Working Paper: NBER ID: w5898
Authors: Brian R. Copeland; M. Scott Taylor
Abstract: This paper examines the interaction between relative factor abundance and income-induced policy differences in determining the pattern of trade and the effect of trade liberalization on pollution. If a rich and capital abundant North trades with a poor and labor abundant South, then free trade lowers world pollution. Trade shifts the production of pollution intensive industries to the capital abundant North despite its stricter pollution regulations. Pollution levels rise in the North while those in the South fall. These results can be reversed however if the North-South income gap is "too large," in this case, the pattern of trade is driven by income-induced pollution policy differences across countries. Capital mobility may raise or lower world pollution depending on the pattern of trade.
Keywords: Trade; Capital Mobility; Environment; Pollution; International Trade
JEL Codes: F18; Q56
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| North (capital abundant) trades with South (labor abundant) (F16) | Free trade lowers world pollution levels (F64) |
| Pollution-intensive industries relocating to North (Q52) | Increase in pollution levels in North (Q53) |
| Pollution-intensive industries relocating to North (Q52) | Decrease in pollution levels in South (Q53) |
| Income gap between North and South is too large (R12) | Income-induced policy differences dictate trade patterns (F16) |
| Factor abundance determines trade (F14) | Capital mobility increases pollution due to shift of production to South (F64) |
| Income differences drive trade patterns (F16) | Capital mobility leads to reduction in pollution (F64) |