What is it about?
Trade negotiations have started to pay attention to liberalization in environmental goods(EGs), whose production may require dirty intermediate goods. We construct a two-countrytrade model to explore the effects of trade liberalization in EGs on the local pollution, theglobal environment and welfare in the presence of such an environmental conundrum.We find that countries do not necessarily benefit from trade liberalization in EGs in theabsence of an environmental policy. With the assistance of an upstream pollution tax, tradeliberalization in EGs improves each country’s welfare. This result holds independent ofwhether the upstream market is competitive or not, or whether we have upstream tradeacross countries. For asymmetric countries, trade liberalization in EGs improves the worldwelfare and the welfare for the country if it has a smaller demand for EGs; or experiencesless damage from the production of dirty inputs; or values environment improvement more.
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Why is it important?
Countries do not necessarily benefit from trade liberalization in EGs without upstream pollution controlled by the environmental policy. With the assistance of upstream environmental policy, free trade in EGs always improves each country’s welfare if two countries are symmetric. For asymmetric countries, free trade in EGs tends to improve world welfare but may decrease individual welfare.
Perspectives
It is interesting to investigate abatement investment by firms and terms-of-trade effect. Environmental regulations are affected by terms-of-trade effects, which could change the incentive fortrade liberalization in EGs. It is also interesting to generalize this model and allow for two downstream sectors, say, EG sand non-EGs. The role of technological change in upstream and downstream industries, as well as the exhaustibility ofupstream non-renewable resources can be examined by using a dynamic model.
Prof. (Associate) Minoru Nakada
Graduate School of Environmental Studies, Nagoya University
Read the Original
This page is a summary of: Trade liberalization in environmental goods, Resource and Energy Economics, February 2018, Elsevier,
DOI: 10.1016/j.reseneeco.2017.11.001.
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