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Free Trade, Autarky And The Sustainability Of An International Environmental Agreement

  • Hassan Benchekroun

    ()

  • Halis Murat Yildiz

    ()

We determine the impact of free trade on the sustainability of an international environmental agreement (IEA) and incorporate it into the assessment of the net benefits of opening up to free trade. We show that such an analysis can reverse the conclusions reached within a standard one-shot game framework. First, we examine a one shot game and argue that the benefits from an increase in economic activity due to free trade outweigh the extra cost of free trade associated with larger environmental damage. Then, we analyze the infinite repetition of the one-shot game where countries can use trigger strategies and show that there exist circumstances where an IEA is sustainable under autarky but not under free trade. This aggravates the environmental damages caused by free trade and leads to the possibility that autarky may welfare dominate free trade. This conclusion remains valid even when countries adopt the most cooperative environmental policy when the "fully cooperative" environmental policy is not sustainable.

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File URL: http://www.mcgill.ca/files/economics/Benchekroun-YildizFreeTradeAutarkyIEA.pdf
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Paper provided by McGill University, Department of Economics in its series Departmental Working Papers with number 2009-10.

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Length: 21 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:mcl:mclwop:2009-10
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  1. Bond, Eric W & Syropoulos, Costas & Winters, L. Alan, 2000. "Deepening of Regional Integration and Multilateral Trade Agreements," CEPR Discussion Papers 2480, C.E.P.R. Discussion Papers.
  2. Richard Chisik, 2010. "Gradualism in Free Trade Agreements: A Theoretical Justification," Working Papers 018, Ryerson University, Department of Economics.
  3. Ulph, A., 1994. "Strategic environmental policy and international trade: the role of market conduct," Discussion Paper Series In Economics And Econometrics 9415, Economics Division, School of Social Sciences, University of Southampton.
  4. Santiago Rubio & Alistair Ulph, 2003. "An Infinite-Horizon Model of Dynamic Membership of International Environmental Agreements," Working Papers 2003.57, Fondazione Eni Enrico Mattei.
  5. Limao, Nuno, 2005. "Trade policy, cross-border externalities and lobbies: do linked agreements enforce more cooperative outcomes?," Journal of International Economics, Elsevier, vol. 67(1), pages 175-199, September.
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  8. Josh Ederington, 2010. "Should Trade Agreements Include Environmental Policy?," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 4(1), pages 84-102, Winter.
  9. Ulph, Alistair Mitchell, 1994. "Strategic Environmental Policy and International Trade - The Role of Market Conduct," CEPR Discussion Papers 1065, C.E.P.R. Discussion Papers.
  10. Bagwell, Kyle & Staiger, Robert W, 1997. "Multilateral Tariff Cooperation during the Formation of Free Trade Areas," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 291-319, May.
  11. Baksi, S. & Ray Chaudhuri, A., 2008. "Transboundary Pollution, Trade Liberalization, and Environmental Taxes," Discussion Paper 2008-78, Tilburg University, Center for Economic Research.
  12. 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.
  13. Odd Rune Straume, 2006. "Product Market Integration and Environmental Policy Coordination in An International Duopoly," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 34(4), pages 535-563, August.
  14. Riezman, Raymond G., 1990. "Dynamic Tariffs with Asymmetric Information," Working Papers 720, California Institute of Technology, Division of the Humanities and Social Sciences.
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  17. repec:dgr:kubcen:200878 is not listed on IDEAS
  18. Kamal Saggi, 2006. "Preferential Trade Agreements And Multilateral Tariff Cooperation ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 29-57, 02.
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  22. Ferrara, Ida & Missios, Paul & Murat Yildiz, Halis, 2009. "Trading rules and the environment: Does equal treatment lead to a cleaner world?," Journal of Environmental Economics and Management, Elsevier, vol. 58(2), pages 206-225, September.
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