Showing papers in "Review of Development Economics in 2010"
TL;DR: This paper examined the various aspects of trade liberalization with heterogeneous firms using the Melitz (2003) model and found a number of novel results and effects including a Stolper-Samuelsonlike result and several results related to the volume of trade, which are empirically testable.
Abstract: This paper examines the various aspects of trade liberalization with heterogeneous firms using the Melitz (2003) model. We find a number of novel results and effects including a Stolper-Samuelson-like result and several results related to the volume of trade, which are empirically testable. We also analyze what might be called an anti-variety effect as the result of trade liberalization. We show that this effect is most pronounced for small countries. This resonates with the often voiced criticism from antiglobalists that globalization leads the world to become more homogeneous by eliminating local specialties. Nevertheless, we find that trade liberalization always leads to welfare gains in the model.
155 citations
TL;DR: The authors conducted a meta-analysis on the empirical literature on technology spillovers from foreign direct investment (FDI) in developing countries and found that spillover effects are more pronounced when studies measure the effect of FDI spillovers on output, and are more likely to be significant and positive for Asian countries.
Abstract: This paper reviews the empirical literature on technology spillovers from foreign direct investment (FDI) in developing countries. Our meta-analysis uses a sample of 32 studies to determine what aspects of study design and data characteristics explain the magnitude, significance, and direction of spillovers from FDI. Results suggest that spillover effects are more pronounced when studies measure the effect of FDI spillovers on output, and are more likely to be significant and positive for Asian countries. Results also highlight the possibility that the documented spillover effects from FDI in developing countries may be partly a product of model misspecification.
123 citations
TL;DR: In this paper, the relative importance of three potential benefits provided by networks: information on border crossing, information on jobs, and credit was investigated. But the authors focused on the effect of family and community networks on migration.
Abstract: While a large literature has established that migration experience among an individual's family and community networks tends to encourage migration, there is little research investigating the mechanism by which networks exert such effects. This paper aims to determine the relative importance of three potential benefits provided by networks: information on border crossing, information on jobs, and credit. We develop empirical tests of these effects based on a simple model that allows individuals to choose between migrating alone or with the help of a border smuggler. Using a dataset of undocumented Mexican migrants to the United States, we find that larger family networks encourage both migration and coyote use, consistent with the job information hypothesis. In contrast, community networks appear to provide crossing information. The finding that family networks have a smaller impact for asset holders indicates that some of the benefit the family network provides is a source of credit.
116 citations
TL;DR: In this paper, the authors investigated the impact of foreign direct investment (FDI) on China's industrial productivity and showed that FDI has a positive direct and spillovers effect on Chinese industrial productivity level and growth.
Abstract: How does foreign direct investment (FDI) affect China's industrial productivity? While the topic is important, the relevant empirical studies in the literature have been limited. This paper attempts to close the gap by investigating the issue with panel data in the period 2001–06. Empirical models for both productivity level and growth are developed, in which two channels are identified through which FDI may affect industrial productivity directly and indirectly. The estimates suggest that FDI has positive direct and spillovers effect on China's industrial productivity level and growth, and the contribution of FDI to productivity is enhanced by its interaction with China's human capital. While labor-intensive industries benefit more from FDI direct effects, capital-intensive industries gain more from FDI spillover effects.
66 citations
TL;DR: In this article, the authors examined Granger causality among exports, domestic demand, and economic growth in China using time-series data over the period from 1978 to 2002, and showed that there is a dynamic relationship among exports and domestic demand.
Abstract: This study examines Granger causality among exports, domestic demand, and economic growth in China using time-series data over the period from 1978 to 2002. This study uses three measures for domestic demand, namely household consumption, government consumption, and investment. The results show bidirectional Granger causality among these variables, namely exports, domestic demand, and economic growth. Thus, there is a dynamic relationship among exports, domestic demand, and economic growth. Exports and domestic demand are both important for economic growth in China. Moreover, economic growth in China has an impact on its exports and domestic demand. A successful and sustained economic growth requires growth in both exports and domestic demand. © 2010 Blackwell Publishing Ltd.
61 citations
TL;DR: In this article, the impact of foreign aid on the process of economic development in India by controlling for the degree of financial liberalization is examined and a composite index is constructed using the method of principal component analysis to capture the joint influence of various financial sector policies.
Abstract: This paper examines the impact of foreign aid on the process of economic development in India by controlling for the degree of financial liberalization. A composite index is constructed using the method of principal component analysis to capture the joint influence of various financial sector policies. The results show that while foreign aid exerts a direct negative influence on output expansion, its indirect effect via financial liberalization is positive. Therefore, an important implication of the findings in this paper is that adequate liberalization in the financial system of the host country is a crucial requirement for effective foreign aid. Our results are robust to a number of control variables and estimation techniques.
59 citations
TL;DR: In this paper, the authors developed an oligopoly model with endogenous technology spillovers through foreign direct investment (FDI), where the foreign entrant brings a superior technology and therefore may spend resources to prevent spillovers of its technology to the home firm.
Abstract: This paper develops an oligopoly model with endogenous technology spillovers through foreign direct investment (FDI). The foreign entrant brings a superior technology and therefore may spend resources to prevent spillovers of its technology to the home firm. The home firm has an incentive to spend resources to gain these spillovers. After firms strategically choose their expenditures to influence technology spillovers, they compete in a Cournot–Nash quantity game. This study provides theoretical insight on the positive and negative empirical spillover results of FDI on productivity of local firms. Up to a critical bound, the larger the initial technology gap between the foreign and home firms, the more the home firm spends to gain spillovers. Past that boundary, the home firm decreases spending. As a result, the home firm's profits from spillovers vary, but larger technology gaps engender greater net profit losses from FDI.
43 citations
TL;DR: In this paper, the authors empirically examined the validity of the lottery receipt experiment (LRE) and found that LRE has significantly raised the sales tax and the growth of sales tax.
Abstract: Indirect tax such as sales tax collection is difficult as the government has difficulty monitoring the actual economic dealings. To bring out private information on transaction only known to a firm and a consumer, China's government has set up a lottery receipt system which has been tried out in many areas. This paper empirically examines the validity of this new system. Estimation is performed based on panel data for different periods during 1998-2003 from a total of 37 districts in Beijing and Tianjin. It is found that the lottery receipt experiment (LRE) has significantly raised the sales tax and the growth of sales tax and total tax revenues. Copyright (C) 2010 Blackwell Publishing Ltd.
40 citations
TL;DR: The authors decompose Chinese growth in GDP per labor into the contributions arising from the agricultural, public, and private sectors; and the contribution arising from reallocations of labor among these three sectors.
Abstract: We perform a growth-accounting exercise for Chinese economic growth from 1978 to 2003, by decomposing Chinese growth in GDP per labor into the contributions arising from the agricultural, public, and private sectors; and the contribution arising from the reallocations of labor among these three sectors. The greatest contributor to overall labor productivity growth (contributing 30% of the overall) is the growth in total factor productivity in the private nonagricultural sector. The next largest contributor (26% of the overall) is the reallocation of labor from the agricultural sector to the nonagricultural sector.
40 citations
TL;DR: This paper examined the role of ex post labor supply in smoothing income in response to crop losses caused by large floods among riverine households in the Peruvian Amazon, where rich environmental endowments permit a variety of resource extractive activities and coping responses.
Abstract: This article examines the role of ex post labor supply in smoothing income in response to crop losses caused by large floods among riverine households in the Peruvian Amazon, where rich environmental endowments permit a variety of resource extractive activities and coping responses. The paper finds that households respond to crop losses primarily by intensifying fishing effort, not by relying on gathering of nontimber forest products, hunting, or asset liquidation. This ex post labor adjustment helps to smooth total income against small crop losses but less well against large crop losses. Both relatively nonpoor households with better fishing capital and poor young households with a physical labor advantage employ this natural insurance in rivers.
38 citations
TL;DR: In this paper, the authors examined the relationship between FDI inflows and economic growth of Korea and tested the Bhagwati hypothesis which says that FDI inflow is more beneficial to economic growth in an open trade regime in a multivariate framework.
Abstract: The current study examines the relationship between FDI inflows and economic growth of Korea and tests the Bhagwati hypothesis which says that FDI inflow is more beneficial to economic growth in an open trade regime in a multivariate framework. Unlike previous works on the concerned hypothesis, a small-sample cointegration test is applied to the time-series data. There is no evidence of cointegration among the variables. The Granger causality test results show that, although FDI inflows do not cause per capita real GDP, the latter is revealed to cause the former when the economic crisis dummy variable is included. There is a unidirectional short-run causality from domestic investment to per capita real GDP growth rate. The case of Korea does not support the Bhagwati hypothesis.
TL;DR: In this article, a comparative static analysis in the Harris-Todaro (H-T) model by accommodating local pollution is conducted, showing that an improvement in pollution-abatement technology gives rise to an increase in urban unemployment and has no effect on the workers' aggregate welfare.
Abstract: This paper undertakes a comparative static analysis in the Harris-Todaro (H-T) model by accommodating local pollution. Unlike in the classical H-T model where migration proceeds in response to urban-rural differences in expected earnings, we consider labor movement taking place according to the difference in utility, which is influenced by the quality of the local environment. The paradoxical result is that an improvement in pollution-abatement technology gives rise to an increase in urban unemployment and has no effect on the workers' aggregate welfare.
TL;DR: This article examined the impact of exchange rate uncertainty on the timing of foreign direct investment (FDI) with heterogeneous investing motives and showed that an increase in exchange rate volatility tends to delay FDI of a market-seeking firm, while an export-substituting firm might accelerate FDI if the firm's degree of risk aversion is high enough.
Abstract: This paper examines the impact of exchange rate uncertainty on the timing of foreign direct investment (FDI) with heterogeneous investing motives. We first extend Dixit–Pindyck's real options model to show that while an increase in exchange rate volatility tends to delay FDI of a market-seeking firm, it might accelerate FDI of an export-substituting firm if the firm's degree of risk aversion is high enough. The rationale behind this finding is that a market-seeking FDI might increase the exposure of the firm's profits to exchange rate risk, while an export-substituting FDI might reduce it. Empirical evidence from a survival analysis based on firm-level data on the entry by Taiwanese firms into China over the period between 1987 and 2002 is consistent with the theory. These results reveal that the relationship between exchange rate uncertainty and FDI is crucially dependent on the motives of the investing firms.
TL;DR: The authors examined the impact of economic liberalization on interregional inequality in India and found that trade openness is the key factor determining the manufacturing share in income across the regions, along with the findings of the structuralist model about disproportionate growth of manufacturing across regions.
Abstract: This paper examines the impact of economic liberalization on interregional inequality in India. It has been observed in many studies that interregional inequality in India has been steadily increasing over time. This paper is a further confirmation of this result. We have tried to locate the cause of rising interregional inequality within the production structure of the economy and observed that it is positively and systematically related to the cross-regional inequalities in agriculture and manufacturing. This systematic relationship has further been examined from a structuralist viewpoint to unravel the factors determining manufacturing production across regions where we have found that trade openness is the key factor determining the manufacturing share in income across the regions. Our further enquiry into manufacturing and trade patterns has shown that the Herfindahl index of concentration has been increasing over time on both counts. This result, along with the findings of the structuralist model about disproportionate growth of manufacturing across regions, provides an explanation of the cause of rising interregional inequality in India.
TL;DR: In this paper, the authors study the empirical determinants of China's capital flight in addition to the covered interest differential, including a rather exhaustive list of macroeconomic variables and a few institutional factors, and find that capital flight is quite well explained by its own history and covered interest differentials.
Abstract: We study the empirical determinants of China’s capital flight In addition to the covered interest differential, our empirical exercise includes a rather exhaustive list of macroeconomic variables and a few institutional factors Overall, our regression exercise shows that China’s capital flight is quite well explained by its own history and covered interest differentials The other possible determinants offer relatively small additional explanatory power It is also found that China’s capital flight responds differently to the components of covered interest differentials and to the positive and negative components of these variables The response pattern, however, depends on the choice of data frequency The general impression is that the monthly results are more intuitive than the quarterly ones
TL;DR: Chantasasawat et al. as discussed by the authorsung, K.C., Iizaka, Hitomi, Siu, Alan, and Busakorn studied the effect of China's foreign direct investment on the level of inward investment in East and Southeast Asia and Latin America.
Abstract: Author(s): Chantasasawat, Busakorn; Fung, K. C.; Iizaka, Hitomi; Siu, Alan | Abstract: China in recent years has emerged as the largest recipient of foreign direct investment (FDI) in the world. Many analysts and government officials in the developing world have increasingly expressed concerns that they are losing competitiveness to China. Is China diverting FDI from other developing countries?Theoretically, a growing China can add to other countries’ direct investment by creating more opportunities for production networking and raising the need for raw materials and resources. At the same time, the extremely low Chinese labor costs may lure multinationals away from sites in other developing countries when the foreign corporations consider alternative locations for low-cost export platforms.In this paper, we explore this important research and policy issue empirically. We focus our studies on East and Southeast Asia as well as Latin America. For Asia, we use data for eight Asian economies (Hong Kong, Taiwan, Republic of Korea, Singapore, Malaysia, Philippines, Indonesia and Thailand) for 1985-2002 while for Latin America, we use data for sixteen Latin American economies (Argentina, Bolivia, Brazil, Chile, Columbia, Costa Rica, Ecuador, El Salvador, Guatemala, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay and Venezuela) for 1990-2002. We control for the standard determinants of their inward direct investment. We then add China’s inward foreign direct investment as an indicator of the “China Effect”. Estimation of the coefficient associated with the China Effect proxy gives us indications about the existence of the China Effect.We have three results: (1) The level of China’s foreign direct investment is positively related to the levels of inward direct investments of economies in East and Southeast Asia, while the China Effect is mostly insignificant for Latin American nations; (2) the level of China’s foreign direct investment is negatively related to the direct investment of these economies as shares of total foreign direct investments in the developing countries; (3) The China Effect is generally not the most important determinant of the inward direct investments of these economies. Market sizes and policy variables such as openness and corporate tax rates tend to be more important.
TL;DR: In this paper, a dynamic panel estimation for the data of 66 countries during 1991-2004 is used to verify the validity and robustness of the relationship between trade and economic growth, and trade structure variables show strong evidence of positive effects on growth.
Abstract: What is the relationship between trade and economic growth? Does trade positively affect economic growth? Owing to the ambiguity of this relationship, the empirical relationship has remained open (Rodriguez and Rodrik, 2001; Baldwin, 2003). This paper introduces “trade structure” variables, borrowed from the paper of Lederman and Maloney (2003), and applies them to the relationship. A dynamic panel estimation for the data of 66 countries during 1991–2004 is used to verify the validity and robustness of the relationship. Trade structure variables show strong evidence of positive effects on growth. Free-trade agreements/areas (FTAs) also enhance economic growth. East Asia shows a different relationship between trade and growth than the world and reflects a weaker role of FTAs in its growth.
TL;DR: This article assess the rationale behind development policies targeting high rates of school enrollment through the prism of allocation of labor and earnings effects of skills across the formal and informal sectors, and not working.
Abstract: Using comparable data from five West African capitals, we assess the rationale behind development policies targeting high rates of school enrollment through the prism of allocation of labor and earnings effects of skills across the formal and informal sectors, and not working. We find that people with high levels of education allocate to the small formal sector, while less educated workers allocate to the informal sector. While high levels of education are given more value in the relatively smaller sectors of salaried employment, observed skills like education appear to be fairly unprofitable in the larger self-employment sector. The fact that only the small formal sector in urban West Africa both seems to absorb highly educated workers and provide high skill premiums may be an important reason for the observed low demand for education and high dropout rates.
TL;DR: In this paper, the authors studied the behavior of mid-to long-run real coal price in the Chinese market and found that the shifting trend model with continuous and random changes in price level and trend outperforms plain vanilla ARIMA models.
Abstract: The paper studies the behavior of mid- to long-run real coal price in the Chinese market. The problem is of great importance because the coal takes a 70% share in China’s energy mix, and China is the world’s second largest carbon emitter. An accurate forecast in coal price is crucial in predicting China’s future energy consumption mix as well as the private sector’s energy-type-related investment decisions. In estimation and forecasting, the shifting trend time-series model suggested by Robert Pindyck is used to capture the technological progress that is unobservable to the econometrician. It is found that the shifting trend model with continuous and random changes in price level and trend outperforms plain vanilla ARIMA models. It is argued that the model postulated by Pindyck is robust even in a transition economy where energy prices are subject to relatively rigid regulatory control. Out-of-sample forecasts are provided.
TL;DR: In this article, the authors apply the generalized gravity theory to construct a new multi-equation econometric model of trade-growth causality for China using historical trade and growth data and advanced estimation.
Abstract: The growing economic and political importance of China in the global economy in recent years has been discussed by academic and business economists, trade and investment experts, transnational corporate planners, government advisers, and politicians worldwide. While the discussions have been useful for global knowledge enhancement, and regional and national strategic purposes, they have often been regarded as “hypothetical or with fuzzy outcomes” due to their lack of substantive support. The paper addresses the issue by applying the recent generalized gravity theory to construct a new multi-equation econometric model of trade–growth causality for China. Using historical trade and growth data and advanced estimation, the model provides substantive evidence for the intertwining impact of China's trade and economic activities, WTO membership, regional economic integration, national, regional and global shocks, and gradual policy reforms on China's trade, growth, and economic relations. Some resulting major strategic trade, development and cooperation issues will also be discussed.
TL;DR: This paper explored the linkages between demography and investment premium in a global economic model that incorporates full demographic behavior and found that a feasible continuation of financial reforms will be sufficient to compensate for a slowdown and decline in its labor force.
Abstract: China's economic growth has, hitherto, depended on its relative abundance of production labor and its increasingly secure investment environment. Within the next decade, however, China's labor force will begin to contract. This will set its economy apart from other developing Asian countries where relative labor abundance will increase, as will relative capital returns. Unless there is a substantial change in population policy, the retention of China's large share of global FDI will require further improvements in its investment environment. These linkages are explored using a global economic model that incorporates full demographic behavior. Financial reform is measured by the effect of declining intermediation costs on the wedge between home and foreign borrowing rates, or the “investment premium.” The influence of this wedge on China's projected economic growth performance is investigated under alternative assumptions about fertility decline and labor force growth. China's share of global investment is found to depend sensitively on both its demography and its interest premium, though the results suggest that a feasible continuation of financial reforms will be sufficient to compensate for a slowdown and decline in its labor force.
TL;DR: Based on prior information, theoretical reasoning, and various empirical evidences, this article concluded that international trade has positive independent effects on economic performance and that a 1% increase in per capita trade raises the equilibrium GDP growth by 0.29%.
Abstract: Many studies suggest the positive causal effects of trade on productivity and growth. However, controversies are still prevalent among vast empirical studies on the issue. In this paper, I propose a standard empirical framework for investigating GDP growth and apply the framework to estimate the growth effects and transmission channels of per capita trade. Based on prior information, theoretical reasoning, and various empirical evidences, I conclude that international trade has positive independent effects on economic performance. A 1% increase in per capita trade raises the equilibrium GDP growth by 0.29%.
TL;DR: In this article, the authors construct a simple two-sector specific-factor model and explore the validity of Mankiw's remarks and find his ideas are valid when the country does not produce any outsourced factor's work at home in that both the laborers and the nation benefit.
Abstract: Outsourcing has become an increasingly contentious subject ever since N. Gregory Mankiw remarked in 2004 that outsourcing is just another way of doing international trade, and must be beneficial to the nation, including the workers. We construct a simple two-sector specific-factor model and explore the validity of Mankiw's remarks. We find his ideas are valid when the country does not produce any outsourced factor's work at home in that both the laborers and the nation benefit. But when some outsourced factor cum intermediate good is also produced at home, the nation still benefits but the workers may suffer.
TL;DR: In this paper, the authors analyzed the evolution of urban output per capita across Chinese cities in post-reform era and found no evidence of output convergence across cities from 1984 to 2003.
Abstract: This paper analyzes the evolution of urban output per capita across Chinese cities in post-reform era. Our results suggest no evidence of output convergence across cities from 1984 to 2003. We find that cities with comparable output per capita are likely to be located in the same region; furthermore, cities tend to mirror the mobility of their counterparts located in the same province, but not the same region. The divergence in urban output per capita across the nation will continue if the current economic growth pattern persists in the future.
TL;DR: In this article, the authors present a model which incorporates elements from the theory of information cascades with the standard model of tax evasion and analyze the connection between the decision of a potential tax evader, the number of tax evaders, and the number caught in previous periods.
Abstract: In this paper we try to understand the phenomenon whereby a large proportion of the population evades tax payments. We present a model which incorporates elements from the theory of information cascades with the standard model of tax evasion and analyze the connection between the decision of a potential tax evader, the number of tax evaders, and the number caught in previous periods. General conditions exist under which any expected utility maximizing potential tax evaders will decide to emulate other tax evaders.
TL;DR: In this article, the authors consider sustainability as a matter of intergenerational welfare equity, and propose a compromise development policy that follows the optimal growth approach but adopts certain measures to mitigate both the inter-generational and intragenerational welfare inequalities.
Abstract: Considering sustainability a matter of intergenerational welfare equity, this paper examines whether an optimal development path can also be sustainable. It argues that the general “zero-net-aggregate-investment” condition for an optimal development path to be sustainable in the sense of the maximin criterion of intergenerational justice is too demanding to be practical, especially in the context of developing countries. It further argues that while the maximin criterion of sustainability may be appealing to the rich advanced industrial countries, for the poor developing countries it implies equalization of poverty across generations, and as such is too costly a moral obligation to be acceptable. The paper suggests that a compromise development policy that follows the optimal growth approach but adopts certain measures to mitigate both the intergenerational and intragenerational welfare inequalities may be more appropriate for these countries. Some of the principal elements of such a policy are highlighted.
TL;DR: In this article, the authors provided a simple model of guanxi given stylized facts, and then used these facts to model it as an interpersonal investment game and found that the degree of loyalty must be higher than that of ability to guarantee stable gaunxi relationships.
Abstract: The purpose of this paper is to provide a simple model of guanxi given stylized facts. I first outline the intrinsic characteristics of guanxi to draw the stylized facts, and then use these facts to model it as an interpersonal investment game. I find that the degrees of the ability and loyalty of the Recipient must be reasonably high enough for the interpersonal investment to take place. After the investment has occurred, the degree of loyalty must be higher than that of the ability to guarantee stable gaunxi relationships. When the interpersonal investment is made, it is a signal of trust in the ability and loyalty of the Recipient. However, if the ability factor dominates, then the Recipient will not always feel loyal enough to return the favor. This indicates that loyalty counts for more than ability. A related result is that a stable guanxi relationship is unlikely to occur for a highly able person given the equal chance of the two characteristics. This paper also presents some interesting implications for corruption and lock-in relationships.
TL;DR: In this article, the effects of equity control of multinational firms on resource allocation and national welfare in a model with rural-urban migration and urban unemployment were examined, and it was shown that a restriction on multinational investment may lower the unemployment rate and increase the total employment in the host country.
Abstract: In this paper, we re-examine the effects of equity control of multinational firms on resource allocation and national welfare in a model with rural–urban migration and urban unemployment. A large number of recipient (host) countries are developing countries with dual economies. We indicate, among other things, that a restriction on multinational investment may lower the unemployment rate and increase the total employment in the host country. Furthermore, we find that the restriction on multinational investment raises the national welfare in the host economy if the tariff imposed on imports is sufficiently large and the difference between domestic and foreign capital rental is sufficiently small.
TL;DR: In this paper, the authors analyzed the past trade patterns between China and ASEAN countries and assessed the impact of the rising Chinese economy on ASEANN countries, in particular, the impacts on specific industries in each individual ASA country.
Abstract: The emergence of China as one of the largest trading nations in the world provides challenges and opportunities to its neighboring ASEAN countries. In the face of the rise of the Chinese economy, there were concerns that ASEAN economies may be adversely affected with the loss of competitiveness in the international market. One of the concerns is that the world export markets of labor-intensive goods will be threatened if China turns into the world low-cost manufacturing factory. Meanwhile, trade between China and ASEAN countries increased dramatically during the past decades. Not surprisingly, China's accession to the WTO and the future establishment of a free trade area (FTA) between ASEAN and China will further change the trade relations in the region. The paper first analyzes the past trade patterns between China and ASEAN countries and assesses the impact of the rising Chinese economy on ASEAN countries, in particular, the impacts on specific industries in each individual ASEAN country. Second, the paper examines the ever-increasing role of foreign direct investment between the two regions and, finally, it analyzes and assess the policy responses of the ASEAN countries thus far and their possible consequences.
TL;DR: In this paper, the authors study how reductions in transport costs and import tariffs affect the Nash-equilibrium welfare of an environmental policy game as compared to any initial state including autarky.
Abstract: The literature on strategic environmental policy has not fully addressed welfare effects of trade liberalization from autarky. In a reciprocal market model of duopoly with transboundary pollution, we study how reductions in transport costs and import tariffs affect the Nash-equilibrium welfare of an environmental policy game as compared to any initial state including autarky. We show three patterns of gainfulness of trade depending on the interaction between marginal damage from pollution and the degree of transboundary pollution.