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Cross-Border Externalities and Trade Liberalization: The Strategic Control of Pollution

  • Rodney D. Ludema
  • Ian Wooton

The authors examine international trade in a commodity whose production creates a negative externality for the importing country and they consider the nations' strategic policy choices when they can restrict trade and when they are bound by a free-trade agreement. When pollution-abatement technology is available, the exporting country induces its adoption, despite national indifference to the externality, in order to reduce the tariff. In a free-trade agreement, environmental policy is used to exploit monopoly power in trade. An alternative policy instrument, a process standard, is introduced. National competition in controlling emissions leads to very restrictive antipollution measures. We examine international trade in a commodity whose production creates a negative externality for the importing country; and we consider the nations' strategic policy choices, when they can restrict trade, and when they are bound by a free-trade agreement. When pollution-abatement technology is available, the exporting country induces its adoption, despite national indifference to the externality, in order to reduce the tariff. In a free-trade agreement, environmental policy is used to exploit monopoly power in trade. An alternative policy instrument, a process standard is introduced. National competition in controlling emissions leads to very restrictive anti-pollution measures.

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Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 27 (1994)
Issue (Month): 4 (November)
Pages: 950-66

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Handle: RePEc:cje:issued:v:27:y:1994:i:4:p:950-66
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