Optimal adjustment of environmental policy following agricultural trade liberalization
We use an extended partial equilibrium trade model to derive optimal environmental policy responses to tariff reduction requirements and assess the impact of such policies on the welfare of trading partners. We find that countries which attribute preferential political weights to farmers’ welfare have an incentive to implement environmental policies that deviate from the Pigouvian solution – even if production is not de facto linked to environmental externalities. We clarify the conditions under which trading partners do not gain from unilateral trade liberalization if trade concessions are accompanied by strategic environmental policy changes. We postulate a role for the WTO in overseeing the process of formulating domestic policies to further the multifunctional role of agriculture.
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