INTERNATIONAL ECONOMICS

INTERNATIONAL ECONOMICS

INTERNATIONAL ECONOMICS

Introduction

This is response to Røpke's (1994) question whether environmental taxes increase or decrease volume of international trade. Using three-country Heckscher-Ohlin -Samuelson model, it is shown that effect can be in either direction. In absence of pollution haven and three-country affects that reverse natural comparative advantage, environmental taxes decrease (increase) volume of trade between any two countries when tax is larger in country that exports (imports) pollutive good. The environmental tax can also generate strong trade effects between two of countries, changing production costs and thereby reversing expected tax effect on third country. The consequences on trade are likely to be lesser when comparable pollution damage is international rather than local.

Discussion and analysis

If it was 'possible to internalize all external costs', whether 'relatively dramatic changes of relative prices' would cause international trade to 'increase or decrease'? Neither prospect is necessarily bad from Røpke's (1994) perspective, for increases in trade can beneficially 'increase biophysical carrying capacity of world', whereas decrease can fortuitously promote 'self-sufficiency' of individual countries. Nevertheless, question that Røpke poses is an interesting one, and given increased call for environmental taxes, one that may be important for policy makers.

To gain some insight on whether environmental taxes are likely to increase or decrease volume of international trade, present paper simulates Heckscher-Ohlin -Samuelson trade equilibria in absence of, then with universal Pigouvian taxation, and finally with mixture of both Pigouvian and laissez-faire countries. In model, there are three countries using capital and labour to make two goods, first of which is capital intensive and polluting in production, while second, which is labour intensive, is adversely impacted during production by domestic pollution; this is well-studied case of production-on-production externalities.

Except for case of pollution haven and three-country affects that reverse natural comparative advantage, country with largest ratio of capital to labour specializes in pollutive good, which it exports to other two countries. There are three stages of modelling exercise. In first, all three countries are laissez faire and do not tax domestic emissions. In second, all three are Pigouvian and tax their emissions. In third, which is an alternative to second, any country that would be worse off when all countries tax emissions is assumed to unilaterally remain laissez faire.

The major result of these simulations is that pollution taxation can either decrease or increase trade, depending on whether tax raises relative price of pollutive good more in country that exports that good than in country that imports it. In general, when country that exports pollutive good has more of both inputs and produces more of both outputs, its marginal pollution damage and hence its environmental tax rate are greatest, and universal shift to Pigouvian taxation decreases its comparative advantage and reduces world trade.

In answer to Røpke's (1994) question if ecological levies increase or decrease volume of worldwide trade, this paper concludes that change can be in either direction. In absence of pollution haven and three-country consequences that reverse comparative advantage, ecological levies decline (increase) volume of trade between two ...