Tariffs and Retaliation: A Climate Point of View

Abstract

This paper identifies a mechanism through which trade restrictions and counter-restrictions affect the climate. A series of tariffs and retaliatory export taxes increases the level of global emissions if a country using export taxes obtains considerable real income gains from local air pollution reduction. As a related result, it is shown that under certain conditions, Home tariffs alone reduce global pollution emissions, whereas a combination of Home tariffs and Foreign production taxes increases these emissions. The results here have alarming implications. Second-best policies can provoke trade disputes and are harmful to the climate.