Review of Econometric Article
The present paper is a review of Soham Baksi’s article, Regional versus Multilateral Trade Liberation, Environmental Taxation And Welfare, published in the Canadian Journal of Economics in February 2014. In this article, Baksi investigates how reductions in regional tariffs affect environmental taxes of the participating countries and the resultant changes in welfare. The author then compares the results with those of multilateralism. The study contributes towards the understanding of the impact of globalization on environmental policies at local and regional levels, a topic that is rapidly gaining attention as free trade expands. Baksi drew inspiration from previous works such as Ulph (1996), and Lapan and Sikdar (2011) indicating that countries faced with the threat of pollution from their trading partners in an imperfect competition scenario can adjust their environmental policies to maximize welfare gains. However, the author made a unique contribution by examining the relationship between free trade, environmental policy, and welfare at a regional level. Previous studies had neglected regional trade liberalization and instead, focused on bilateral and multilateral trade arrangements. Baksi justifies his treatment of regional trade as significantly different from multilateral trade by arguing that regional trade arrangements have been flourishing as multilateral trade fumbles.
Methodology and Data
Baksi uses mathematical models to determine the relationship among dependent and independent variables in the study. The independent variables, in this case, are regional trade liberalization and multilateral trade liberalization while the dependent variables are pollution taxation, and welfare. The author begins by simulating a scenario in which three identical countries trade in a homogeneous commodity and then computes the equilibrium levels of output, taxes, and welfare using the Cournot model of oligopoly for a regional setting prior to liberalization (Kameda and Ui 2012). The author then uses backward induction to compute the perfect Nash equilibrium in a liberalized regional trade. The author uses the same approach to establish the Nash equilibrium for a multilateral trade arrangement before and after trade liberalization. The resulting relationships among tariffs, pollution taxes, and welfare in the regional trade setting are compared with those of multilateral trade liberalization. Concerning the source of data, the author did not use any external data apart from supporting arguments and findings. The author simply used his understanding of the relationships among variables such as tariffs, demand, tax, and welfare to generate mathematical expressions that he used to predict relationships among the variables.
The study generated several findings. First, the effect of trade liberalization on pollution tax and welfare varied with the nature of trade arrangement and the scope of pollution. For countries that reduce tariffs, those that are engaged in regional trade are less likely to subsidize local firms as compared to a multilateral arrangement. The author attributed this difference to the fact that unlike in multilateral, tariff adjustments in a regional trade setting are not uniform. The author found that countries participating in liberalized multilateral and regional trade differ in terms of their incentive to reduce pollution tax depending on the nature of pollution. For local pollution, a reduction in tariffs through regional arrangements is unlikely to result in the reduction of pollution tax. On the contrary, countries that reduce tariffs through regional arrangements have a higher incentive to reduce pollution tax when the environmental threat is global. In addition, the author reported that the effect of tariff reduction on the strictness of pollution tax and welfare level is similar for both regional and multilateral trade negotiations when local pollution is involved but different in the case of global pollution. The severity of pollution determines if countries that reduce tariffs in multilateral trade liberalization will increase the level and strictness of pollution tax or not with such increase occurring only when the effects of pollution are significantly detrimental. Furthermore, with local pollution, multilateral and regional trade liberalizations have a positive effect on welfare for countries that reduce their trade barriers. However, for global pollution, countries in regional trade liberalization are likely to improve their welfare while those in multilateral trade experience reduced welfare.
Most readers would find several aspects of this article useful. First, researchers interested in investigating the effect of tariff reductions on the welfare and local environment protection policies would find this article highly helpful not only as a general reference but also as a source of specific rare information on the unique aspects of regional trade relationships. The fact that very few studies have compared the effects of multilateral and regional trade liberalizations on the participating country policies and welfare using the econometric approach renders the paper quite resourceful. Second, the paper scores high on originality. Rather than simply apply existing mathematical models to analyze the case, the author develops a custom model that captures most of the variables involved in the case. Although the author makes some assumptions such as the idea of identical countries, the validity of his arguments remains largely unquestionable since the focus of the paper is to predict general trends rather than describe all aspects of such trends precisely. While the problem description and the outcomes of the paper are relatively easy to grasp, understanding the mathematical model that the author uses would require background study.
Baksi, Soham (2014). “Regional Versus Multilateral Trade Liberalization, Environmental Taxation And Welfare.” Canadian Journal of Economics 47, no. 1, 232-249.
Kameda, Hisao, and Takashi Ui (2012). “Effects of Symmetry on Globalizing Separated Monopolies to A Nash-Cournot Oligopoly.” International Game Theory Review 14, no. 2, 1-16.
Lapan, H., and S. Sikdar (2011). “Strategic Environmental Policy under Free Trade with Transboundar Pollution.” Review of Development Economics volume 15, 1–18.
Ulph, A. (1996). “Environmental Policy and International Trade when Governments and Producers Act Strategically.” Journal of International Economics and Management 30, 265-281.