Environmental pollution and world trade

In this paper we present a model that highlights the relationship between i nternational trade and environmental pollution. It includes a small open ec onomy that produces a domestic composite good and imports an other composit e good and energy products. The pollution is created by local production, g lobal production and transportation. Given this model we demonstrate that f ree trade within the current political and economic context may produce a s uboptimal level of welfare. The rationale is based upon the argument that t ransportation is energy-intensive and that, therefore, trade itself is a so urce of pollution. Consequently, under certain global conditions the introd uction of an energy tariff in a small open economy raises social welfare an d is superior to free trade. A consumption tariff adopted by a single natio n will not have similar consequences because it has no impact upon local us age. However, when a consumption tariff is globally adopted there is the op portunity for a net benefit. Finally, we argue that a global tariff that ra ises both the price of energy and the price of the imported composite good may generate the greatest increase in welfare by reducing both energy-inten sive production and energy-intensive trade. (C) 1998 Elsevier Science B.V. All rights reserved.