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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.