Abstract: International Environmental Agreements suffer from a strong free-riding incentive that generally leads to failure of coalition formation in the economics literature and have been largely unsuccessful in practice. At the same time, preferential trade agreements (PTAs) have increasingly included elements not specifically related to trade, such as domestic policy over the environment, labour, intellectual property, health and investment. One area that has received a great deal of attention is deep agreements is the environment. In this dissertation, we develop three models of asymmetric countries, that include both trade and environmental externalities and study the incentives to form international trade agreements between those asymmetric countries.
First, we develop a two-country, two-good model with cross-border negative spillovers and perfect competition in product markets. We compare shallow (trade only) and deep (trade and environment) trade agreements between those two large asymmetric countries, and we show that deep and shallow trade agreements have different outcomes in terms of world and individual countries welfares, trade specialization and environmental damages.
Next, we develop two three-country, three-goods models, a “competing importers model” and a “competing exporters model”, and examine equilibrium agreements and environmental outcomes assuming (i) environmental agreements are negotiated separately, (ii) trade agreements are shallow, and (iii) trade agreements are deep. To examine the stability of endogenous deep and shallow trade agreements we set up various three stage games and use coalition-proof Nash equilibria refinement to circumvent the multiplicity of Nash equilibria. Furthermore, in order to examine the differences between shallow and deep trade agreements, we develop extended games where countries can choose between different deep and shallow PTAs and investigate how equilibrium agreements differ based on being deep or shallow. Therefore, in two different models of multiple asymmetric countries, we ask and answer the following questions: (i) how do equilibrium agreements differ when countries choose deep rather than shallow agreements?; (ii) given the choice between deep and shallow trade agreements, would countries prefer to incorporate an environmental clause into their equilibrium trade deal?; and (iii) what are the implications of including non-trade elements in PTAs for the pursuit of global free trade?
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