightforward conditions for which (1) and (2) outweigh (3). We then calibrate the model to China in 1997, which is prior to implementing the reforms specifically required by the US-China World Trade Organization (WTO) Bilateral Agreement. Our model predicts that pollution emissions in China are up to 22.9% lower than a baseline in which China does not enter the WTO, without any pollution abatement policy changes or environmental side agreements.
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Paper provided by University of Miami, Department of Economics in its series Working Papers with number
0603.
Find related papers by JEL classification: Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounting F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics O13 - Economic Development, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
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