Trade costs and the choice of international commodity tax base revisited: The role of transboundary pollution

Abstract

It is generally believed that when trade costs fall, the origin‐based production taxes are superior to the destination‐based consumption taxes under imperfect competition. This result can be justified from a perspective of purely local pollution when considering a production‐type externality. However, we show that with smaller trade costs, the destination‐based consumption taxes tend to generate greater welfare levels than the origin‐based production taxes when the degree of a production‐type transboundary externality is high enough, contrary to general belief.

Trade and commodity taxes as environmental instruments in an open economy

“…Fujiwara's papers, to some extent, follow earlier research by Kayalica and Kayalica (2005) and Kayalica and Yilmaz (2006) scrutinizing the relationship between import tariffs, export subsidies and emission taxes under consumption externalities. Another related paper is by Wu (2019) that extends Haufler et al (2005) to production externalities, and also considers both consumption externalities and import tariffs as a robustness check for the results. The results from that robustness check suggest that destination-based consumption taxes might be better than origin-based production taxes when there is an import tariff under consumption externalities.…”

“…The results from that robustness check suggest that destination-based consumption taxes might be better than origin-based production taxes when there is an import tariff under consumption externalities. Wu (2019), however, focuses solely on comparing destination-based consumption taxes versus origin-based production taxes, unlike this paper focusing on Nash trade policies and (non-discriminatory) consumption taxes, and on their role as strategic environmental instruments, as well as on the implications of these two policy tools on gains from trade under consumption-based environmental pollution.…”