An Economic Analysis of Trade Measures to Protect the Global Environment

Abstract:     
This paper addresses the role of trade restrictions in support of policies to protect the global environment and proposes a more liberal treatment of these environmental trade measures (ETMs) than that adopted by dispute- settlement panels of the General Agreement on Tariffs and Trade (GATT). The GATT Secretariat has recommended that countries like the United States rely on "carrots" rather than "sticks" to induce the participation of other countries in multilateral agreements. This paper defends the use of "sticks" on the ground that they encourage more restrained exploitation of the environment pending a multilateral agreement. First, "sticks" would discourage countries from harming the environment. Second, "carrots" create perverse incentives. Countries may seek to convince others that they derive large benefits from exploitation by engaging in a great deal of exploitation, so that other countries will offer large "carrots" to induce their restraint. This paper also addresses how GATT should limit the use of trade restrictions to prevent the protectionist abuse of trade measures.

JEL Classification: F1, Q2

Accepted Paper Series