International Trade Agreements , Environmental Policy , and Emergence of Multinational Firms ∗

During recent decades there has been substantial momentum for trade liberalization. At the same time, multinational production has become increasingly important in international competition. In this paper we show that these phenomena may be linked through environmental policy. When the national governments cannot use direct trade policy measures, environmental policy is distorted towards enhancing competitiveness of the domestic producers. In this environment, signing agreements that prevent the use of trade policy may lead to Þrms investing in production capacity abroad.