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Trade Liberalization, Vertical Related Markets, and Strategic Environmental Policy
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TitleTrade Liberalization, Vertical Related Markets, and Strategic Environmental Policy  
AuthorXing Fei and He Huanlang  
OrganizationHuazhong University of Science & Technology; Shanghai University of Finance & Economics, 
Key WordsVertical Related Markets; Trade Liberalization; Strategic Environmental Policy  
AbstractWe construct a third market model to analyze the impact of trade liberalization on the environmental policies and social welfare. In the setting, there are two vertical-related manufacturers (upstream firm and downstream firm) in each country. The upstream firm produces intermediate input to supply downstream firm in both countries. All the final products produced by downstream firm are exported to a third market. Environmental tax is levied on the polluting intermediate input in order to keep environmental issue under control. Our results show that(1)the rent-shift effect from strategic environmental policy for intermediate goods is obvious, but it is ambiguous for final goods under the vertical-related market (2) the trade liberalization of these intermediate input between two countries will bring down the environmental tax which will cause countries’ environmental standard racing to the bottom. While the environmental pollution effect is senior, the free trade will force to increase the environmental tax in each country. (3)The effect of trade liberalization on social welfare is ambiguous, when social welfare function is a concave function of bilateral tariff. Moreover we also investigate the implications of the reasonable environmental tax to settle the international trade disputes and achieve sustainable development in China.  
Serial NumberWP63 
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