Is Free Trade Good for the Environment?

This paper sets out a theory of 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 from the Global Environment Monitoring Project. We find international trade creates relatively small changes in pollution concentrations when it alters the composition, and hence the pollution intensity, of national output. Our estimates of the associated technique and scale effects created by trade imply a net reduction in pollution from these sources. Combining our estimates of scale, composition and technique effects yields a somewhat surprising conclusion: freer trade appears to be good for the environment. An earlier version of this paper was circulated under the title, “Trade and the Environment: Theory and Empirical Results,” (Aug. 1997). We would like to thank, without implicating, P. Beaudry, D. Green, H. Emery, G. Heal, K. Head, K. Scholz, J.McGregor, two anonymous referees and our co-editor, seminar participants at numerous universities, the NBER Summer Institute Workshop on Public Policy and the Environment, the NBER Trade, Resources, and the Environment conference, and the Research Institute for Economics and Business in Kobe, Japan. Financial support was provided by the SSRHC, the Hampton Fund, and the NSF. Correspondence: Antweiler: University of British Columbia, Faculty of Commerce, 2053 Main Mall, Vancouver, BC, V6T-1Z2, Copeland : University of British Columbia, Department of Economics, 997-1873 East Mall, Vancouver, BC, V6T 1Z1; Taylor: University of Wisconsin, Department of Economics, Social Science Bldg. 6448, 1180 Observatory Dr., Madison WI 53706-1393. Email: [email protected]; [email protected]; [email protected]