Upstream Pricing Schemes, Trade Liberalization, Trade and Environmental Policies of Downstream Countries

Bo Li,Mark Yu,Fei Xing

doi:10.3390/su10072428

Bo Li, Mark Yu + Show 1 more

Open Access

https://doi.org/10.3390/su10072428

Copy DOI

Abstract

Trade liberalization has a significant impact on the environment and social welfare of countries. In the real world, almost all industries exist upstream and downstream firms but the existing literature on the impact of trade liberalization rarely discuss the interaction between upstream and downstream firms. The goal of this study is to analyze the effects of trade liberalization on the trade policies, environmental policies and social welfare of downstream exporting countries when different pricing schemes (uniform pricing vs. discriminatory pricing) are implemented by upstream monopoly firms. By constructing a three-stage dynamic game model we found that, regardless of pricing schemes, trade liberalization leads to increase both environmental taxes and import taxes. Trade liberalization increases the social welfare of downstream countries under discriminatory pricing, while trade liberalization first reduces and then increases the social welfare of downstream countries under uniform pricing. The results indicate that the downstream countries always have the incentive to participate in trade agreements that integrate markets when discriminatory pricing schemes will be implemented by upstream firms. This finding is the most significant contribution of this paper which has not been addressed in the previous literature.

Highlights

Trade liberalization has been considered an important proposition in the field of international trade by promoting the effective allocation of economic resources and improving the social welfare of all countries [1]
Equation (33) shows that, lowering the trade cost will increase the motivation of the downstream countries to extract profits from the upstream firm by raising the domestic environmental tax, which has the same impact as it did under the discriminatory pricing scheme in Equation (23)
As an extension to the model proposed by Fujiwara [12], this study introduced an upstream intermediate product exporter and found that regardless of the kind of pricing schemes implemented by the upstream firm, trade liberalization would increase the environmental taxes and import tariffs imposed by the downstream countries

Summary

Introduction

Trade liberalization has been considered an important proposition in the field of international trade by promoting the effective allocation of economic resources and improving the social welfare of all countries [1]. An upstream intermediate product exporting country is introduced in this paper on the basis of Fujiwara [12] model to explore the effects of trade liberalization (decreases in non-tariff trade costs) on the trade policies, environmental policies and social welfare of the downstream exporting countries. This paper analyzed the effects of trade liberalization on the trade policy, environmental policy and social welfare of the downstream exporting countries when implementing different pricing schemes (uniform pricing and discriminatory pricing) by upstream monopoly firm. The objective of this paper is to consider the impact of trade liberalization on the trade and environment of downstream countries under different upstream pricing schemes, to extend the literature on strategic trade and environmental policies and to make up for the shortcomings of related theoretical studies.

Discriminatory Pricing Scheme

Uniform Pricing Scheme

Impact of Trade Liberalization on the Social Welfare

Conclusions