Free trade agreements and the environment with pre-existing subsidies

Claustre Bajona and David Kelly

No 306, 2006 Meeting Papers from Society for Economic Dynamics

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 trade agreement on pollution emissions. We show that while reducing tariffs may indeed increase pollution intensive production in a country, reductions in some subsidies required by the trade agreement reduce pollution in general equilibrium for reasonable parameter values. The reduction results from two effects. First, a reduction in subsidies to firms reduces pollution-causing capital accumulation. Second, if subsidized firms, industries, and/or state owned enterprises are sufficiently more pollution intensive, then reducing subsidies moves capital and labor from more to less pollution intensive firms. We calibrate the model to the case of China and show that pollution emissions after China's accession to the WTO are up to 22.9 percent lower than a baseline in which China does not enter the WTO, without any pollution abatement policy changes or environmental side agreements.

Keywords: trade agreements; domestic subsidies; pollution emissions; dynamic general equilibrium (search for similar items in EconPapers)
JEL-codes: F18 F41 Q56 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-cna, nep-env and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://moya.bus.miami.edu/~dkelly/papers/soe12_8_05.pdf main text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed006:306

Access Statistics for this paper

More papers in 2006 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().