Welfare Economics of Trade Liberalisation and Strategic Environmental Policy

Thilo W. Glebe ()
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Thilo W. Glebe: Environmental Economics and Agricultural Policy Group, Technical University of Munich

No 72005, Discussion Papers from Technische Universität München, Environmental Economics and Agricultural Policy Group

Abstract: The paper employs a partial equilibrium model of international trade to derive optimal environmental policy responses to tariff reduction requirements and assesses the impact of such policies on social welfare. The domestically optimal policy adjustment for a large importing country committing itself to unilateral tariff reduction is to lower the Pigouvian tax rate. Transforming a Pigouvian instrument into a strategic environmental policy, following trade liberalization, enhances global welfare. The paper thereby proves that the distorting effect of an optimal tariff is generally greater than that of a strategically motivated environmental policy. On the other hand, global efficiency gains are uncertain, if countries engage in an environmental tax war as a result of trade liberalization. To avoid situations where gains from trade liberalisation are impaired by strategically motivated adjustments to domestic policies, tariff reductions should be negotiated along with environmental standards. It is argued that criteria for distinguishing genuine policy from disguised protectionism need to be established.

New Economics Papers: this item is included in nep-env and nep-int
Date: 2005-07, Revised 2008
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Published in Agricultural Economics Review (in work; title: Welfare economics of agricultural trade liberalisation and strategic environmental policy)

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