Abstract

After decades of gradual tariff cuts, few conventional barriers to international trade remain. As a result, the focus of new trade agreements has shifted from further tariff concessions to harmonizing other trade-affecting regulations between countries. We build a theoretical model to analyze how such deepening trade integration affects environmental regulation and lobbying activity in a strategic two-country setting. We first derive analytical expressions for the optimal regulatory levels under various trade scenarios. Our results show strong incentives for international regulatory cooperation, but the effects can be welfare-reducing in the presence of politically influential firms. Then, we extend the model by considering endogenous lobbying efforts. Deep trade integration tends to increase lobbying relative to a conventional shallow agreement and can provide incentives for lobbies in different countries to coordinate, which is always detrimental to welfare. Committing to perfect regulatory harmonization as opposed to partial convergence can improve welfare by weakening the influence of lobbies. However, this is always in conflict with the policymaker’s objective.

Practical information