Applied general equilibrium analysis of trade and environmental issues
This thesis uses general-equilibrium numerical-simulation techniques to analyse trade and environmental issues. It tries to take applied general equilibrium modelling in these areas beyond their traditional confines in a number of ways. These include endogenous incorporation of international capital flows into trade models, decomposition of observed economic outcomes, and computation of bargaining solutions and non-cooperative equilibria. Chapter 1 analyses the welfare, income distribution and macroeconomic implications of trade liberalisation and increased indirect taxation in El Salvador. It is found that these policies have little effect on welfare and income distribution, but a significant impact on macroeconomic aggregates. Chapter 2 examines trade liberalisation when foreign direct investment (FDI) flows and international capital income taxation are present, using data for Costa Rica. The main finding is that, once FDI flows and its taxation are taken into consideration, trade liberalisation can hurt a small open economy, whose optimal policy is no longer free trade but a combination of taxes and subsidies on imports. Chapter 3 deals with the decomposition into trade and technology constituents parts of recent increased wage inequality in the UK. It analyses how decomposition is affected by the way in which labour markets are modelled. It is found that when labour markets are perfectly competitive, the main force behind increased wage inequality is technological change, with trade playing only a small role; but when labour market inflexibilities are taken into account, any of the two factors considered can become dominant, depending on the parameter specification used in the model. Chapter 4 examines the incentives for developing-country participation in possible future negotiation on trade and the environment, assumed to break down on North-South lines. It finds that developing countries will do better if they negotiate jointly on trade and environmental policies than if they negotiate over trade policy only. However, negotiations accompanied with side payments of cash will be even better for them. Finally, Chapter 5 analyses the role of adaptation responses to damage from externalities. Using a hierarchy of models calibrated to UK data, we compare internalisation effects in the presence of these responses with a case where they are absent. We find that taking account of adaptation responses significantly reduces the level of full-internalisation taxes and the associated welfare gains from externality correction.