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Abstract

Despite the merits of eco-labeling as a consumer information and market-based environmental policy alternative, the promise that green consumerism holds in encouraging environmentally conscious production decisions also raises concerns over whether eco-labeling deters the market access of developing countries in high income countries, and e®ectively serves the role of a non-tari® barrier to trade. In this paper, we disentangle the role of eco-labeling in world trade, and show that (i) imperfectly informed consumption decision making in the absence of labeling has a pro-trade bias; (ii) eco-labeling can guide green consumption and production decisions to reach the e±ciency frontier, provided that (iii) the choice of eco-labeling standards in the two countries are not subject to coordination failure. Taking labeling standards as endogenously determined by market share rivalry between the two countries, we show that strategic use of eco-labeling gives rise to opposing incentives, and results in a \tari®-like" outcome that further reduces the volume of trade. Speci¯cally, net importers deviate from the e±ciency frontier by choosing labeling standards that are too high, while net exporters choose labeling standards that are too low.

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