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Managed Trade, Trade Liberalisation and Local Pollution

  • Regibeau Pierre M


    (University of Essex)

  • Gallegos Alberto


    (ITESM Mexico City)

Abstract The current paper addresses the relationship between trade and endogenous pollution levels, with a focus different from the previous literature. The mechanism linking pollution and trade here is that trade policy provides the home government with a credible threat that helps motivate domestic firms to adopt cleaner technologies. This credible threat comes from the fact that the government has a greater incentive to protect a clean industry than to protect a very polluting one. In that sense, the existence of trade helps reduce domestic pollution compared to what would prevail in a situation of autarky. On the other hand, a commitment to free trade would be counterproductive: it removes the government’s ability to credibly threaten lower levels of protection. In fact we show that any trade liberalization hurts the welfare of the home country. In terms of world welfare, moderate trade liberalization is helpful, but only as long as it does not affect the technology choices of the firms. Because committing to lower ‘bounded’ tariffs limits a government’s ability to enforce strict environmental standards, a country that has agreed to tighter tariff limits under the World Trade Organization would, other things equal, be a more likely “pollution haven” than a country with weaker WTO commitments.

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Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 3 (2004)
Issue (Month): 2 (November)
Pages: 1-26

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Handle: RePEc:bpj:bejeap:v:advances.4:y:2004:i:2:n:5
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  1. Markusen, James R. & Morey, Edward R. & Olewiler, Nancy, 1995. "Competition in regional environmental policies when plant locations are endogenous," Journal of Public Economics, Elsevier, vol. 56(1), pages 55-77, January.
  2. Zhao, Jinhua & Karp, Larry & Sacheti, Sandeep, 2001. "Common Ground Between Free-Traders and Environmentalists," Staff General Research Papers 5138, Iowa State University, Department of Economics.
  3. M. Scott Taylor & Brian R. Copeland, 2014. "International Trade and the Environment: A Framework for Analysis," Working Papers 2014-71, Department of Economics, University of Calgary, revised 29 Sep 2014.
  4. Kennedy Peter W., 1994. "Equilibrium Pollution Taxes in Open Economies with Imperfect Competition," Journal of Environmental Economics and Management, Elsevier, vol. 27(1), pages 49-63, July.
  5. Brander, James A. & Spencer, Barbara J., 1987. "Foreign direct investment with unemployment and endogenous taxes and tariffs," Journal of International Economics, Elsevier, vol. 22(3-4), pages 257-279, May.
  6. Ulph, Alistair, 1996. "Environmental Policy and International Trade when Governments and Producers Act Strategically," Journal of Environmental Economics and Management, Elsevier, vol. 30(3), pages 265-281, May.
  7. Conrad Klaus, 1993. "Taxes and Subsidies for Pollution-Intensive Industries as Trade Policy," Journal of Environmental Economics and Management, Elsevier, vol. 25(2), pages 121-135, September.
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