Relations between Free Trade and Economic Protection: A Game Theory Analysis

By Lin, Chung-Ming; Lee, Chen-Kuo | International Journal of Management, June 2012 | Go to article overview

Relations between Free Trade and Economic Protection: A Game Theory Analysis


Lin, Chung-Ming, Lee, Chen-Kuo, International Journal of Management


According to public opinion about free trade and environmental protection, there is no necessary contradiction between the two, at least as mutual policies between countries. However, the fact that theoretical discussions often do not reflect reality frequently leads to stalemate between trade and environment in the international arena. With this as a starting background, the present investigation identifies a number of distinct ways in which countries can pursue policies-of free trade and environmental protection-which do not harm and can sometimes benefit each other, using game theory analysis. It also analyzed the strategies adopted by players (countries) involved in international cooperation efforts when they are motivated by self-interest. Using this analysis, this study examined the pollution control methods outlined by the international trade agreement, as an example. The results of the game theory analysis suggest that trade issues and environment issues can be solved more effectively when environment issues are explicitly included in trade liberalization negotiations.

(ProQuest: ... denotes formulae omitted.)

Introduction

Anumber of developing nations 'adjusted' their economic development strategies in the 1980s, with most adopting trade liberalization strategies from that time (Telle and Larsson, 2007). Trade entails sustainable development as its foundation including natural resources and ecology. However, environment and natural resources are extremely different from private properties. People always overlook or underestimate the environment and then blame the "incapability" of market and government. Therefore, more and more environment protection issues arise as trade liberalization continues to develop. It is important to note here that the eco-awareness has caused the world to be concerned with trade-related issues as well environment and sustainable development issues. Trade globalization accelerates economic development and imposes severe impacts to the environment. The depletion of natural resources and import/export of perilous wastes damage the global environment. It is also important to note that environment issues are inseparable from trade issues. At the time that environment issues are more important than ever, economic development globalization and environment protection globalization are equally important for the world. GATT/WTO has to deal with trade policies, environment policies, and sustainable development simultaneously.

Many topics and issues are involved in the coordination between trade liberalization and environment protection (Kathuria, 2007; Levinson and Taylor, 2008). A number of methods were designed to examine trade liberalization and environment protection from various aspects. Secondly, it is unlikely to establish an authoritative environment protection agency to oversee the international trade liberalization and environment protection affairs in the coming future. Thirdly, WTO has included many topics into the trade liberalization agenda including services, intellectual properties, investment, and so on. As a result, more and more environment protection issues are involved in the trade liberalization negotiations. Presently, free trade advocates are debating with environment protectionists while multi-trade systems contradict multi-environment treaties and unilateral environment protection measures causing paradoxes between the developed nations and developing nations. Furthermore, WTP Doha-Round's ministerial meeting has agreed to include environment protection issues into agenda. Therefore, how to maintain the harmony between trade liberalization and environment protection, especially the balance and continuity between trade liberalization and environment protection, has to be solved urgently and is therefore Hie motive behind this study.

Based on the bundled solutions for trade and environment proposed by Hansen (1999), this study employed game theory to identify the issues between trade and environment for the purposes stated hereunder:

(1) Using game theory to examine the possibility of including environment issues into trade negotiations; and

(2) Examining the impasse confronting the coordination between trade and environment. …

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