Trade disputes and the climate

Abstract

Using a two-country perfectly competitive general equilibrium model, this paper identifies a mechanism through which trade restrictions and counter-restrictions affect the climate. The analysis shows that local pollution externalities and real income changes affect the climate impact of trade disputes. Specifically, a series of tariffs and retaliatory measures increases the level of global emissions if a country using export taxes (or production taxes) obtains considerable real income gains from local air pollution reductions. The self-interested incentive to reduce local pollution encourages retaliation and can be counterproductive to the climate.