Costly pollution abatement, competitiveness and plant location decisions

The NAFTA debate included assertions that were used as arguments against trade and investment liberalization. (1) Trade liberalization increases production sensitivity to environmental restrictions (‘environmental dumping’?). (2) Investment liberalization, leading to multinational firms, similarly increases the production and welfare response to costly environmental restrictions. I find that: (1) Trade liberalization increases production sensitivity to costly environmental restrictions, but arguments against liberal trade on welfare grounds do not follow. (2) Multinationals do not increase the production-reallocation effect caused by environmental restrictions or regulations. In addition, I find a great difference between restrictions that fall on fixed costs and restrictions that fall on marginal costs.