Integration of Trade and the Environment

Whereas the first chapter in Part IV addresses the legal framework of international trade in its relation to the environment, this chapter attempts an integration of trade and environment. Using a formal model, topics such as unfair trade, a race to the bottom in terms of environmental standards, and a potential welfare loss are analyzed. The game-theoretic analysis shows that this interaction between trade and environment can lead to unexpected results. In particular, it should be stressed that the interests of the environment are not necessarily sacrificed when they are in conflict with those of free trade. The formal approach looks at subgame-perfect Nash equilibria of a game and models the strategic interaction of governments, producers and consumers. The analysis examines the transition from autarky to free trade in terms of both regional and international environmental effects. Further sections relate to the question of harmonization of environmental standards and to the impact of a tariff on equilibrium standards.