Chapter 13: Optimal trade and recycling policies in vertically related markets
During past decades, as the WTO has regulated protectionist use of trade-distorting subsidies and import tariffs, barriers to global trade have been substantially eliminated. Instead of such traditional trade policies, environmental policy measures are employed in many industrialized countries to promote or protect domestic industries to gain competitiveness over foreign rivals. An example of strategic environmental policies affecting international trade is a recycling policy based on Extended Producer Responsibility (EPR) such as EU legislation of 2003 on the restriction of waste electrical and electronic equipment (WEEE), called the WEEE Directive. It is reported that the Directive can be regarded as a trade barrier. Some countries/ regions including the EU and Japan introduced a recycling program that requires producers to recycle end-of-life goods they produced. Under EPR-based recycling programs a recycling fee is imposed on not only domestic goods but also imported goods and it can be regarded as a tariff on imported final goods. Because those recycling fees on the purchase of goods are collected to subsidize related recycling activities, we can think that those recycling programs include a recycling subsidy as well. In addition, those programs are likely to set a minimum recycling rate for each good (for example see Article 7 of WEEE Directive). This chapter sets up a two-country model of international trade with a vertical structure of imperfectly competitive markets in which upstream recyclers are granted recycling subsidies and downstream producers of a recyclable final good are subject to import tariffs.
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