Research
(Job Market Paper)
This paper investigates the relative importance of environmental regulations in shaping trade patterns of manufactured goods with particular reference to the OECD countries. I introduce environmental regulation and factor endowment differentials into a multi-country general equilibrium model of bilateral trade with random productivities and trade barriers along the line of Eaton and Kortum (2002) and Alvarez and Lucas (2007). In this framework, comparative advantage is determined by an interaction of both country and industry characteristics. I calibrate the model for the OECD countries by estimating trade barriers and productivity parameters so as to match bilateral manufacturing trade shares in year 2000. I show that the calibrated model is capable of generating home trade shares and specialization patterns in pollution-intensive and clean manufacturing goods that are consistent with the data. Next, the model is used to analyze trade and pollution impacts of two types of environmental harmonization policies and trade liberalizations. I find that harmonization of environmental taxes across the OECD countries is predicted to be more effective than the harmonization of pollution quotas in reducing aggregate pollution while under both policies trade impacts are relatively small. I also predict that full trade liberalizations not only have substantial impact on trade but also help to lower OECD pollution emissions by 32%, on average.
There is growing concern over the possible impact of free international trade on global environmental quality while there are various international attempts to control global pollution. In this paper, I theoretically investigate the effects of trade liberalization on the level and concentration of world pollution in presence of endogenous and strategic environmental policy-making by involved countries. I study a variation of Copeland and Taylor (1995) two-country (North-South) Heckscher-Ohlin model of trade with global pollution by incorporating an environment where the incentive to trade is based on differential factor endowments rather than differential environmental standards. I find that it is possible to obtain a trading equilibrium where the capital-abundant North specializes in the relatively more polluting goods just as the empirical findings suggest and in contrast to the predictions of the pollution haven hypothesis. I also show that free trade in goods helps reduce global pollution when factor prices do not equalize and in this case, allowing international trade of emission permits between North and South is not beneficial in reducing global pollution.