Joint production of agricultural and environmental 'outputs' means that agri-environmental policies aimed at internalising domestic externalities may affect trade flows and world prices and may impose burdens on a country's trading partners, setting the scene for conflict in the WTO. The trade burden may be exacerbated by inappropriately designed policies skewed towards protectionist goals at the cost of environmental effectiveness. The paper develops a conceptual framework for assessing the tradeoffs (and synergies) between agri-environmental and trade policies. The analysis leads to the conclusion that correcting for domestic externalities does not always result in net gains in global welfare, and that the gains (or losses) are not shared equally among trading partners. It is argued that agri-environmental policies classified as 'trade-correcting' should continue to enjoy Green Box status under the proviso that these policies pass a number of tests establishing their environmental efficiency, cost-effectiveness and trade compatibility.
