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Free Trade, Autarky and the Sustainability of an International Environmental Agreement

Hassan Benchekroun () and Halis Yildiz ()

The B.E. Journal of Economic Analysis & Policy, 2011, vol. 11, issue 1, 1-30

Abstract: We determine the impact of free trade on the sustainability of an international environmental agreement (IEA) and incorporate it into the assessment of the net benefits of opening up to free trade. We show that such an analysis can reverse the conclusions reached within a standard one-shot game framework. We first examine a one shot game and show that the benefits from an increase in economic activity due to free trade outweigh the extra cost of free trade associated with larger environmental damage. We then consider the infinite repetition of the one-shot game where countries can use trigger strategies and show that there exist circumstances where an IEA is sustainable under autarky but not under free trade. This aggravates the environmental damages caused by free trade and leads to the possibility that welfare may be smaller under free trade than under autarky. This conclusion remains valid even when (i) countries adopt the most cooperative environmental policy when the “fully cooperative” environmental policy is not sustainable or (ii) we consider “intermediate tariff reductions.”

Date: 2011
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