Economic Analysis of Trade and Environmental Policy Linkages

Whether new rules and institutions are needed to oversee the linkages between trade and environment after the Uruguay Round and, if so, their appropriate form, depends on the nature of the environmental problems involved and how they are affected by trade and trade policies. This requires an examination of the relative efficiency of various environmental policies. Transborder and ‘global commons’ problems raise questions of the efficiency of trade policies in dealing with them either as second-best instruments or as sanctions. The purpose of this chapter will be to clarify some of the analytical issues raised by these questions. These include the extent to which trade policies might serve as second-best environmental policies, particularly when the environmental problem is associated with a production process, and the use of trade measures as enforcement mechanisms to induce cooperation in pollution abatement. The central conceptual underpinnings of this analysis are the notions of externalities and public goods. The nature of property rights systems are also essential in understanding certain environmental resource problems and the prospects for instituting effective policy.