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Title: Per-Capita Income as a Determinant of International Trade and Environmental Policies

Author(s): James R. Markusen

Publication Date: January 2014

Keyword(s): international negotiations, non-cooperative environmental policy and Trade and environment

Programme Area(s): International Trade and Regional Economics

Abstract: 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 and preferences. The specific context 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 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.

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Bibliographic Reference

Markusen, J. 2014. 'Per-Capita Income as a Determinant of International Trade and Environmental Policies'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9799