Eco-Labels and International Trade in Textiles

This paper provides a formal analysis of the welfare and trade implications of eco-labeling schemes. A simple model of vertical (quality) differentiation captures major stylized features of the textiles market in which trading takes place between an industrialized North (domestic) and a developing South (foreign). The paper investigates several labeling scenarios (labeling by North, labeling by both North and South, and harmonization). A labeling scheme in the North without the South's participation is detrimental to both the North's and the South's producers of conventional textiles. In aggregate, the North's textiles industry benefits from the introduction of the label. If the South creates its own label, it regains market share in aggregate, but at the cost of its conventional textiles sector; both of North's industries lose. Consumers gain with a wider choice and with higher quality of textile goods. They would favor upward international harmonization of eco-labels towards the higher quality of the North, as long as the South participates in production and provides some cost discipline.