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Free trade agreements and the environment with pre-existing subsidies

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  • Claustre Bajona

    ()
    (Economics University of Miami)

  • David Kelly

Abstract

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 trade agreement on pollution emissions. We show that while reducing tariffs may indeed increase pollution intensive production in a country, reductions in some subsidies required by the trade agreement reduce pollution in general equilibrium for reasonable parameter values. The reduction results from two effects. First, a reduction in subsidies to firms reduces pollution-causing capital accumulation. Second, if subsidized firms, industries, and/or state owned enterprises are sufficiently more pollution intensive, then reducing subsidies moves capital and labor from more to less pollution intensive firms. We calibrate the model to the case of China and show that pollution emissions after China's accession to the WTO are up to 22.9 percent 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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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 306.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:306

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Keywords: trade agreements; domestic subsidies; pollution emissions; dynamic general equilibrium;

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  1. Dietrich Earnhart & Lubomir Lizal, 2002. "Effects of Ownership and Financial Status on Corporate Environmental Performance," CERGE-EI Working Papers wp203, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  2. Hua Wang & Mamingi, Nlandu & Laplante, Benoit & Dasgupta, Susmita, 2002. "Incomplete enforcement of pollution regulation : bargaining power of Chinese factories," Policy Research Working Paper Series 2756, The World Bank.
  3. Nandini Gupta, 2005. "Partial Privatization and Firm Performance," Journal of Finance, American Finance Association, vol. 60(2), pages 987-1015, 04.
  4. Low, P., 1992. "International Trade and the Environment," World Bank - Discussion Papers 159, World Bank.
  5. Rauscher, Michael, 2005. "International Trade, Foreign Investment, and the Environment," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 3, chapter 27, pages 1403-1456 Elsevier.
  6. Hua Wang & Yanhong Jin, 2002. "Industrial ownership and environmental performance : evidence from China," Policy Research Working Paper Series 2936, The World Bank.
  7. Xing, Yuqing & Kolstad, Charles, 1996. "Environment and Trade: A Review of Theory and Issues," MPRA Paper 27694, University Library of Munich, Germany.
  8. Piyush Tiwari & Tetsu Kawakami & Masayuki Doi, 2002. "Dual Labor Markets and Trade Reform in China," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 5(2), pages 101-113.
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