Trade and Development Review, Vol 13, No 2 (2020)

Effects of Trade Liberalization on the Environment in Developing Countries: A Theoretical Study in General Equilibrium Framework

Sujata Deb Roy, Joydeb Sasmal


This paper theoretically examines the effects of trade liberalization on environment in developing countries. In a three sector general equilibrium model informal manufacturing sector is the polluting sector in the economy which supplies intermediate products to the formal manufacturing sector. A reduction in tariff rate for the product of the formal manufacturing sector leads to higher import of the competing goods causing shrinkage of the formal and polluting sectors. On the other hand, capital inflow results in expansion of both the formal manufacturing sector and the polluting informal sector. As a result, overall pollution increases. However, if pollution abatement cost is imposed on the formal manufacturing sector, returns to capital falls leading to decline of both polluting informal and formal manufacturing sectors.

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