Divergent Environmental Process Regulation in Open Economies

Abstract

Two classes of economic relations have to be distinguished:

• For environmental regulation affecting trade in goods categories that are homogenous, the main causation will run along the line of comparative advantage. For the analysis of these goods flows, therefore, traditional trade theory shall be employed. In geographic terms the issue for industrialized countries’ environmental regulation here is that of a competitive threat mainly by economically rather different countries, e.g., for Austria by Eastern European as well as Third World Countries.

• A much larger fraction of trade, however, takes place in the form of cross-hauling within the same sector among very similar countries. Here it is product differentiation that explains trade flows. For this category of trade flows it is new trade theory that gives us the best instrumentarium at hand, as it incorporates product differentiation and its consequences, increasing returns to scale and imperfect competition.