International trade in recycled materials in vertically related markets

This paper examines environmental effects of trade in recycled materials in a two-country model of international trade with a vertical structure. Downstream duopoly firms located in different countries can use recycled materials as an input to produce a recyclable final good. With heterogeneous recovery rates, the final good is recycled by upstream recycling duopoly firms located in each country. We first explore the conditions for the emergence of bilateral trade in the recycled materials and then examine the effects of liberalizing trade in the upstream as well as the downstream market on environmental damage. We show that, depending on the heterogeneity in the recovery rates between the two countries, trade liberalization in each vertically related market can be detrimental or beneficial to the environment. © 2012 Springer.