Improving the Environment for a Greener Future
New Horizons in Environmental Economics series
Chapter 12: Trade Liberalization, Technology, and the Environment
INTRODUCTION Trade liberalization has the potential to contribute to overall improvements in environmental performance (Frankel and Rose, 2002; Copeland and Taylor, 2004). At the same time, countries might lose a comparative advantage in trade as a result of the countries’ stringent environmental regulations. Earlier empirical investigations tend to fail to find a significant and convincing link between environmental outcomes and freer trade. Following Antweiler et al. (2001) and Copeland and Taylor (2004), we model trade effects of environmental outcomes. Furthermore, we provide some answers to the following questions: how does free trade affect the environment and how do environmental factors affect trade? Antweiler et al. respond to the first question with reference to sulfur dioxide (SO2). They develop a theoretical model to divide the impact of trade on pollution into scale, technique and composition effects. The second question deals with the following proposition: if stringent environmental regulations are a major source of comparative disadvantage, then countries with stringent environmental regulations will lose a comparative advantage in trade (for example, Baumol and Oates, 1988; Copeland and Taylor, 1994). One group of studies treated the trade variable as exogenously determined, while another group treated the level of environmental regulation as exogenously determined. Thus, both groups implicitly assumed away the possibility of interaction between trade and regulation. The assumption of exogeneity might be critical if environmental outputs are determined by trade intensity, or stringent environmental regulations are a major source of comparative disadvantage. In this study, we relax the exogeneity assumption and consider...
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