The dynamic e ects of trade liberalization and environmental policy harmonization

We study a general equilibrium model in which trade is driven by institutional di erences (di erences in environmental distortions) and di ering factor endowments (di erences in production-related environmental stocks). The endogenous evolution of environmental stocks depends on the trade regime and on the extent of environmental distortions in the two countries. The economy can have multiple steady states that depend on the policy regime and the initial stock levels. We investigate the e ects of harmonization of the distortions and of trade liberalization, in the short and the long-run. The model illustrates the ambiguous e ects of these reforms, and it explains why the predictions of environmentalists or economists are more likely to be born out, depending upon whether the environment is fragile or resilient.