Regional versus Multilateral Trade Liberalization, Environmental Taxation, and Welfare

The paper considers trade between identical countries with imperfectly competitive markets, and compares the impacts of regional and multilateral tariff reduction on strategic environmental taxation and welfare. While both forms of trade liberalization increase production and consumption in tariff-reducing countries, regionalism also reduces production in a non-participating country and may decrease its consumption. Consequently, regionalism and multilateralism change pollution tax and welfare in the tariff-reducing countries in similar ways when pollution is local, but in dissimilar ways for global pollution. When pollution is global, regionalism is likely to be preferred to multilateralism for the establishment of free trade among countries.