Managed Trade and Environmental Policy under Imperfect Competition

Abstract

This paper aims to deepen the theoretical relationship between international trade and the environment. I design a duopolistic competition model where a domestic and a foreign firm compete in the domestic market with homogeneous products and differentiated production technologies. In this context, I examine the effect that managed trade has on the domestic firm's choice to adopt or not an environmental-friendly technology. The commercial authority decides the level of protection applying a specific trade tax before the domestic firm determines its production level, but after the domestic firm makes its choice to adopt or not the cleaner technology. This second-best policy leads to welfare losses. Nevertheless, the decrease in the monopolistic distortion and the production externality, compensates for the costs associated with the adoption of the cleaner technology. For the policy maker, to remain credible regarding the managed trade protection, avoids negative effects that may exacerbate opening trade processes upon the environment: a free-trade policy could be counterproductive for the domestic firm to adopt, since the incentives to adopt are null.