The strategy of trade sanctions in international environmental agreements

This paper analyzes the links between policies aimed at supplying a global public good and international trade in segmented markets. I find that the credible threat to impose trade sanctions may be capable of sustaining full cooperation in the supply of the public good, provided the sanctions are accompanied by a minimum participation clause which serves to coordinate government behavior. In equilibrium, trade is not restricted. But if the threat to impose sanctions were not allowed by the rules of the game, supply of the public good would be Pareto-inefficient.     

Size inequality,coordination externalities and international trade agreements

Developing countries now account for a significant fraction of world trade and two-thirds of the membership of the World Trade Organization (WTO). However, many are still individually small and thus have a limited ability to bilaterally extract and enforce trade concessions from larger developed economies even though as a group they would be able to do so. We show that this coordination externality generates asymmetric outcomes under agreements that rely on bilateral threats of trade retaliation – such as the WTO – but not under agreements extended to include certain financial instruments. In particular, we find that an extended agreement generates improvements in global efficiency and equity if it includes the exchange of bonds prior to trading but not if it relies solely on ex post fines. Moreover, a combination of bonds and fines generates similar improvements even if small countries are subject to financial constraints that prevent them from posting bonds.     

Paths of efficient self-enforcing trade agreements

This paper characterizes the efficient payoff frontier in a three country model where countries face one time adjustment costs of forming trade agreements, and compares it with the constrained efficient frontier when agreements must be self-enforcing. The presence of self-enforcement constraints puts a limit on the magnitude of transfers that can be made between countries, and makes it more likely that bilateral agreements are observed on the constrained efficient frontier. The existence of adjustment costs leads to the possibility that payoffs under a two step agreement, in which an initial bilateral agreement is expanded to include the third country, may Pareto dominate the payoffs from immediate formation of an agreement among all three countries. However, the condition that a two step agreement be efficient in the absence of self-enforcing constraints is neither necessary nor sufficient for the gradual approach to have a lower minimum discount factor. This paper was prepared for the conference “New Directions in International Trade Theory” held at the University of Nottingham. I thank Andres Rodriguez-Clare, Rod Falvey, conference participants, and anonymous referees for helpful comments on an earlier draft.     

Preferential trade agreements and tax competition for foreign direct investment

This paper examines how free-trade agreements and customs unions affect the location of foreign direct investment (FDI) and social welfare, taking into account that governments may adjust taxes and external tariffs to compete for FDI. Conditions are identified under which a free-trade agreement leads to FDI and under which this improves welfare. The welfare effect is shown to depend on the relative size of efficiency gains in production and government revenue losses due to tax competition. A free-trade agreement may fail to induce welfare-improving FDI, creating a role for a customs union.     

Optimal remedies in international trade agreements

This paper takes a mechanism-design approach to characterize a politically optimal trade agreement under the assumption that governments have private information about the fluctuating political pressure they face from domestic interest groups to restrict trade. The optimal mechanism under these changing circumstances involves a remedy system for breach of trade agreements that specifies less-than-proportional retaliations against deviating parties. This result is in contrast to the conventional wisdom in the literature regarding the efficiency of the Reciprocity Principle as a rule of renegotiation in trade agreements. I also consider an institutional structure in which only commensurate retaliations are practical but governments can employ a public randomizing device to authorize retaliations. I show that it is optimal to authorize retaliations only randomly. This suggests a role for the WTO dispute settlement process as a public randomizing device.     

International supply chains and trade agreements

There is a growing literature that examines the role of trade agreements on the formation of international supply chains. The evidence indicates that in general countries that share trade agreements are more likely to develope cross-border supply chains. In this analysis, we argue that in order to examine the effects of trade agreements on the formation of supply chains between two countries, it is not enough to analyse the impact of the trade agreements that the two countries share but it is also important to assess the impact of the trade agreements that they share with third countries. Using data on trade in value added for 129 countries, we show empirically that about 40% of the potential increase in trade in value added induced by a trade agreement between an importing country and a sourcing partner is wiped out by each additional trade agreement signed by the importing country with third nations in which the sourcing partner is not a member. The result has important implications for regions seeking to develop international supply chains but in which the process of integration is highly fragmented.     

International production fragmentation,trade in intermediate goods and environment

This paper examines the implications of growing international production fragmentation-induced trade in intermediate goods on environmental quality. Specifically, by making use of a general equilibrium framework, this paper explores the link between trade in intermediate goods and pollution in a setting of endogenous environmental policy. The paper shows that international trade in intermediate goods, through an increase in the number of components available to the international producers, affects the level of pollution and environmental quality. Specifically, developed countries may reduce pollution at the cost of more pollution in developing countries.     

Country asymmetry,trade agreements,and transfers

Using a standard 2 × 2 trade agreement model, I show that the welfare effects of a free trade agreement (FTA) depend on the asymmetry on supply and demand functions. When countries are sufficiently asymmetric with respect to the size or the demand functions, the small country tends to be better off, while the large country is worse off. Thus, the small country must compensate the large country for the FTA to be incentive‐compatible. However, in the presence of sufficient asymmetry in the supply functions, the small country is worse off, while the bigger is better off. In this case, the transfer must flow from the large to the small country. This last finding helps explain why some FTAs between rich and poor countries provide for adjustment transfers to the latter.     

Optimal policy for environmental goods trade in asymmetric oligopolistic eco-industries

In this paper, we examine the optimal structure of an environmental tax to pollution, a production subsidy to a domestic eco-industry, and an import tariff on environmental goods (EGs) in a two-country model where the home country imports EGs from the foreign country. Home and foreign firms that produce EGs engage in Cournot competition. We then assume that the number of the home local firms which produce EGs is constant, but that of the foreign firms is variable. Our main findings are as follows: (I) The optimal environmental tax level may be lower than the Pigouvian level even if the tax has a positive impact on the output of EGs produced by a domestic firm. (II) The optimal tariff level may be positive when the country implements the first best policy combination in a closed economy regarding the environmental tax and the subsidy. (III) The optimal subsidy level may be positive, and then the subsidy may be substitutive for the import tariff on EGs.     

An open economy model of the effects of unilateral environmental policy by a large developing country

In this paper, we pose the following question. Why is it that despite the universal recognition of the need for global environmental protection, developing countries have been lax in instituting stringent environmental regulations? Addressing this question from an economic standpoint, we show that there are plausible theoretical circumstances in which a large developing country can be worse off if it chooses to implement environmental policy in an uncoordinated fashion. The empirical dimension of this question is stressed and the key parameters – such as elasticities and marginal propensities to consume – which are germane to any policy discussion regarding this issue are identified. Second, we study – once again from the perspective of a large developing country – the possibility of using the domestic tax structure optimally to attain environmental policy objectives in a second-best environment. This scenario involves taxing pollution indirectly, by using product taxes. Finally, keeping the empirical dimension of the question in mind, we show how to compute optimal externality correcting taxes. These taxes are primarily a function of different kinds of elasticities.     

New trade theory versus old trade policy: a continuing enigma

This paper examines the theoretical and empirical grounds fortrade liberalisation. We note that many of the conventionalarguments relating to the static and dynamic gains from liberalisationare based on fragile theoretical grounds. We also show that,although new trade theory takes account of some of the complexitiesof international trade and although the analytical thrust ofmany models justifies intervention, such policy conclusionsare rejected even by those at the forefront of these theorieson the grounds of political economy arguments which do not standup to careful scrutiny. Finally, we show that arguments favouringtrade liberalisation are not supported by existing empiricalresearch, which generally fails to capture the complex and ambiguouseffects of liberalisation and openness.     

International environmental agreements with ancillary benefits: Repeated games analysis

Both ancillary and primary benefits, generated by climate change mitigation, are indispensable key factors to implement the full participation in international environmental agreement (IEA). This paper presents a new IEA model with ancillary benefits, using a repeated game with the linear and quadratic emission abatement cost functions of each country. This study also investigates the effect of ancillary benefits on the condition for full participation in IEA. Ancillary benefits function as a complementary device of punishment scheme for IEA. Our main results show that ancillary benefits can facilitate full participation in IEA, thus suggesting that they should be considered in climate change negotiations.     

A bargaining model of voluntary environmental agreements

We present an explicit model of firm-regulator negotiations in a market with several firms. We describe how the regulatory surplus is distributed between firms and regulator, and analyse the impact of various parameters on the resulting level of environmental regulation. Our main result is that a ‘toughest firm principle’ holds: the outcome of negotiations is essentially determined by the firm with the most aggressive attitude towards environmental control.     

Environmental improvement with trade liberalization

Past studies predict that trade liberalization agreements (and NAFTA in particular) harm the environment. These studies have focused on adjustments in production and have assumed that environmental policy is exogenously given. We show why trade liberalization and improved environmental quality are mutually compatible — when environmental policy is recognized as politically endogenous. We also present empirical evidence to support the basic assumptions underlying the consistency of more liberal trade policy and an improved environment.     

Heterogeneous trade agreements,WTO membership and international trade: an analysis using matching econometrics

This article explores the heterogeneous effects of trade agreements (TAs) and World Trade Organization (WTO) membership on the volume of international trade. We extend Baier and Bergstrand’s (2009a) application of matching econometrics by distinguishing between different types of TAs and WTO participation and account for the endogenous nature of trade policy. For a panel data set covering 1960–2005 and 187 countries, we find that the treatment effect on international trade systematically varies with the type of TA and WTO membership.     

Distortions in the trade policy for development debate: A re-examination of Friedrich List

This paper re-examines the works of Friedrich List and arguesthat he had a vision of how to promote economic and social developmentfrom the initial state of an advanced agricultural society thathas been distorted in the trade policy for development debate.It shows that his vision is much broader than the orthodox labelof ‘protectionism’ conveys. He thus proposed manymethods of promoting development, cautioned and suggested measuresagainst the drawbacks of protection, and emphasised exports.It is hoped that this paper will contribute to the debate onthe wisdom behind the current push toward trade liberalisation.     

Value of WTO trade agreements in a New Keynesian model

We revisit the question of the quantitative benefits of WTO trade agreements in a setup that is non-standard from the traditional trade policy point of view. We show that in a New Keynesian model, unilateral trade liberalization reduces welfare due to terms-of-trade deterioration, creating an incentive for a trade agreement. For realistic parameter values, the value of an agreement, which cuts tariffs by one percentage point, is 0.5–2% of consumption, much larger than in trade models. The intuition for this result hinges on endogenous labor supply.     

A study of environmental impact on manufacturing products trade in Shandong,China

Based on the situation that the trade of manufactured goods takes the main position in Shandong Province,this paper identifies Shandong industrial pollutant discharge by three indices,which are industrial effluent discharge,industrial SO2 emission,and solid waste disposal.Furthermore,it conducts an empirical analysis of the trade terms of pollution content transfer on nine identified industrial sectors.The conclusion is that the increase in industrial effluent discharge,industrial SO2 emission,and solid waste disposal has paralleled the growth of the GDP in Shandong.The rapid economic growth brings obvious negative impact on the environment.Compared with that in 1998,the increase in the pollution content of exports in 2007 indicated that more environmental costs were generated with the economic development in Shandong.There is a need for optimization of foreign trade structure in Shandong,especially the need for increasing import of the pollution intensive products and decreasing the export of the pollution intensive products.The research on the relationship between manufactured goods trade and the environmental impact will make a contribution to the adjustment of foreign trade and environmental policies.     

Economies of scale and trade policy: The median voter model revisited

Why do some political economy models perform so poorly in predicting actual trade policy? Do scale economies provide the missing puzzle to our understanding of the anti-trade bias? By integrating economies of scale in production, this paper theoretically reinstates the median voter model as in Mayer [Mayer, W. (1984). Endogenous tariff formation. The American Economic Review, 74, 970–985] as a suitable political economy model in predicting trade policy. The modified model generates the scope for the anti-trade bias and predicts that sometimes economic, rather than political, considerations may lead to restrictive trade.     

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.