Environment and trade: the implications of imperfect information and political economy

The last ten years have seen an upsurge in interest in the nexus of trade and environmental policies. In part this reflects the need to deal with major global pollution problems, and in part a concern that globalization may have adverse impacts on the environment. Environmentalists worry that globalization may trigger a race-to-the-bottom in environmental standards. While they would like to see upward harmonization in environmental standards, they are sceptical about the ability of supra-national agencies to achieve this. Industrialists also raise concerns about the need for a ‘level playing field’ in environmental regulations because of fears about the impact of environmental regulations on competitiveness. However, developing countries question whether disputes over differences in environmental regulations simply reflect a covert form of ‘green protectionism’. In this paper we review what light recent developments in economic analysis (conceptual and empirical) can shed on these concerns. We quickly summarize conventional trade models in which government bodies have perfect information and are welfare maximizers, and show that this analysis does not provide much support for the concerns or proposed policy recommendations. We then turn to models of political economy and imperfect information to see whether they provide a better explanation for the concerns and policy recommendations.