Improving the Environment for a Greener Future
New Horizons in Environmental Economics series
Chapter 7: Trade-induced Technological Change
INTRODUCTION Technological progress allows standards of living in the world to increase. International trade plays an important role in technological change (for example, Grossman and Helpman, 1999).1 This study extends the traditional measures of technological change to take account of the production of undesirable byproducts (that is, environmental pollution), which may lead to decreases in the level of human welfare. Subsequently, we test whether there is significant trade-induced technological progress, and whether international trade is able to encourage the efficient reduction of the negative externalities as well as faster traditional technological progress. The environmental impact of trade liberalization is one of the most important questions in trade policy in the past 10 years (Copeland and Taylor, 2005). Previous studies have ignored the technological effects induced by trade on the environment. Trade can affect the environment in two ways: terms of trade effect and trade-induced technological effect (Maria and Smulders, 2004). Several empirical studies on trade and the environment support the pollution haven hypothesis, that is, that international trade allows developed countries to clean up their environment at the expense of those in developing countries.2 These studies apply the terms of trade effect argument, that is, that environmental regulations are relatively weak in developing countries, and these countries specialize in the production (or export) of dirty goods. However, if production techniques improve because of trade, then a greater share of dirty goods production might be associated with lower pollution levels (Copeland and Taylor, 2005).3 In the literature, insufficient evidence...
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