COSTLY POLLUTION-ABATEMENT, COMPETITIVENESS AND PLANT LOCATION DECISIONS

The NAFTA debate included assertions that were used as arguments again st trade and investment liberalization. (1) Trade liberalization incre ases production sensitivity to environmental restrictions ('environmen tal dumping'?). (2) Investment liberalization, leading to multinationa l firms, similarly increases the production and welfare response to co stly environmental restrictions. I find that: (1) Trade liberalization increases production sensitivity to costly environmental restrictions , but arguments against liberal trade on welfare grounds do not follow . (2) Multinationals do not increase the production-reallocation effec t caused by environmental restrictions or regulations. In addition, I find a great difference between restrictions that fall on fixed costs and restrictions that fall on marginal costs. (C) 1997 Elsevier Scienc e B.V.