Trade, Transport Emissions and Multimarket Collusion with Border Adjustments

Abstract

AbstractWe analyze the impact of border adjustment policies on trade, pollution and welfare when firms, located in different countries, sell differentiated products in geographically-separated markets. Transportation of goods not only incurs a cost, but also generates emissions. We compare outcomes under competition and multimarket collusion. Cooperating governments can implement the first-best using appropriate border adjustments regardless of the market structure. When governments set policies non-cooperatively, the border adjustment tariffs exceed the marginal damage from emissions. While it is expected that colluding firms would reduce trade flows relative to competition, trade increases under collusion, resulting in higher welfare. This highlights the possibility of allowing firms to collude and taxing (part of) their profits, which can be redistributed to citizens or used to mitigate the effects of pollution.