International trade and the environment: Assessing the linkages

This dissertation is in three essays. The first analyses the interdependencies of comparative advantage and transboundary pollution in a dynamic Ricardian framework. Pollution is modeled as a negative externality on the production side. It is shown how cross-national differences in pollution intensity can give rise to comparative advantage and under what conditions the emerging trade pattern combined with transboundary pollution results in decreasing productivity and global welfare losses. The theoretical findings are put in perspective with a discussion of the role of trade in actual cases of transboundary pollution. The second essay is an empirical investigation of whether and to what extent trade liberalization combined with lax environmental regulation induces developing countries to specialize in pollution-intensive industries. Guided by recent theoretical work, the analysis accommodates industry- and country-specific differences. The results provide no evidence that trade liberalization contributes in any significant way to the specialization of developing countries in dirty industries. In the third essay, a multilateral computable general equilibrium (CGE) model combined with environmental sub-models simulates the environmental effects of trade policy changes among member regions of the Asia-Pacific Economic Cooperation (APEC) group. Environmental policy scenarios range from command-and-control abatement requirements to market-based instruments. The simulations show that even radical changes in trade barriers have only a small effect on pollution, while lower environmental standards do not necessarily result in increased pollution when trade is liberalized. Moreover, trade restrictions are both less effective and less efficient than environmental regulation in curbing pollution. Despite the very different methodologies chosen in the three essays, the environmental effects of trade liberalization appear to be small in many cases and can even be opposite in direction to what is widely believed. The results suggest that the benefits from international trade need not be sacrificed in order to solve environmental problems.