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Trade sanctions and green trade liberalization*

Published online by Cambridge University Press:  15 April 2010

ALIREZA NAGHAVI
ALIREZA NAGHAVI*
Affiliation:
Department of Economics, University of Bologna, Piazza Scaravilli 2, 40126 Bologna, Italy, and Fondazione Eni Enrico Mattei (FEEM), Italy. Tel: +39-051-2098873. Email: alireza.naghavi@unibo.it
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Abstract

This paper studies the impact of a World Trade Organization withdrawal of trade concessions against countries that fail to respect globally recognized environmental standards. We show that a punishing tariff can be effective when environmental and trade policies are endogenous. When required standards are not too stringent with respect to the marginal damage of pollution, compliance along with free trade as a reward is the unique equilibrium outcome. A positive optimal tariff in the case of non-compliance prevents complete relocation to pollution havens, but only works as a successful credible threat and does not emerge in equilibrium.

Type
Research Article
Information
Environment and Development Economics , Volume 15 , Issue 4 , August 2010 , pp. 379 - 394
Copyright
Copyright © Cambridge University Press 2010

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