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Trade Liberalization, Transboundary Pollution, and Market Size

Author

Listed:
  • Rikard Forslid
  • Toshihiro Okubo
  • Mark Sanctuary

Abstract

This paper uses a monopolistic competitive framework to study the impact of trade liberalization on local and global emissions. We focus on the interplay of asymmetric emission taxes and the home market effect and show how a large-market advantage can counterbalance a high emission tax, so that trade liberalization leads firms to move to the large high-tax economy. Global emissions decrease when trade is liberalized in this case. We then simulate the model with endogenous taxes. The larger country, which has the advantage of the home market effect, will be able to set a higher Nash emission tax than its smaller trade partner yet still maintain its manufacturing base. As a result, a pollution haven will typically not arise in this case as trade is liberalized. However, global emissions increase as a result of international tax competition, which underscores the importance of international cooperation as trade becomes freer.

Suggested Citation

  • Rikard Forslid & Toshihiro Okubo & Mark Sanctuary, 2017. "Trade Liberalization, Transboundary Pollution, and Market Size," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 4(3), pages 927-957.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/693562
    DOI: 10.1086/693562
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    Cited by:

    1. Damien Dussaux & Francesco Vona & Antoine Dechezleprêtre, 2020. "Carbon Offshoring: Evidence from French Manufacturing Companies," Working Papers hal-03403069, HAL.
    2. Cheng Haitao & Kato Hayato & Obashi Ayako, 2021. "Is Environmental Tax Harmonization Desirable in Global Value Chains?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 21(1), pages 379-416, January.
    3. Lai, Yu-Bong, 2024. "Policy linkages, country size, and international capital distribution," Journal of Environmental Economics and Management, Elsevier, vol. 123(C).
    4. Haitao Cheng, 2023. "Consumption pollution and taxes with endogenous firm locations and different market sizes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(6), pages 1601-1632, December.
    5. Shoji Haruna & Rajeev K. Goel, 2023. "Transboundary Pollution Control with Both Production and Consumption Emissions," CESifo Working Paper Series 10667, CESifo.
    6. Yoshihiro Hamaguchi, 2022. "Effect of environmental tax evasion on pollution havens within the EU’s dual regulation system," SN Business & Economics, Springer, vol. 2(12), pages 1-25, December.
    7. Yiming Zhou, 2025. "Industrial agglomeration, firm heterogeneity, and environmental pollution," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 24(3), pages 393-418, September.
    8. Rikard Forslid & Toshihiro Okubo & Mark Sanctuary, 2017. "Trade Liberalization, Transboundary Pollution, and Market Size," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 4(3), pages 927-957.
    9. Vona, Francesco, "undated". "Skills and human capital for the low-carbon transition in developing and emerging economies," FEEM Working Papers 338778, Fondazione Eni Enrico Mattei (FEEM).
    10. Hayat Khan & Liu Weili & Itbar Khan, 2022. "Environmental innovation, trade openness and quality institutions: an integrated investigation about environmental sustainability," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 24(3), pages 3832-3862, March.
    11. Cheng, Haitao, 2024. "Domestic versus international emissions trading with capital mobility," Resource and Energy Economics, Elsevier, vol. 77(C).
    12. Damien Dussaux & Francesco Vona & Antoine Dechezleprêtre, 2023. "Imported carbon emissions: Evidence from French manufacturing companies," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(2), pages 593-621, May.
    13. Francesco Vona, 2023. "Skills and human capital for the low-carbon transition in developing and emerging economies," Working Papers 2023.19, Fondazione Eni Enrico Mattei.
    14. Caballero, María Victoria & Martínez-García, María Pilar & Morales, José R., 2024. "Pollution-induced migration and environmental policy in an economic geography model," Resource and Energy Economics, Elsevier, vol. 76(C).
    15. Hartmut Egger & Udo Kreickemeier & Philipp M. Richter, 2021. "Environmental Policy and Firm Selection in the Open Economy," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 8(4), pages 655-690.
    16. Yoshihiro Hamaguchi, 2025. "Agglomeration, inequality, and the environment in an R&D-based growth model," Letters in Spatial and Resource Sciences, Springer, vol. 18(1), pages 1-17, December.
    17. Tatjana Vukelić, 2023. "Black Awakening in Obama’s America: The End of an Illusion," European Journal of Social Sciences Articles, Revistia Research and Publishing, vol. 6, ejss_v6_i.
    18. Mark Sanctuary, 2018. "Border carbon adjustments and unilateral incentives to regulate the climate," Review of International Economics, Wiley Blackwell, vol. 26(4), pages 826-851, September.
    19. Forslid, Rikard, 2019. "Trade, Transportation and the Environment," CEPR Discussion Papers 14228, C.E.P.R. Discussion Papers.
    20. Yoshihiro Hamaguchi, 2020. "Do pollution havens restrict tourism-led growth? Achieving sustainable tourism via a mix of environmental and tourism policies," Tourism Economics, , vol. 26(7), pages 1175-1196, November.
    21. José M. Cansino & Rocio Román-Collado & Juan C. Molina, 2019. "Quality of Institutions, Technological Progress, and Pollution Havens in Latin America. An Analysis of the Environmental Kuznets Curve Hypothesis," Sustainability, MDPI, vol. 11(13), pages 1-20, July.
    22. repec:spo:wpmain:info:hdl:2441/7j6trda2ip9uja53ghj5qo32rg is not listed on IDEAS

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration

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