Working Paper: CEPR ID: DP4491
Authors: Alberto Gallegos; Pierre Rgibeau
Abstract: The current Paper addresses the relationship between trade and endogenous pollution levels. The main focus is quite different from the previous literature. The mechanism linking pollution and trade is that trade provides the home government with a credible threat that helps motivate domestic firms to adopt cleaner technologies. This credible threat comes from the fact that the government has a greater incentive to protect a clean industry than to protect a very polluting one. In that sense, the existence of trade helps reduce domestic pollution compared to what would prevail in a situation of autarky. On the other hand, a commitment to free trade would be counterproductive: it limits the government ?s ability to credibly threaten its domestic firms. In fact we show that any trade liberalisation hurts the welfare of the home country. In terms of world welfare, moderate trade liberalisation is helpful but only as long as it does not affect the technology choices of the firms.
Keywords: Environment; Pollution; Trade Policy
JEL Codes: F13; F18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade (F19) | Cleaner Technologies (Q55) |
| Trade (F19) | Domestic Pollution (Q53) |
| Government Protection of Clean Industries (Q52) | Cleaner Technologies (Q55) |
| Trade Liberalization (F13) | Domestic Firm's Incentives to Invest in Cleaner Technology (Q52) |
| Managed Trade (F14) | Domestic Welfare (I38) |
| Free Trade (F19) | Domestic Welfare (I38) |