Trade negotiations, domestic policies, and the Most Favored Nation clause

Abstract.  This paper illustrates how restricting trade instruments to non-discrimination links trade agreements to non-trade agreements and, under certain conditions, helps governments further lower tariffs and/or domestic standards (policies). These conditions are: (i) governments' objective functions are sufficiently concave with respect to domestic standards (policies); (ii) domestic standards are sufficiently valued; and (iii) policies are strategic complements. These can then be used as a rationale for restricting safeguard measures to non-discrimination.     

Industrial Policy As an Alternative to Trade Policy: Helping By Hurting*

Abstract Industrial policies that are essentially nonlinear taxes or subsidies on adjustment costs of domestic firms affect those firms' market power in oligopolistic international markets. These adjustment policies often can achieve a strategic purpose at lower cost to the government than linear trade or investment subsidies and are less likely to result in retaliation by other governments. Many governments, however, use adjustment policies for nonstrategic purposes without recognizing that they are reducing their firms' market power by subsidizing adjustment costs rather than taxing them.     

Trade Agreements in the Shadow of Lobbying

This paper presents a model of international trade agreements in which the executive branches of each government negotiate agreements while the legislative branches, subject to political pressure from firms, can disrupt them. Lobbying is in the style of Grossman and Helpman's ‘Protection for Sale’ model with a new feature: all actors face uncertainty arising from the complexity of the legislative process. I demonstrate that the higher the executives set tariffs in a trade agreement, the less effort lobbies put forth to prevent its ratification. Thus trade agreements act as a domestic political commitment device: executives set relatively high tariffs to discourage lobbying and increase the chance that the agreement will be ratified. The model sheds light on the empirical puzzle surrounding governments’ welfare weights in the Grossman and Helpman model and provides a new explanation for failures to ratify trade agreements.     

Plant location and strategic environmental policy with inter-sectoral linkages

In recent debates on trade liberalisation the concern has often been expressed that with more competitive international trade governments will be worried that by setting tougher environmental policies than their trading rivals they will put domestic producers at a competitive disadvantage, and in the extreme case this could lead to firms relocating production in other countries. The response by governments to such concerns will be to weaken environmental policies (‘eco-dumping’). In competitive markets such concerns are ill founded, but there is a small amount of literature which has analysed whether governments will indeed have incentives for eco-dumping in the more relevant case of markets where there are significant scale economies; even here there is no presumption that the outcome will involve eco-dumping.In this paper we extend the analysis of strategic environmental policy and plant location decisions by analysing the location decision of firms in different sectors which are linked through an input-output structure of intermediate production. The reason why we introduce inter-sectoral linkages between firms is that they introduce an additional factor, relative to those already analysed in the literature, in the plant location decision, which is the incentive for firms in different sectors to agglomerate in a single location. This has a number of important effects. First, there is now the possibility of multiple equilibria in location decisions of firms. Following from this there is the possibility of catastrophic effects where a small increase in an environmental tax can trigger the collapse of an industrial base in a country; however there is also the possibility that a country which raises its environmental tax could attract more firms to locate in that country, because of the way the tax affects incentives for agglomeration. Finally, and again related to the previous effects, there is the possibility of a hysteresis effect where raising an environmental tax in one country can cause firms to relocate to another country, but subsequently lowering that tax will not induce firms to relocate back into the original country.We consider a simple model with two countries, two industries, an upstream and a downstream sector, and two firms per industry. The analysis proceeds through a three-stage game: in the first stage the governments of the two countries set their environmental policies; in the second stage the firms in both industries choose how many plants to locate and where; in the third stage firms choose their output levels, with the demand for the upstream firms being determined endogenously by the production decisions of the downstream firms. We assume that there are no limits to production capacity, so that firms do not build more than one plant in any country. However, firms may build plants in different countries because of positive transport costs. Although the model appears very simple, it cannot be solved analytically, so all the conclusions must be drawn from numerical simulations.     

Market Integration and Competition in Environmental and Trade Policies

Recent empirics suggest the relevance of transport cost reductions for world trade growth along with eliminations in protectionist trade barriers. To address the welfare effects of trade cost reductions in a context of ??trade and the environment,?? we develop a two-stage game model where governments choose environmental and trade policies and firms play a Cournot-Nash game. We show that reductions in transport costs lead to lower emission taxes and higher tariffs. And, we find that the degree of pollution damage plays a central role in whether market integration is welfare-improving relative to autarky.     

Environmental Policy in Open Economies and Monopolistic Competition

This paper analyses the implications of international trade for non-cooperative environmental policy in the case of local production externalities. A particular focus is on the potential effects of regulations on the variety of goods and the resulting international spillover caused by trade. A tougher domestic standard negatively affects the utility of the households abroad, since such a policy reduces their variety of imports (due to fewer domestic product inventions) or their consumption of each imported brand (due to higher import prices). Ignoring the negative spillover, non-cooperative governments implement inefficiently strict standards in equilibrium. In contrast to this clear-cut inefficiency result, the impact of international trade on the state of the environment is ambiguous.     

Environmental policy instruments and imperfectly competitive international trade

Policy makers, industrialists and environmentalists express concern that the imposition of tough environmental policies in some countries displaces production, and hence pollution, to countries which impose less tough environmental policies. Yet empirical studies of such impacts suggest they are small. However, these findings are derived from models in which international trade is modelled as being perfectly competitive. In this paper I model trade as imperfectly competitive with scope for strategic behavior by producers, in this case investment in capital. I show that the choice of environmental policy instrument can have a marked impact on the incentives for producers to act strategically, with environmental standards significantly reducing the incentives for strategic overinvestment relative to environmental taxes or no environmental policy at all. Whether welfare is higher using standards or taxes depends on whether producing countries are also significant consumers of the polluting product, and on whether all producing governments act to reduce emissions or only some subset of governments. To assess the quantitative significance of these theoretical results I conduct policy simulations on a calibrated model of the world fertilizer industry. These simulations show that the impact of environmental policy on strategic behaviour can be large.     

Trade,Strategic Environmental Policy,and Global Pollution

This paper examines the effects of international trade in a model with global pollution that accumulates over time because of production emissions in each country. If countries cooperatively determine their environmental policies, autarky and free trade in the absence of trade costs generate the same optimal solution. By contrast, if environmental policies are determined noncooperatively, the effects of trade on global pollution and welfare are ambiguous because policy games can result in multiple equilibria. Although trade increases both the lower and upper bounds of the pollution stock, whether trade expands the range of possible steady‐state pollution levels is ambiguous. The analysis then extends to consider trade costs.     

DYNAMIC ENVIRONMENTAL TAXES UNDER INTERNATIONAL DUOPOLY

This paper studies a dynamic game of environmental taxes between two countries in the absence of explicit trade policies when both governments and firms act strategically. We demonstrate that the environmental tax in the steady‐state equilibrium in a dynamic environmental tax game is lower than that in a static environmental one. Therefore, the dynamic behaviour of the governments results in an increase in the environmental damage. Further, as a result of international cooperation on environmental taxes between two countries in the beginning of policy competition, there is an increase in the optimal environmental tax. This implies that it is important to set cooperative environmental taxes in the beginning of policy competition because non‐cooperative environmental taxes in the dynamic game result in the race‐to‐the‐bottom, which does not lead to environmental improvement.     

VERs and Price Undertakings under the WTO*

Under the rules of the WTO, governments are prohibited from negotiating voluntary export restraints (VERs) but may negotiate price undertakings (i.e. import price minima). While these two policies can have identical effects in models of perfect competition, they can have very different economic consequences with imperfect competition. The model presented here shows that in a model of international Bertrand duopoly, a VER can result in lower domestic prices and profits than a price minimum regime. This suggests that price undertakings should also be prohibited under the WTO.     

Privatization and the Political Economy of Strategic Trade Policy

This article considers the interdependence between international financial markets, privatization, and strategic trade policies. We describe an economy where portfolio allocations are chosen by risk-averse agents who rationally forecast future trade policies. Assuming a government responsive to the policy preferences of voters, we show that ownership structure affects trade policy through the incentives for lobbying by private agents. Portfolios and trade policy are thus jointly determined in political-economic equilibrium. Privatization of state-owned industry exerts an important influence over the trade policies chosen by domestic and foreign governments by expanding the scope for individual diversification.     

US Ethanol Trade Policy: Pollution Reduction or Domestic Protection

To mitigate dependence on fossil fuel and reduce pollution, the US government has undertaken several policies—an import tariff, tax credit, and mandate—to augment domestic ethanol production and increase ethanol in the fuel supply. This study uses a general equilibrium model to analyze the effects of the US ethanol import tariff on welfare by internalizing the externality and incorporating US fuel and ethanol policies and to determine the optimal tariff. The results show that because of the environmental benefits of imported ethanol, the adverse effects of domestic ethanol on the environment, the need for the imported ethanol to boost the blended gasoline production, and the economy‐wide interactions of various markets, the optimal trade policy may call for subsidizing rather than taxing ethanol imports.     

Export quality and income distribution in a small dependent economy

This paper provides a simple general equilibrium structure to analyze the two-way causation between choice of export quality by a small open economy and domestic income distribution. The important policy conclusion of our analysis is the following: When direct quality regulations are costly to impose or may not have desirable consequences for income distribution, the target level of export quality may be met through appropriate direct and indirect income redistribution policies such as wage policies or standard trade policies.     

Trade and Domestic Policy Linkage in International Agreements*

A central question in discussions of integrating negotiations over domestic policy (e.g., environmental policy or labor standards) into traditional trade agreements is the degree to which the trade policy and domestic policy provisions of an agreement should be explicitly linked. For example, should the World Trade Organization enforce domestic policy obligations with the threat of the suspension of trade concessions? This article considers the conditions under which linking trade and domestic policy agreements within a self‐enforcing agreement is beneficial, and argues that the benefits of such policy linkage may be lower than is commonly thought.     

Delegation of Decision-Rights for Wetlands

Different nutrient abatement activities jointly determine water quality. Policies are determined by governments at central and local level, implying that decisions can be affected by strategic considerations. In this article, decentralization of wetland policies is analyzed with regard to the environmental and economic consequences. A two-stage game is used to investigate strategic abatement decisions regarding nitrogen fertilizer reductions, waste water treatment plant phosphorus reductions and wetlands, assuming that wetland decision can be decentralized. It is shown that under particular circumstances, strategic consideration may imply that a central government undertakes more abatement than socially optimal, but in most cases the opposite is likely to occur. Decentralization of wetland decisions is advantageous to the central government but only benefits the local government if its wetland technology is considerably more efficient that the central government’s. This paper explains why local governments often hesitate to take on additional responsibilities for environmental management, and identifies conditions under which local governments make smaller losses or even gain from delegation. The results also contribute to understanding how strategically optimal matching grants are chosen when governments only take into account their own direct costs of abatement and the central government needs to satisfy the local government’s participation constraint.     

Strategic Environmental Policy under Free Entry of Firms

With direct trade barriers banned, governments may be tempted to use indirect policy tools to interfere with trade, such as environmental taxes. The author uses a model of an endogenous market structure, where the number of firms is determined by a zero-profit condition in one country but is exogenously given in the other country, to show that a government harboring a fixed number of firms fails to affect aggregate supply, and therefore has little scope for improving domestic environmental quality (if pollution is transboundary). Moreover, owing to the absence of a terms-of-trade effect, it diverts from the classical strategic tax rule. The author argues that both governments arguably fix their equilibrium emission taxes "too low," meaning that tax competition plausibly leads to "ecological dumping."     

Lobbying, corruption and “optimal” tariff

This paper explores how a government officer enacts “optimum” import policy when confronting lobbies on trade policies from both domestic and foreign firms in a transition economy. Two results are found: firstly, if the inducement from the foreign firm on the government officer works, then the optimum tariff is negative, that is, import subsidy. However, this subsidy will turn to a positive tariff rate with the increasing lobbying inducement from domestic firms. Secondly, zero tariff duty is not an optimum choice under most circumstances. Besides, an asymmetric result is that when these two firms’ marginal costs are different, the optimum policy is to levy an import tariff on the one whose marginal cost is relatively small, while the other firm will get an import subsidy.     

Quality-Differentiated Inputs and Trade In Vertically Related Markets*

This paper presents an international trade model of vertically related markets with quality differentiation at the stage of the intermediate good. Domestic input producers are at a disadvantage relative to higher quality foreign suppliers in providing inputs to a domestic final-good producer. the input producer may be driven out of the market unless policies enacted by the domestic government can encourage domestic final-good firms to use the domestic input. Results show that multiple tariffs and direct production subsidies are the most beneficial policy options.     

Strategic Trade Policy Under Incomplete Information

This paper examines equilibrium trade policies when firms have better information than governments about the profitability of the industry. Contrary to the intuition that the policymakers' lack of information should reduce their incentives to engage in strategic trade intervention, the analysis suggests that information asymmetries may increase trade policy distortions in equilibrium and ultimately worsen the "prisoner's dilemma" between governments.     

Environmental and economic impacts of trade barriers: The example of China–US trade friction

The new age of trade wars could simultaneously affect the worldwide distribution pattern of the economy and environmental emissions. However, previous studies have focused on economic impacts, and on trade liberalization, while little is known about the equilibrium effects of trade barriers on the environment. Using a global computable general equilibrium model and taking the recent anti-trade policies of the Trump administration as an example, this study investigates the possible socio-economic and environmental effects of trade friction. Specifically, this study explores how the implemented six rounds of China–US trade friction and its different long-term development trends affect regional economic output, GHG and air pollutant emissions. Results show that trade barriers harm both countries’ economies and such losses have a certain permanence, while non-participants can benefit indirectly. Trade friction decreases participants’ GHG emissions, modifies global GHG emission distribution patterns, and leads to improved air quality in most countries. If governments continue to impose tariffs, global GHG emissions could counterfactually decrease by up to 5%. However, the change in trade patterns is not conducive to clean energy development in the less-developed regions, including the Middle East, Africa, and Latin America, and emission reductions from trade friction are insufficient to avoid catastrophic climate change.