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This paper investigates how openness to international goods markets affects pollution concentrations. We develop a theoretical model to divide trade's impact on pollution into scale, technique, and composition effects and then examine this theory using data on sulfur dioxide concentrations. We find international trade creates relatively small changes in pollution concentrations when it alters the composition of national output. Estimates of the trade-induced technique and scale effects imply a net reduction in pollution from these sources. Combining our estimates of all three effects yields a somewhat surprising conclusion: freer trade appears to be good for the environment. (JEL F 11, Q25)
The debate over the role international trade plays in determining environmental outcomes has at times generated more heat than light. Theoretical work has been successful in identifying a series of hypotheses linking openness to trade and environmental quality, but the empirical verification of these hypotheses has seriously lagged. Foremost among these is the pollution haven hypothesis that suggests relatively low-income developing countries will be made dirtier with trade. Its natural alternative, the simple factor endowment hypothesis, suggests that dirty capital-intensive processes will relocate to the relatively capital-abundant developed countries with trade. Empirical work by James A. Tobey (1990), Gene M. Grossman and Alan B. Krueger (1993), and Adam B. Jaffe et al. (1995) cast serious doubt on the strength of the simple pollution haven hypothesis because they find that trade flows are primarily determined by factor endowment considerations and apparently not by differences in pollution abatement costs. Does this mean that trade has no effect on the environment?
This paper investigates how "openness" to international markets affects pollution levels to assess the environmental consequences of international trade. We develop a theoretical model to divide trade's impact on pollution into scale, technique, and composition effects and then examine this theory using data on sulfur dioxide concentrations from the Global Environment Monitoring Project. The decomposition of trade's effect into scale, technique, and composition effects has proven useful in other contexts [see Grossman and Krueger (1993); Copeland and Taylor (1994, 1995)] and here we move one step forward to provide estimates of their magnitude.
IV. Conclusions
This paper investigates how openness to trading opportunities affects pollution concentrations. We started with a theoretical specification highlighting scale, technique,...