Free Trade Agreements with Environmental Standards

In this paper, we investigate the effects of a free trade agreement (FTA) with environmental standards between Northern and Southern countries, with explicit considerations for transferring clean technology and enforcing reduced emissions. Southern producers benefit greatly from having unimpeded access to a Northern market, but they are reluctant to use new high-cost, clean technology provided by the North. Thus, environmentally conscious Northern countries should design an FTA where Southern countries are provided with sufficient membership benefits but must follow tighter enforcement requirements. Since including too many Southern countries dilutes the benefits of FTA membership, it is in the best interest of the North to limit the number of Southern memberships while strictly enforcing emissions reduction. This may result in unequal treatment among the Southern countries. We provide a quantitative evaluation of FTA policies using a numerical example.