Trade liberalization, environmental policy, and welfare

Abstract

We analyze how trade liberalization affects environmental policies in the context of bilateral trade and imperfect competition. Instead of looking at the strategic distortions that trade introduces in environmental policies—the focus of most existing studies—we analyze how these distortions change in the face of a bilateral reduction in tariffs. The incentives to distort environmental protection may be reduced by this move. As a consequence, environmental policies may be more stringent. Also, welfare is likely (and for some instruments certain) to increase.