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Per-capita Income as a Determinant of International Trade and Environmental Policies

  • James R. Markusen

International trade policy analysis has tended to focus on the production side of general equilibrium, with policies such as a tariff or carbon tax affecting international and internal income distributions through a Heckscher-Ohlin nexus of factor intensities and factor endowments. Here I move away from this structure to focus on demand and preferences. The specific context is an international environmental externality such as carbon emissions, and I assume a high income elasticity of demand for environmental quality. I analyze how per-capita income differences between two countries affect their abatement efforts in a non-cooperative policy-setting game. This outcome can then be used as a disagreement point to analyze cooperative Nash bargaining. In both outcomes, the poor country makes a lower abatement effort in equilibrium; indeed, it may make none at all and cooperative bargaining with only abatement levels as an instrument may offer no gains. Other features include a novel terms-of-trade externality in which an abating country passes on a part of its abatement cost to its trading partner, in which case the non-cooperative and cooperative outcomes are identical under special symmetry assumptions. When per-capita income differences are large, the poor country may be worse off when the rich country abates. Finally, I examine "issue linking" in international bargaining, in which one country is both large and rich, and hence has both a high tariff and a high abatement effort in a non-cooperative equilibrium.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19754.

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Date of creation: Dec 2013
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Handle: RePEc:nbr:nberwo:19754
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  4. Giuseppe Francesco Gori & Luca Lambertini, 2012. "Trade Liberalisation between Asymmetric Countries with Environmentally Concerned Consumers," Working Paper Series 40_12, The Rimini Centre for Economic Analysis.
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  12. Conconi, P. & Perroni, C., 2000. "Issue Linkage and Issue Tie-in in Multilateral Negotiations," The Warwick Economics Research Paper Series (TWERPS) 558, University of Warwick, Department of Economics.
  13. Copeland, Brian R. & Taylor, M. Scott, 2005. "Free trade and global warming: a trade theory view of the Kyoto protocol," Journal of Environmental Economics and Management, Elsevier, vol. 49(2), pages 205-234, March.
  14. Bard Harstad, 2012. "Climate Contracts: A Game of Emissions, Investments, Negotiations, and Renegotiations," Review of Economic Studies, Oxford University Press, vol. 79(4), pages 1527-1557.
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  17. Caron, Justin & Fally, Thibault & Markusen, James R., 2012. "Skill Premium and Trade Puzzles: A Solution Linking Production and Preferences," CEPR Discussion Papers 8999, C.E.P.R. Discussion Papers.
  18. Yi-Bin Chiu, 2012. "Deforestation and the Environmental Kuznets Curve in Developing Countries: A Panel Smooth Transition Regression Approach," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 60(2), pages 177-194, 06.
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  22. 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.
  23. Nuno Limão, 2002. "Trade policy, cross-border externalities and lobbies: do linked agreements enforce more cooperative outcomes?," International Trade 0206002, EconWPA, revised 28 Jul 2002.
  24. Ignatius J. Horstmann & James R. Markusen & Jack Robles, 2001. "Multi-Issue Bargaining and Linked Agendas: Ricardo Revisited or No Pain No Gain," NBER Working Papers 8347, National Bureau of Economic Research, Inc.
  25. Deacon, Robert & Norman, Catherine S, 2004. "Is the environmental Kuznets curve an empirical regularity?," University of California at Santa Barbara, Economics Working Paper Series qt2m44f7kr, Department of Economics, UC Santa Barbara.
  26. Markusen, James R, 1986. "Explaining the Volume of Trade: An Eclectic Approach," American Economic Review, American Economic Association, vol. 76(5), pages 1002-11, December.
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