Policy debates on trade and the environment frequently refer to a need for countries linked by trade to co-ordinate, or even harmonise, their purely domestic environmental policies. Underlying this argument is a concern that national governments will not fully internalise environmental externalities. Conventional trade models suggest this concern is unwarranted and harmonisation may be damaging. In this paper I consider two possible bases for this concern - strategic trade and political economy considerations - and assess the implications for the design of policy and political institutions to achieve co-ordination. A model which links these two factors suggests a possible rationale for harmonisation of environmental policies, even when countries differ significantly with respect to environmental damage costs.
Environmental policy International trade Harmonisation Asymmetric information Political economy Special interests Restricting government discretion