Free Trade, Autarky and the Sustainability of an International Environmental Agreement

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.