It is often argued that the case for free trade is weakened where environmental considerations are important. Some even claim that free trade will promote environmental dumping or a competitive race to the bottom for environmental standards. Against this, many who favour free trade fear that allowing inferences with trade on environmental grounds will provide a cover for straight protectionist interests, whose true motivations will not be green.
Concerning these questions, Bhagwati and Srinivasan (1994) in a model from the standard trade theory family, conclude that there is no case for interferences with free trade if optimal Pigou pollution taxes are charged, and either a country is small, or efficiency for the whole world is required. In particular they argue that diversity of environmental tastes or environmental situations form a rational bases for comparative advantage and trade.
The present paper looks at the case where free trade needs negotiated cooperation, because countries are large, or because unilateral free trade is not the best strategy for the individual government for any one of several reasons. It is shown that it is rational for governments to negotiate jointly both classic trade-affecting instruments, such as tariffs, and environmental regulations which affect trade, even if no trans-national environmental effects are involved. The Bhagwati and Srinivasan conclusion that diversity of environmental situation should influence trade remains correct.