Trade and the Environment with Pre-existing Subsidies: A Dynamic General Equilibrium Analysis

Claustre Bajona and David Kelly

No 603, Working Papers from University of Miami, Department of Economics

Abstract: Countries that wish to erect trade barriers have a variety of instruments at their disposal. In addition to tariffs and quotas, countries can offer tax relief, low interest financing, reduced regulation, and other subsidies to domestic industries facing foreign competition. In a trade agreement, countries typically agree to reduce not only tariffs, but also subsidies. We consider the effect of a free trade agreement on pollution emissions. We show that while reducing tariffs may indeed increase output and pollution, reductions in some subsides required by the trade agreement reduce pollution in general equilibrium for reasonable parameter values. Reducing subsidies has three effects on pollution: (1) reducing subsidies to firms reduces pollution-causing capital accumulation, (2) if subsidized firms are more pollution intensive, then reducing subsides moves capital and labor from more to less pollution intensive firms, and (3) reducing subsidies concentrates production in more productive firms, increasing output and thus pollution. We derive straightforward conditions for which (1) and (2) outweigh (3). We then calibrate the model to China in 1997, which is prior to implementing the reforms specifically required by the US-China World Trade Organization (WTO) Bilateral Agreement. Our model predicts that pollution emissions in China are up to 22.9% lower than a baseline in which China does not enter the WTO, without any pollution abatement policy changes or environmental side agreements.

Keywords: Stock market crash; Energy crisis; Energy saving technological change; Induced innovation (search for similar items in EconPapers)
JEL-codes: F4 F41 F43 O13 Q28 Q5 Q53 Q56 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2005-11-11, Revised 2006-03-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Forthcoming: Under Review

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https://www.herbert.miami.edu/_assets/files/repec/wp-0603.pdf Revised version, 2006 (application/pdf)

Related works:
Journal Article: Trade and the environment with pre-existing subsidies: A dynamic general equilibrium analysis (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:mia:wpaper:0603

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