Trade liberalization and the environment: The case of intra-industry trade

Abstract

While a large body of literature examines the environmental impact of trade on the environment, this discussion focuses largely on the context of inter-industry trade. Empirical evidence has long suggested that an increasing share of international trade takes the form of intra- rather than inter-industry trade. In an attempt to fill this gap, the present paper uses a price-setting duopoly model of intra-industry trade to highlight the environmental consequences of trade liberalization when oligopolistic rivalry rather than comparative advantage drives international trade. We find that the environmental impact of trade liberalization depends mostly on two factors, namely, on the nature of pollution (i.e. whether it is local, transboundary or global) and on which country liberalizes trade (i.e. whether it is the 'clean' country or the 'dirty' country).Trade, environment, intra-industry trade,

Trade liberalization, intra-industry trade and the environment: competition mode and the order of firms’ moves

“…1 Compared with Fung and Maechler (2005) who have analyzed the case of simultaneous quantity competition, Fung and Maechler (2007) make tiny modification in the demand side. Due to these two objectives, especially the second objective, sharper results for sake of comparison are required.…”

“…As in Fung and Maechler (2007), we formulate a duopolistic model in which there are two polluting firms, each located in a different country: the home and the foreign, indexed by x and y, respectively. Each firm produces a differentiated pollution-intensive 2 good which is consumed both at home and abroad.…”

“…One of the objectives of this paper is to examine whether or not Fung and Maechler's (2007) results are affected by the change(s) in the order of firms' moves and/or in the mode of firms' competition. It is shown that the existing results obtained for the case of simultaneous price competition are robust in quantity competition and sequential move cases.…”

“…Moreover, it is worth noticing that international trade, no matter whether inter-or intra-industry, may generate environmental consequences. Recently, Fung and Maechler (2007) present an analysis of intraindustry trade in a differentiated duopolistic model under price competition to stress the environmental consequences of trade liberalization. They assume that both firms are Bertrand-Nash players; namely, both firms choose price as their strategic variable and make their decisions simultaneously.…”

“…On the basis of two assumptions about the clean and the dirty country, Fung and Maechler (2007) demonstrate that the environmental effect of trade liberalization mostly depends upon the nature of pollution (i.e. whether it is local, transboundary or global) and upon which country implements trade liberalization (i.e.…”