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Free trade and the burden of domestic policy

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  • Sumeet Gulati

Abstract

. Consider a small economy facing accession to a exogenously defined trade agreement. Before accession, the government controls trade and pollution policy. After accession, it retains control over pollution policy, but must allow free trade in all goods. This is a choice many governments face while joining trade agreements today. They decide whether greater market access to other members is more valuable than control over trade policy. I ask two questions. All else being equal what happens to environmental policy after accession? Second, what affects the choice of accession and how does this choice impact aggregate welfare? I show that a loss in control over trade policy alters the political incentives determining environmental policy. Before accession, producers can transfer a portion of their burden of environmental regulation to consumers through price increases. After accession the same regulation is borne entirely by producers. Owing to the change in burden, there exist plausible conditions under which the adoption of free trade can lead to more stringent environmental regulation, a reduction in the preferential treatment of special interest groups, and an increase in aggregate welfare. On examine la situation d'une petite économie considérant l'accession possible à un accord commercial défini par des forces exogènes. Avant l'accès, le gouvernement contrôle sa politique commerciale et environnementale. Après l'entrée dans cet accord, le gouvernement retient le contrôle sur la politique environnementale mais doit permettre le libre commerce de tous les biens. C'est un choix auquel plusieurs gouvernements doivent faire face au moment de faire des accords commerciaux. Ils doivent décider si l'accès à un plus vaste marché vaut davantage que le contrôle sur la politique commerciale. On s'interroge sur deux points: d'abord, toutes choses étant égales par ailleurs, qu'arrive‐t‐il à la politique environnementale après la signature de l'accord? ensuite, quelles sont les forces déterminantes dans ce choix, et quel est son impact sur le niveau de bien‐être? On montre que la perte de contrôle de la politique commerciale modifie les incitations politiques qui déterminent la politique environnementale. Avant l'accession, les producteurs peuvent transférer une portion du fardeau de la réglementation environnementale aux consommateurs via des augmentations de prix. Après l'accession, le fardeau de cette réglementation doit être porté entièrement par les producteurs. A cause de ce changement, il existe des conditions plausibles qui mènent à croire que l'adoption du libre échange va entraîner une réglementation environnementale plus robuste, une réduction du traitement préférentiel de certains groupes d'intérêt, et un accroissement dans le niveau agrégé de bien‐être.

Suggested Citation

  • Sumeet Gulati, 2008. "Free trade and the burden of domestic policy," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 41(3), pages 817-837, August.
  • Handle: RePEc:wly:canjec:v:41:y:2008:i:3:p:817-837
    DOI: 10.1111/j.1540-5982.2008.00487.x
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    References listed on IDEAS

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    Cited by:

    1. Gulati Sumeet, 2010. "Price and Quantity Policies in a Simple Political Economy Framework," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-16, October.
    2. Per G. Fredriksson & Xenia Matschke, 2016. "Trade Liberalization and Environmental Taxation in Federal Systems," Scandinavian Journal of Economics, Wiley Blackwell, vol. 118(1), pages 150-167, January.
    3. Minoru Nakada, 2020. "The impact of environmental tax revenue allocation on the consequence of lobbying activities," Economics of Governance, Springer, vol. 21(4), pages 335-349, December.
    4. Emma Aisbett & Magdalene Silberberger, 2021. "Tariff liberalization and product standards: Regulatory chill and race to the bottom?," Regulation & Governance, John Wiley & Sons, vol. 15(3), pages 987-1006, July.
    5. Alain-Désiré Nimubona & Horatiu Rus, 2015. "Green Technology Transfers and Border Tax Adjustments," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 62(1), pages 189-206, September.
    6. Olper, Alessandro, 2017. "The political economy of trade-related regulatory policy: environment and global value chain," Bio-based and Applied Economics Journal, Italian Association of Agricultural and Applied Economics (AIEAA), vol. 5(3), February.
    7. Ederington,Josh & Ruta,Michele, 2016. "Non-tariff measures and the world trading system," Policy Research Working Paper Series 7661, The World Bank.

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