MFN Tariff Rates and Carbon Emission: Evidence from Lower-Middle-Income Countries

Abstract

The paper empirically investigates whether developing countries may use trade policy as an alternative to environmental policies in order to control carbon emission. It measures the effectiveness of the existing ‘Most Favored Nations’ (MFN) tariff rates applicable to lower-middle income countries and for countries sorted on the basis of manufacturing-to-trade shares, in lowering carbon emission. By applying a fixed effects panel regression method over 16 years, it is found that the MFN tariff rate helps these economies to reduce carbon emission substantially. In addition, the role of foreign direct investment as purveyor of clean products is explored at the cross-country level. The results, at least on the ground of better environmental standards, indicate the need to re-evaluate the choice for protection under the domain of multilateral trade negotiations.