Strategic environmental policy and international trade — the role of market conduct

Abstract

This paper addresses a broad set of concerns expressed by environmentalists in recent debates over further moves towards trade liberalisation — such as the Single European Market, the Uruguay Round of GATT and especially NAFTA — that in the absence of the ability to use trade instruments to protect domestic industries governments might seek to weaken their domestic environmental policies as a means of covert protection. Conventional trade models based on competitive markets provides no grounds for such concerns (see Ulph (1993b) for a recent summary of these arguments), but it is possible to find some basis for these concerns in models of imperfectly competitive trade, building on the literature on strategic international trade (see Helpman and Krugman (1989) for a review). There is now a small literature which has developed variants of the basic Brander and Spencer (1985) “rent-shifting” model to show that governments may indeed be tempted to engage in “ecological dumping” — i.e. relaxing their environmental policies relative to the usual “first-best” rule of equating marginal costs of abatement and marginal costs of damage (see Barrett (1994), Conrad (1993), Kennedy (1994), Rauscher (1992), Ulph (1993a), Ulph and Ulph (1994), among others, and, for a survey, Ulph (1994)).