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Managed Trade, Trade Liberalization and Local Pollution

  • Gallegos, Alberto
  • Régibeau, Pierre

The current Paper addresses the relationship between trade and endogenous pollution levels. The main focus is quite different from the previous literature. The mechanism linking pollution and trade is that trade 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 limits the government ‘s ability to credibly threaten its domestic firms. In fact we show that any trade liberalisation hurts the welfare of the home country. In terms of world welfare, moderate trade liberalisation is helpful but only as long as it does not affect the technology choices of the firms.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4491.

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Date of creation: Jul 2004
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Handle: RePEc:cpr:ceprdp:4491
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  1. Brian R. Copeland & M. Scott Taylor, 2001. "International Trade and the Environment: A Framework for Analysis," NBER Working Papers 8540, National Bureau of Economic Research, Inc.
  2. 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.
  3. Karp, Larry & Sacheti, Sandeep & Zhao, Jinhua, 1999. "Common ground between free-traders and environmentalists," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt7jw3t8pw, Department of Agricultural & Resource Economics, UC Berkeley.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
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