Berkeley Haas | 2 May 2020
The environmental bias of trade policy
by Joseph S. Shapiro
This paper documents a new fact, then analyzes its causes and consequences : in most countries, import tariffs and non-tariff barriers are substantially lower on dirty than on clean industries, where an industry’s“dirtiness” is defined as its carbon dioxide (CO2) emissions per dollar of output. This difference in trade policy creates a global implicit subsidy to CO2emissions in internationally traded goods and so contributes to climate change. This global implicit subsidy to CO2emissions totals several hundred billion dollars annually. The greater protection of downstream industries, which are relatively clean,substantially accounts for this pattern. The downstream pattern can be explained by theories where industries lobby for low tariffs on their inputs but final consumers are poorly organized. A quantitative general equilibrium model suggests that if countries applied similar trade policies to clean and dirty goods, global CO2emissions would decrease and global real income would change little.
Using trade policy negotiations to decrease this environmental bias of trade policy could help address climate change, particularly in regions like the EU which currently have trade policies that may be encouraging leakage of dirty production to other regions.