Alison Butler 445subsidy. Environmental regulations may change international trade, but enhance
social welfare by removing this subsidy. The optimal amount of environmental
protection, however, can differ significantly across countries because of differences
in preferences, income and assimilative capacities.
One important concern is that countries will use environmental policies as an
excuse to establish protectionist policies. As environmental protection and
environmental use take on a more transnational nature and the assimilative capacity
is reduced worldwide, new agreements will have to be designed to both protect
scarce resources and protect countries from being discriminated against because
of how they choose to use their environmental endowments domestically. As the
recent GATT report suggested, however, it is possible to protect the environment
without distorting trade flows. Thus, free trade and environmental policy are not
mutually exclusive but can work together to encourage both economic growth
and environmental quality worldwide.