Why a tariff war may not decrease global CO2 emissions

It has been suggested that an intensified trade war between China and the US could reduce CO2 emissions associated with exports. We develop an export-greenfield-endogenous merger model, showing that significantly increased tariffs can enable domestic firms to undertake entry-deterring acquisitions. This forces foreign firms to remain exporters, which, in turn, leads to higher emissions. Strong competition policies and support for green technologies can help address this issue, resulting in lower emissions. Furthermore, we show that implementing an emissions trading system combined with a carbon border adjustment mechanism has effects comparable to those of increased tariffs.