Per-Capital Income as a Determinant of International Trade and Environment Policies
CESifo, Munich, 2014
CESifo Working Paper No. 4618
International trade policy analysis has tended to focus on the production side of general equilibrium, with policies such as a tariff or carbon tax affecting international and internal income distributions through a Heckscher-Ohlin nexus of factor intensities and factor endowments. Here I move away from this structure to focus on demand, preferences, and endogenous policies set in a cooperative or non-cooperative manner. The specific context I choose is an international environmental externality such as carbon emissions, and I assume a high income elasticity of demand for environmental quality. I analyze how per-capita income levels of and differences between two countries affect their abatement efforts in a non-cooperative policy-setting game. This outcome can then be used as a disagreement point to analyze cooperative Nash bargaining. In both outcomes, the poor country makes a lower abatement effort in equilibrium; indeed, it may make none at all and cooperative bargaining with only abatement levels as an instrument may offer no gains. Other features include a novel terms-of-trade externality in which an abating country passes on a part of its abatement cost to its trading partner, in which case the non-cooperative and cooperative outcomes are identical under special symmetry assumptions. When per-capita income differences are large, the poor country may be worse off when the rich country abates. Finally, I examine “issue linking” in international bargaining, in which one country is both large and rich, and hence has both a high tariff and a high abatement effort in a non-cooperative equilibrium.
Trade Policy
Resources and Environment