The relationship between international trade and environmental regulation under special interest politics

The relationship between trade and the environment is of immense concern today. Environmentalists fear that without international coordination, governments will sacrifice environmental quality and the welfare of their citizens to become globally competitive.; Economic theory supports these fears. In the presence of a domestic policy distortion, Bhagwati (1971) demonstrates a reduction in welfare when free trade is adopted. In the presence of an international trade policy distortion, Beghin et al. (1997), and Ederington (2001) show that exogenous trade liberalization brings about a reduction in pollution tax. In the presence of incomplete environmental policy (that does not fully account for environmental damages), Brander and Taylor (1997a, b, and 1998), and Chichilinsky (1994) demonstrate a reduction in welfare when free trade is adopted.; Before we conclude that environmentalists' fears are well founded a few questions need to be considered. The results listed above are based on exogenously given environmental or trade policy distortions. The reason why policies are distorted is not explained. Would endogenizing these distortions produce different results? Further, in the studies cited above, no mechanism for the choice of free trade is specified. If the adoption of free trade causes a reduction in aggregate welfare, why would a country with policy distortions ever adopt free trade? Why is free trade relevant in this context?; In this dissertation I provide a comprehensive analysis of the interaction of international trade and pollution policy. Assuming that most policies are outcomes of a political process, policy distortions are attributed to the presence of special interest influence. The political process defined in the dissertation also provides a well defined mechanism for the choice of free trade.; I find that the adoption of free trade under incomplete pollution policy does not necessarily cause a reduction in aggregate welfare. Plausible conditions exist under which an improvement in pollution policy accompanies the choice of free trade. Under the same conditions, a country with incomplete pollution policy can enhance aggregate welfare by adopting free trade.