Trade and the Environment with Pre-existing Subsidies: A Dynamic General Equilibrium Analysis
Countries that wish to erect trade barriers have a variety of instruments at their disposal. In addition to tariffs and quotas, countries can offer tax relief, low interest financing, reduced regulation, and other subsidies to domestic industries facing foreign competition. In a trade agreement, countries typically agree to reduce not only tariffs, but also subsidies. We consider the effect of a free trade agreement on pollution emissions. We show that while reducing tariffs may indeed increase output and pollution, reductions in some subsides required by the trade agreement reduce pollution in general equilibrium for reasonable parameter values. Reducing subsidies has three effects on pollution: (1) reducing subsidies to firms reduces pollution-causing capital accumulation, (2) if subsidized firms are more pollution intensive, then reducing subsides moves capital and labor from more to less pollution intensive firms, and (3) reducing subsidies concentrates production in more productive firms, increasing output and thus pollution. We derive straightforward conditions for which (1) and (2) outweigh (3). We then calibrate the model to China in 1997, which is prior to implementing the reforms specifically required by the US-China World Trade Organization (WTO) Bilateral Agreement. Our model predicts that pollution emissions in China are up to 22.9% lower than a baseline in which China does not enter the WTO, without any pollution abatement policy changes or environmental side agreements.
|Date of creation:||11 Nov 2005|
|Date of revision:||01 Mar 2006|
|Publication status:||Forthcoming: Under Review|
|Contact details of provider:|| Postal: |
Phone: (305) 284-5540
Fax: (305) 284-2985
Web page: http://www.bus.miami.edu/faculty-and-research/academic-departments/economics/index.html
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alwyn Young, 2000. "The Razor's Edge: Distortions and Incremental Reform in the People's Republic of China," NBER Working Papers 7828, National Bureau of Economic Research, Inc.
- Grossman, Gene M & Krueger, Alan B, 1995.
"Economic Growth and the Environment,"
The Quarterly Journal of Economics,
MIT Press, vol. 110(2), pages 353-77, May.
- Lubomír Lízal & Dietrich Earnhart, 2002.
"Effects of Ownership and Financial Status on Corporate Environmental Performance,"
William Davidson Institute Working Papers Series
492, William Davidson Institute at the University of Michigan.
- Dietrich Earnhart & Lubomir Lizal, 2002. "Effects of Ownership and Financial Status on Corporate Environmental Performance," CERGE-EI Working Papers wp203, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
- Earnhart, Dietrich & Lizal, Lubomir, 2002. "Effects of Ownership and Financial Status on Corporate Environmental Performance," CEPR Discussion Papers 3557, C.E.P.R. Discussion Papers.
- Hettige, Hemamala & Huq, Mainul & Pargal, Sheoli & Wheeler, David, 1996. "Determinants of pollution abatement in developing countries: Evidence from South and Southeast Asia," World Development, Elsevier, vol. 24(12), pages 1891-1904, December.
- Wang, Hua & Wheeler, David, 2003. "Equilibrium pollution and economic development in China," Environment and Development Economics, Cambridge University Press, vol. 8(03), pages 451-466, July.
- Stern, David I. & Common, Michael S., 2001.
"Is There an Environmental Kuznets Curve for Sulfur?,"
Journal of Environmental Economics and Management,
Elsevier, vol. 41(2), pages 162-178, March.
- David I. Stern & Tony Auld & Michael S. Common & Kali K. Sanyal, 1998. "Is there an environmental Kuznets curve for sulfur?," Working Papers in Ecological Economics 9804, Australian National University, Centre for Resource and Environmental Studies, Ecological Economics Program.
- Werner Antweiler & Brian R. Copeland & M. Scott Taylor, 1998.
"Is Free Trade Good for the Environment?,"
NBER Working Papers
6707, National Bureau of Economic Research, Inc.
- Shleifer, Andrei & Vishny, Robert W, 1994. "Politicians and Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 995-1025, November.
- Greenwood Jeremy & Huffman Gregory W., 1995.
"On the Existence of Nonoptimal Equilibria in Dynamic Stochastic Economies,"
Journal of Economic Theory,
Elsevier, vol. 65(2), pages 611-623, April.
- Jeremy Greenwood & Gregory W. Huffman, 1993. "On the existence of nonoptimal equilibria in dynamic stochastic economies," Research Paper 9330, Federal Reserve Bank of Dallas.
- James H. Stock & Mark W. Watson, 2006.
"Heteroskedasticity-Robust Standard Errors for Fixed Effects Panel Data Regression,"
NBER Technical Working Papers
0323, National Bureau of Economic Research, Inc.
- James H. Stock & Mark W. Watson, 2008. "Heteroskedasticity-Robust Standard Errors for Fixed Effects Panel Data Regression," Econometrica, Econometric Society, vol. 76(1), pages 155-174, 01.
- Copeland,B.R. & Scott Taylor,M., 2003.
"Trade, growth and the environment,"
10, Wisconsin Madison - Social Systems.
- Cox, David & Harris, Richard, 1985.
"Trade Liberalization and Industrial Organization: Some Estimates for Canada,"
Journal of Political Economy,
University of Chicago Press, vol. 93(1), pages 115-45, February.
- David Cox & Richard Harris, 1983. "Trade Liberalization and Industrial Organization: Some Estimates for Canada," Working Papers 523, Queen's University, Department of Economics.
- Choe, Chongwoo & Yin, Xiangkang, 2000.
"Do China's State-Owned Enterprises Maximize Profit?,"
The Economic Record,
The Economic Society of Australia, vol. 76(234), pages 273-84, September.
- Chongwoo Choe & Xiangkang Yin, 1998. "Do China's State-Owned Enterprises Maximize Profit?," Working Papers 1998.07, School of Economics, La Trobe University.
- repec:ltr:wpaper:1999.03 is not listed on IDEAS
- Claustra Bajona & Tianshu Chu, 2009.
"Data Appendix to "Reforming the State-Owned Enterprises in China: Effects of WTO Accession","
06-12, Review of Economic Dynamics.
- Claustre Bajona & Tianshu Chu, 2010. "Reforming State Owned Enterprises in China: Effects of WTO Accession," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(4), pages 800-823, October.
- Alwyn Young, 2003. "Gold into Base Metals: Productivity Growth in the People's Republic of China during the Reform Period," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1220-1261, December.
- van Beers, Cees & van den Bergh, Jeroen C. J. M., 2001. "Perseverance of perverse subsidies and their impact on trade and environment," Ecological Economics, Elsevier, vol. 36(3), pages 475-486, March.
- William T. Harbaugh & Arik Levinson & David Molloy Wilson, 2002.
"Reexamining The Empirical Evidence For An Environmental Kuznets Curve,"
The Review of Economics and Statistics,
MIT Press, vol. 84(3), pages 541-551, August.
- William Harbaugh & Arik Levinson & David Wilson, 2000. "Reexamining the Empirical Evidence for an Environmental Kuznets Curve," NBER Working Papers 7711, National Bureau of Economic Research, Inc.
- William Harbaugh & Arik Levinson & David Wilson, 2000. "Reexamining the Empirical Evidence for an Environmental Kuznets Curve," Working Papers gueconwpa~00-00-07, Georgetown University, Department of Economics.
- Xing, Yuqing & Kolstad, Charles, 1996. "Environment and Trade: A Review of Theory and Issues," MPRA Paper 27694, University Library of Munich, Germany.
- Low, P., 1992. "International Trade and the Environment," World Bank - Discussion Papers 159, World Bank.
- David L. Kelly, 2006.
"Subsidies to Industry and the Environment,"
0602, University of Miami, Department of Economics.
- Talukdar, Debabrata & Meisner, Craig M., 2001. "Does the Private Sector Help or Hurt the Environment? Evidence from Carbon Dioxide Pollution in Developing Countries," World Development, Elsevier, vol. 29(5), pages 827-840, May.
- Ravi Ratnayake, 1998. "Do Stringent Environmental Regulations Reduce International Competitiveness? Evidence from an Inter-industry A nalysis," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 5(1), pages 77-96.
- Hua Wang & Yanhong Jin, 2007.
"Industrial Ownership and Environmental Performance: Evidence from China,"
Environmental & Resource Economics,
European Association of Environmental and Resource Economists, vol. 36(3), pages 255-273, March.
- Hua Wang & Yanhong Jin, 2002. "Industrial ownership and environmental performance : evidence from China," Policy Research Working Paper Series 2936, The World Bank.
- Nandini Gupta, 2005. "Partial Privatization and Firm Performance," Journal of Finance, American Finance Association, vol. 60(2), pages 987-1015, 04.
- Xiangkang Yin, 1999.
"A Dynamic Analysis of Overstaff in China's State-Owned Enterprises,"
1999.03, School of Economics, La Trobe University.
- Yin, Xiangkang, 2001. "A dynamic analysis of overstaff in China's state-owned enterprises," Journal of Development Economics, Elsevier, vol. 66(1), pages 87-99, October.
- Pargal, Sheoli & Wheeler, David, 1996. "Informal Regulation of Industrial Pollution in Developing Countries: Evidence from Indonesia," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1314-27, December.
- Piyush Tiwari & Tetsu Kawakami & Masayuki Doi, 2002. "Dual Labor Markets and Trade Reform in China," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 5(2), pages 101-113.
- Dasgupta, Susmita & Laplante, Benoit & Mamingi, Nlandu & Wang, Hua, 2001. "Inspections, pollution prices, and environmental performance: evidence from China," Ecological Economics, Elsevier, vol. 36(3), pages 487-498, March.
- Wang, Hua & Wheeler, David, 2005. "Financial incentives and endogenous enforcement in China's pollution levy system," Journal of Environmental Economics and Management, Elsevier, vol. 49(1), pages 174-196, January.
- Lucas, Robert E.B. & Wheeler, David & Hettige, Hemamala, 1992. "Economic development, environmental regulation, and the international migration of toxic industrial pollution : 1960-88," Policy Research Working Paper Series 1062, The World Bank.
- Rauscher, Michael, 2005. "International Trade, Foreign Investment, and the Environment," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 3, chapter 27, pages 1403-1456 Elsevier.
- Alwyn Young, 2000. "The Razor'S Edge: Distortions And Incremental Reform In The People'S Republic Of China," The Quarterly Journal of Economics, MIT Press, vol. 115(4), pages 1091-1135, November.
- Kyle Bagwell & Robert W. Staiger, 2006. "Will International Rules on Subsidies Disrupt the World Trading System?," American Economic Review, American Economic Association, vol. 96(3), pages 877-895, June.
- Fisher-Vanden, Karen & Ho, Mun S., 2007. "How do market reforms affect China's responsiveness to environmental policy?," Journal of Development Economics, Elsevier, vol. 82(1), pages 200-233, January.
When requesting a correction, please mention this item's handle: RePEc:mia:wpaper:0603. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher Parmeter)
If references are entirely missing, you can add them using this form.