Trade Structure, Transboundary Pollution and Multilateral Trade Liberalization: The Effects on Environmental Taxes and Welfare

Abstract

Abstract:This paper considers a trade situation where the production activities of potentially heterogeneous countries generate pollution which can cross borders and harm the well-being of all the countries involved. In each of those countries the policy market levies pollution taxes on the polluting firms and a tariff on imports in order to correct that distortion. The purpose of the paper is to investigate the effect of a reduction in the tariff on equilibrium pollution taxes and welfare. The existing literature has investigated this problem for trade between two identical countries. This paper analyzes the problem in the more realistic context where countries are not necessarily identical and trade can be multilateral. It becomes possible to show what bias is introduced when those two realities are neglected. I find that a tariff reduction can actually lower output; it can also lower welfare even if pollution is purely local. Keywords: Trade liberalization, Pollution taxes, Transboundary pollution, Heterogeneous countries, Imperfect markets Résumé:Ce papier s'inscrit dans un contexte où les activités de production des pays potentiellement hétérogènes génèrent de la pollution qui peut traverser les frontières et nuire au bien-être des pays impliqués. Dans chacun de ces pays, l'état s'impose des taxes sur la pollution aux firmes polluantes et des tarifs à l'importation afin de corriger cette distorsion. Ce papier a pour but d'évaluer les effets que pourrait avoir une diminution des tarifs douaniers sur la production, les taxes sur la pollution et le bien-être de ces pays. La littérature existante a étudié ce problème, mais seulement dans le cadre d'un commerce bilatéral entre pays identiques. Cet article fournit un cadre d'analyse plus réaliste dans lequel les pays ne seront pas nécessairement identiques et où le commerce pourra être multilatéral. Il devient alors possible de mettre en évidence le biais introduit en négligeant ces deux facteurs. Dans ce nouveau contexte, je montre qu'une réduction des tarifs d'importation n'augmente pas nécessairement l'output; elle peut aussi nuire au bien-être, même si la pollution est purement locale.

Transatlantic Trade and Investment Partnership, and Environmental Consequences

“…These theoretical models suggest that trade liberalization follows either the race to the bottom hypothesis (i.e., Copeland & Taylor, 1995) or race to the top hypothesis (i.e., Bommer & Schulze, 1999;Burguet & Sempere, 2003;Lai & Hu, 2008). It is also consistent with strategic theoretical frameworks that find that lower trade barriers have an ambiguous effect on pollution (i.e., Benarroch & Weder, 2006;Bhattacharya & Pal, 2010;Nkuiya, 2013). Our empirical results suggest that the possible implementation of TTIP may increase the per capita emissions of SO 2 and municipal waste.…”

“…Other studies [i.e., Benarroch & Weder (2006); Bhattacharya & Pal (2010); Nkuiya (2013)] developed theoretical models that find that strategic trade policies can create either race to the bottom hypothesis or race to the top hypothesis. 7) Using an intra-industry trade model with intermediate inputs, Benarroch and Weder (2006) show that freer trade may create race to the bottom hypothesis when there exists a constant return to the pollution function (pessimistic scenario).…”

“…with our empirical findings for SO 2 and municipal waste) when the domestic environmental strategic effect owing to local pollution dominates (is dominated by) the strategic environmental global effect owing to the free-riding incentives and the strategic effect due to international rent shifting. Nkuiya (2013) developed an oligopolistic trade game and analyzed the possible improvement in domestic environmental protection or the dilution of environmental standards when asymmetric countries join a multi-national trade agreement. He shows that trade liberalization follows a trade to the top argument in large members because it increases output production, and, therefore, decreases the price of goods, but it increases the marginal environmental damage associated with production.…”

North–South asymmetry, unilateral environmental policy and carbon tariffs

“…It is possible that the output and welfare of a country increases at the expense of another country and global welfare is not maximized. In such a situation, differentiated optimal cooperative tax and non‐cooperative emission tax can improve a country's welfare (Dijkstra et al, 2011; Ludema & Wooton, 1994; Nkuiya, 2013; Yanase, 2012).…”