Is free trade in the interest of exporting countries when there is ecological dumping?

Given conditions of oligopolistic competition, the coordinated ban of direct export-promoting policies (e.g. in the EU or by GATT) increases the income of exporting countries. However, in the presence of environmental distortions, free trade can lead to ecological dumping in exporting countries. The question arises if free trade is still in the interest of exporting countries. We show that welfare-maximizing governments of exporting countries prefer free trade even if countries subsidize their local industries indirectly via ecological dumping. The existence of further national policy instruments does not make free trade agreements obsolete. (C) 1997 Elsevier Science S.A.