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Trade Liberalization, Transboundary Pollution and Market Size

Author

Listed:
  • Rikard Forslid

    (Department of Economics, Stockholm University)

  • Toshihiro Okubo

    (Faculty of Economics, Keio University)

  • Mark Sanctuary

    (Stockholm School of Economics)

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 emission increases as a result of international tax competition, which underscores that the importance of international cooperation increases as trade becomes freer.

Suggested Citation

  • Rikard Forslid & Toshihiro Okubo & Mark Sanctuary, 2017. "Trade Liberalization, Transboundary Pollution and Market Size," Keio-IES Discussion Paper Series 2017-019, Institute for Economics Studies, Keio University.
  • Handle: RePEc:keo:dpaper:2017-019
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    References listed on IDEAS

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    Cited by:

    1. Kreickemeier, Udo & Richter, Philipp M., 2019. "Environmental policy and firm selection in the open economy," KCG Working Papers 15, Kiel Centre for Globalization (KCG).
    2. Haitao Cheng & Hayato Kato & Ayako Obashi, 2019. "Is Environmental Tax Harmonization Desirable in Global Value Chains?," Discussion Papers in Economics and Business 19-13, Osaka University, Graduate School of Economics.
    3. repec:bla:reviec:v:26:y:2018:i:4:p:826-851 is not listed on IDEAS
    4. 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.
    5. repec:gam:jsusta:v:11:y:2019:i:13:p:3708-:d:246191 is not listed on IDEAS

    More about this item

    Keywords

    Trade liberalization; transboundary pollution; home market effect; transportation costs; emission tax;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

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