This article proposes WTO-compatible climate clubs for carbon dioxide, methane and nitrous oxide that are based on the science of how to design effective cooperative agreements on common resources. The clubs require reciprocal commitments at the national level toward net-zero emissions, close monitoring of progress toward net-zero emissions, and the clubs impose measures designed to effectively encourage wide climate-club participation. These measures are: substantial penalties on non-participants and delinquent members, and a carrot for low developing countries with low emissions. The clubs are compatible with existing WTO laws, and, compared with some other climate clubs, they avoid economic distortions and have political advantages. This is a short policy-oriented article based on the related SSRN paper, Tarr (2025), and journal publication, Tarr (2026).

This paper is the first to propose an international climate agreement that both addresses the free-rider problem in international climate policy and is also World Trade Organization (WTO)-compliant. The Paris Climate Agreement is WTO-compliant but is falling far short of its goals since it does not address the free-rider problem. The Nordhaus (Climate clubs: Overcoming free riding in international climate policy. The American Economic Review. 105(4), 1339–1370, DOI: 10.1257/aer.15000001, 2015) proposal addresses the free-rider problem, but it would violate the WTO commitments of many countries. We propose a climate club for carbon dioxide (and similar clubs for methane and nitrous oxide) where each of the member countries commits to net-zero emissions by 2050 (using any regulatory approach) with intermediate goals and imposes various trade penalties on non-members and delinquent members. The proposal includes accommodation for developing countries. Our proposal is WTO-compatible under GATT Article XX(g) since it does not impose a specific regulatory approach for achieving net-zero emissions. This climate club should significantly reduce emissions since it meets the conditions of multiple sub-fields of economic research on what is required for successful cooperative agreements on common resources. Compared to an agreement imposing carbon pricing only, these climate clubs are both more economically efficient and politically acceptable since they provide incentives for important complementary climate policies.

We find that both empirical results and economic theory show that carbon border adjustment mechanisms (CBAMs) will be ineffective at meeting global goals for carbon emissions reduction; but CBAMs will be effective at improving the competitiveness of the domestic industries by assuring that imports bear equal costs of carbon pricing. We elaborate two complementary proposals that hold greater promise for meeting climate goals: (i) a Climate Club, where member countries impose a minimum price for carbon emissions at home and a tariff surcharge on all imports from non-member countries; and (ii) a 0.2%-of-GDP subsidy by high-income countries for transformative research designed to make green energy cheaper than fossil fuels. We discuss multiple paths for a Climate Club to be accommodated within the rules of the World Trade Organization and recommend use of the exception clause under GATT Article XX.

We construct a 45-sector model of Ukraine with Turkey and seven other regions to estimate the impacts on Ukraine of effectively implementing the deep Free Trade Agreement (FTA) it concluded with Turkey on February 3, 2022. Econometric evidence shows that the impacts of Preferential Trade Agreements (PTAs) are much greater than can be explained by tariffs alone. Consequently, we include deep integration in our model, which includes reduction of: (i) Barriers against suppliers of business services including by FDI; (ii) Non-tariff barriers in goods; and (iii) Time-in-trade costs. We innovatively estimate the ad valorem equivalents of the three types of deep integration instruments; and we construct an updated and disaggregated input–output table of Ukraine. Our central model contains foreign direct investment (FDI) in business services with endogenous productivity effects from additional varieties of goods or services in imperfectly competitive sectors. We estimate that a successfully implemented FTA will increase welfare in Ukraine by 2.72 percent, with the deep integration aspects responsible for about 56 percent of the gains; but preferential tariff reduction alone by Ukraine contributes almost nothing. The deep integration and imperfect competition features produce estimated gains 3.5 times larger than a model of perfect competition limited to tariff elimination. Permanent exclusion or very limited access in sensitive sectors, however, reduce the estimated welfare gains to 1.51 percent. Reduction of non-discriminatory barriers against both FDI and Ukrainian investment in business services would add an additional 2.0 percent of real household income to the estimated gains.

HAL is a multi-disciplinary open access archive for the deposit and dissemination of scientific research documents, whether they are published or not. The documents may come from teaching and research institutions in France or abroad, or from public or private research centers. L’archive ouverte pluridisciplinaire HAL, est destinée au dépôt et à la diffusion de documents scientifiques de niveau recherche, publiés ou non, émanant des établissements d’enseignement et de recherche français ou étrangers, des laboratoires publics ou privés. The effects of industrial countries’ policies on developing countries Michael Finger, Patrick Messerlin

We provide detailed textbook style mathematical derivations of an extended version of the heterogenous firms model of Melitz (2003), as well as the Armington (1969) and Krugman (1980) models. Our model of heterogeneous firms extends the model of Melitz (2003) by allowing multiple sectors, intermediates, heterogeneous regions based on data, labor-leisure choice, initial heterogeneous tariffs, multiple factors of production, the possibility of sector-specific inputs and trade imbalances based on data, and we incorporate global and unilateral tariff policy shocks. Although the models in this paper are extensions in numerous directions of the Melitz trade model of heterogeneous firms, the pedagogical approach in this paper should substantially facilitate the accessibility of the applied heterogenous-firms model of international trade. Balistreri and Tarr (2022) apply these models to GTAP data where they assess the relative welfare impacts in the Armington, Krugman, and Melitz style models of trade cost reductions in eighteen model variants. This paper documents the equa-tions of those models, and we hope it will be a clear roadmap for understanding and constructing modern multi-sector, multi-region international trade models that must befitted to data.

Under a wide range of model features, we show that in response to a reduction in global trade costs, the global welfare gains are largest in the Melitz model, followed by the Krugman model, and smallest in Armington. Labor-leisure choice and intermediate goods are the most important features for differentiating results. We show that the optimal tariff is significantly lower in the monopolistic competition models, thereby moving policy away from protectionism. We are the first to consider multi-sector comparative-static welfare impacts of these market structures, while maintaining equal trade responses across the models consistent with a shared structural-gravity elasticity.

We provide detailed textbook style mathematical derivations of an extended version of the heterogenous firms model of Melitz (2003), as well as the Armington (1969) and Krugman (1980) models. Our model of heterogeneous firms extends the model of Melitz (2003) by allowing multiple sectors, intermediates, heterogeneous regions based on data, labor-leisure choice, initial heterogeneous tariffs as well as iceberg trade costs, multiple factors of production and the possibility of sector-specific inputs. Although the models in this paper are extensions in numerous directions of the Melitz trade model of heterogeneous firms, the pedagogical approach in this paper should substantially facilitate the accessibility of the applied heterogeneous-firms model of international trade. Balistreri and Tarr (2022) apply these models to GTAP data where they assess the relative welfare impacts in the Armington, Krugman and Melitz style models of trade cost reductions in eighteen model variants. We hope this will be a clear roadmap for understanding and constructing modern multi-sector, multi-region international trade models that must be fitted to data.

What are the potential gains to the members of the Eurasian Economic Union (EAEU) of successful deep integration through the reduction of time in trade costs, the reduction of non-tariff barriers in goods and the liberalization of barriers against foreign suppliers of services? We estimate that if the EAEU were to effectively implement its objectives for trade cost reduction, it would lead to welfare gains as a percent of consumption of 0.8% for Russia, 1.7% for Kazakhstan, 3.1% for Armenia and 4.8% for Belarus. If these deep integration measures were partially extended to third countries, the welfare gains would increase to 3.6% for Russia, 4.5% for Armenia, 6.3% for Kazakhstan and 7.2% for Belarus. We estimate that the right to legally work in the Russian Federation for Armenians is approximately of equal value to Armenia as the combined aspects of the reduction of trade costs, including spillovers. We identify the external region and reforms that are most important for each member country regarding reforms and spillovers; this may inform lobbying positions of the member governments. Our innovative model, that includes imperfect competition and foreign direct investment, produces important differences compared with a perfect competition model.

We estimate the welfare effects of a modern mega-preferential trade agreement--the Regional Comprehensive Economic Partnership--with three versions of market structure: (i) perfect competition, Armington style; (ii) monopolistic competition based on Krugman (1980); and (iii) monopolistic competition in the style of Melitz (2003). We develop a new numerical model of foreign direct investment (FDI) with heterogeneous firms and extension of the Krugman model that allows small countries to impact the number of varieties. We hold both the trade and FDI responses constant across the three market structures. We find that in all three market structures, there are substantial gains from deep integration, but virtually no gains from preferential tariff reduction. Both our Krugman and Melitz style models produce significantly larger welfare gains than the Armington structure, especially if third countries benefit at least partially from the deep integration reforms via either spillovers or wider liberalization.

We examine regional and unilateral policies to reduce three kinds of trade costs in Eastern and Southern Africa. Our article is the first CGE-microsimulation model to assess the impacts of the reduction of trade costs on poverty and income of the poorest 40% of the population. We estimate significant reductions in the poverty headcount and increases in income for the poorest 40%. We find that trade facilitation would increase the 'share' of income of the poorest 40% of the population, however, services reform decreases the share. We find and explain why our three types of trade costs have very diverse impacts across the countries.

The following sections are included:INTRODUCTION AND SUMMARY OF RESULTSMODEL AND ASSUMPTIONSTHE GAINS AND LOSSES FROM REMOVING THE VRACONCLUSIONSREFERENCES FOR CHAPTER THREE

In recent years a number of authors have considered a variety of expectations assumptions in analyzing the stability of oligopoly. In this paper it is assumed that an oligopolist has a probability distribution for its competitors'outputs. This ≪ nondogmatic conjectures ≫ approach enables us to determine: (1) which of the stability results are not dependent on the expectation assumption made and (2) how the expectation assumptions themselves affect the stability results.

Despite a trend toward more flexible rates, more than half the world's countries maintain fixed or managed exchange rates. In the 1980s and 1990s, developing countries as a group progressively liberalized their trade regimes, but some governments defend their exchange rate in actions that run counter to long-run plans for liberalization. Without discussing the relative merits of fixed and flexible exchange rate systems, the authors note that exchange rate management in many countries has resulted in overvaluation of the real exchange rate. Roughly twenty five percent of the countries for which data are available have overvalued exchange rates, with black market premiums from 10 percent to more than 100 percent. After surveying the literature, the authors present lessons from experience about what has worked (or not) in response to crises involving external shocks and external trade deficits - and why. Trying to defend an overvalued exchange rate with protectionist trade policies is a classic pattern, but experience shows such protection does significantly retard the country's growth, and delay its integration into the world trading community. In fact, and overvalued exchange rate is often the root cause of protection, preventing the country from returning to more liberal trade policies that allow growth and integration into the world community without exchange rate adjustment. Most developing countries have downward price and wage rigidities and, with an external trade deficit, require some form of nominal exchange rate adjustment to restore external equilibrium. The authors present cross-country econometric and case study evidence - citing examples from Argentina, Chile, Ghana, The Republic of Korea, Malaysia, Turkey, Uruguay, and Sub-Saharan Africa (including the CFA zone) - that overvalued exchange rates reduce economic growth. Defending the exchange rate, they show, has nor no medium-term benefits, since falling reserves will eventually force devaluation. Better to have devaluation occur without further debilitating losses in reserves and lost productivity because of import controls. After devaluation the exchange rate will reach a new equilibrium, strongly influenced by government and central bank policies.

This paper summarizes the estimates of what Russia will get from WTO accession and why. A key finding is the estimate that Russia will gain about $53 billion per year in the medium term from WTO accession and $177 billion per year in the long term, due largely to its own commitments to reform its own business services sectors. The paper summarizes the principal reform commitments that Russia has undertaken as part of its World Trade Organization (WTO) accession negotiations, compares them with those of other countries that have acceded to the WTO. It finds that the Russian commitments represent a liberal offer to the members of the WTO for admission, but they are typical of other Transition countries that have acceded to the WTO. The authors discuss why Russian WTO accession will result in the elimination of the Jackson- Vanik Amendment against Russia. The authors discuss Russian policies to attract foreign direct investment, including an assessment of the impact of the 2008 law on strategic sectors and the increased role of the state in the economy. Finally, the authors assess strategies for most efficiently meeting the Government’s objective of diversifying the Russian economy.

Integration with the global economy is essential in making the transition from plan to market. All 15 new independent states (NIS) established in the economic space of the former Soviet Union (FSU) suffered big declines in output and trade after their independence. This study summarizes cross-country experience on the role trade and payments policies played in the linked contraction of output and trade, based on the case studies of eight countries: Estonia, the Kyrgyz Republic, Latvia, Lithuania, Moldova, Russia, Ukraine, and Uzbekistan. Ineffective trade and payments policies have been at the root of the decline in trade, which has been linked to the contraction in output. Their heavy economic interdependence, its roots in the centralized state planning system of the FSU, has intensified the problem. Countries that have reformed slowly have often maintained that their strategy will reduce the high cost of transition. In the NIS, however, the slow adjustment strategy has typically backfired in its effort to reduce adjustment costs. The results of the case studies are reflected in a cross-country regression analysis, which shows that trade reform and reorientation of trade toward the rest of the world have done much to arrest the decline in output usually associated with the transformation from planning to market. Trade policy reform has usually been part of broader reforms aimed at liberalization, stabilization and systemic change. The report reviews the following: 1) trends in trade; 2) trade with the rest of the world; 3) interstate trade; 4) specific experiences of Estonia, Russia and Ukraine; 5) link between reform, exports and GDP; and 6) strategy for reform.

Résumé À partir d’un précédent modèle des échanges à plusieurs régions, deux nouveaux modèles d’équilibre général calculable pour petite économie ouverte ont été construits et appliqués au Chili, comprenant vingt-quatre secteurs. L’un est en statique comparative, l’autre en dynamique. Ils permettent d’évaluer les conséquences pour le Chili d’accords commerciaux conclus soit avec l’Alena, soit avec le Mercosur. Le résultat le plus important est que le modèle dynamique ne donne pas de gains en bien-être sensiblement différents de ceux obtenus avec l’autre modèle. Par ailleurs, bien que la différence soit minime, un modèle complètement dynamique peut produire des estimations de bien-être pour une zone commerciale préférentielle, inférieures à celles obtenues avec un modèle en statique comparative. On définit alors deux classes de modèles en statique comparative et l’on montre qu’il est nécessaire de les calibrer correctement sur la trajectoire d’équilibre en dynamique afin de produire des estimations qui ne soient pas biaisées par rapport à celles obtenues en dynamique. Classification JEL : F15 ; F17 ; C68 ; D58.

The accession negotiations of Belarus to the WTO are unusual since, due to its obligations in the Eurasian Economic Union, WTO accession is not expected to impact its tariffs or formerly substantial trade-distorting agricultural subsidies. Nonetheless, we estimate that WTO accession will increase welfare by 9.9% of consumption in Belarus. We show that inclusion of: (i) foreign direct investment; (ii) reduction in non-discriminatory barriers against services providers; and (iii) our model with imperfect competition and endogenous productivity effects together produce estimated gains eleven times larger than a model of perfect competition with only cross-border trade in services. Our analysis is enabled by our production of a data set on both discriminatory and non-discriminatory barriers in services and their ad valorem equivalents. Based on a new data set on labour productivity by sector and type of ownership, in our central model, we estimate that privatisation will increase welfare by 35.8% of consumption. We find substantial variance in the estimated gains from privatisation depending on model assumptions, but all the estimates of the impacts of privatisation indicate substantial welfare gains.

The effect of trade reform on growth will depend on a variety of complementary policies and institutions. In low income countries, the key complementary policies/institutions that need to be analyzed fall into the following major areas: (a) macro-economic, and especially exchange rate policy; (b) the operation of the market for labor, since the poor are often concentrated in the informal sector; (c) the operation of the markets for agriculture—which is both a major source of income and accounts for a large portion of the household expenditures of the poor; (d) access of the poor to trade related services—for example, credit, marketing, transportation; and (e) access to safety nets. There are of course other issues, such as governance, which are important here as well as in other reform efforts. What follows provides a “checklist” of questions and issues that can be considered in the design and pursuit of trade reform…

Most interesting results on the welfare effects of regional arrangements are ambiguous at a theoretical level. Many questions only have quantitative answers that are specific to the particular model and policy considered. Thus, to determine the impact of prospective regional arrangements governments often rely on a quantitative evaluation. Usually at the request of a government involved, we have implemented a number of computable general equilibrium (CGE) models to inform policy-makers. 1 We summarize the main conclusions we draw from these studies, focusing on applications in the Americas. These conclusions are drawn from a number of model variants, including: perfect and imperfect competition; comparative static, comparative steady-state and dynamic; small open economy and multi-region; and representative consumer and multi-household. Despite the fact that we have found many of these results mentioned below repeatedly in our numerical work, and frequently undertaken piecemeal and systematic sensitivity analysis to identify the source of the results, we characterize these conclusions as rules of thumb. 2 We acknowledge that there are modeling variants or parameter specifications where these rules of thumb may not hold. Rule 1: Countries Excluded from a PTA Almost Always Lose Beginning in the mid 1990’s, countries in Latin America have entered into a “spaghetti bowl” of Preferential Trading Arrangements (PTAs). Considering each agreement on a pair-wise basis, excluded countries almost always lose from such arrangements. The obvious explanation is that the partner countries have preferred access to the markets of the included countries, which reduces demand for the exports of excluded countries into the markets of the PTA. In Table 1 we collate some results to illustrate a number of points. These calculations are based on the 1998 tariff of Chile of 11%. With our central elasticities