IS FREE-TRADE IN THE INTEREST OF EXPORTING COUNTRIES WHEN THERE IS ECOLOGICAL DUMPING

Given conditions of oligopolistic competition, the coordinated ban of direct export-promoting policies (e.g. in the EU or by GATT) increases the income of exporting countries. However, in the presence of enviro nmental distortions, free trade can lead to ecological dumping in expo rting countries. The question arises if free trade is still in the int erest of exporting countries. We show that welfare-maximizing governme nts of exporting countries prefer free trade even if countries subsidi ze their local industries indirectly via ecological dumping. The exist ence of further national policy instruments does not make free trade a greements obsolete. (C) 1997 Elsevier Science S.A.