Agricultural trade and the environment: Analyzing policy linkages and social welfare

The purpose of this study is to analyze the trade and environmental policy nexus in agriculture. I examine how social welfare, comparative advantage, and gains from trade are affected by alternative policies. A novel feature of the model is the explicit distinction of pollution abatement and output reduction. The relative efficiency of alternative policies and their implications for producer incomes and environmental quality are evaluated. Pollution taxes are socially optimal in autarky and for a small country. Tradeable permits minimize regulatory cost. Abatement subsidies or output taxes are non-optimal with their relative efficacy depending on technology, relative prices, and pollution type.; Concepts of "trade distortion" identify environmental policies which unnecessarily distort trade. For a small country, pollution taxes and tradeable permits are non-trade-distorting. Tradeable permits are least trade-distorting. Abatement subsidies and production taxes are trade-distorting. International trade improves social welfare even with pollution, but the type of environmental policy matters for any country to realize potential welfare gains from trade. Optimal pollution taxes yield optimal social welfare and gains from trade. Output taxes are non-optimal, but guarantee beneficial trade for exporters while abatement subsidies do not.; While improving its environment and social welfare, large countries can manipulate world markets and exacerbate global welfare. Trade taxes and domestic instruments with similar effects may reduce global welfare, however some domestic intervention is necessary to improve environmental quality and world welfare.; Optimal domestic welfare is achieved by simultaneously taxing pollution and trade. Optimal global welfare is achieved by taxing pollution at Pigouvian levels, omitting trade taxes and domestic commodity policies.; Pesticide contamination from corn production in the United States was selected as an empirical example. Policy simulations maximizing social welfare indicate significant welfare gains from any pollution reducing policy. Without environmental policy, welfare losses from trade occur. Social welfare gains from trade are significantly smaller than gains from environmental policy. Abatement subsidies improve social welfare and environmental quality by not much less than global welfare maximizing pollution taxes. Because pollution taxes are often infeasible, abatement subsidies may be the most practical way to improve global welfare.