Environmental Regulation, International Trade, and Transboundary Pollution

It has often been argued that opening up the economy to increased international trade can transform a less developed economy into a developed economy. There is growing concern, however, about the environmental consequences of increased international trade. Typically, different countries have different environmental regulations and it is argued that the developed countries have more stringent environmental laws than do less developed (or developing) countries. It is argued that, aided by the free flow of goods and capital across borders, firms will therefore take advantage of lax environmental regulations in developing countries by migrating to those countries and turning them into “pollution havens.” Moreover, nations typically enact environmental laws unilaterally. Different levels of development, different kinds of technologies, and different environmental regulations all imply that pollution levels vary significantly across countries. As a result, pollution that is emitted in one country often ends up causing harm in other (neighboring) countries. This is known as “transboundary pollution.” Full cooperation between countries is difficult to achieve because in this situation countries share pollution abatement costs unequally and there is always an incentive to free-ride. One needs to examine possible alternative mechanisms.