Trade Liberalization in Environmentally Preferable Products

ESTELLE GOZLAN; MARIA PRISCILA RAMOS

Rio de Janeiro

Conferencia; 2008 LACEA/LAMES Joint Conference; 2008

The opportunity to concede selective tariff reductions for certainEnvironmentally Preferable Products is under discussion within current WTOnegotiations on Environmental Goods and Services. The underlying argumentsin favor of such a ´green liberalization´ are to combine traditional gainsfrom trade with environmental benefits from cleaner production/consumption,and also to improve developing countries´ exporting capacities in greenproducts. Using a simple North-South trade, partial equilibrium model withtwo goods (a conventional variety produced with a polluting technology, anda green substitute produced with an environmentally preferable technology),we analyze the validity of these three arguments, and provide a comparisonwith a ´full liberalization´ scenario (unselective tariff reduction for bothvarieties). We show that if consumers in the importing country value the``green´´ product, selective tariff cuts result in lower pollution levels inboth countries, due to substitutions in consumption patterns. Although thecomparison of welfare implications under a green- and a full-liberalizationscenario is ambiguous, it is possible to show that selective tariffreductions result in an interesting distribution of benefits among agents.However, simulations suggest that at the aggregated (country) level, neithera full nor a green liberalization is optimal, while it is possible to findPareto-improving tariff reforms by cutting the tariff on the´environmentally worse´ substitute.