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Is Trade Good or Bad for the Environment? Sorting Out the Causality

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Author Info
Jeffrey A. Frankel
Andrew K. Rose

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Abstract

What is the effect of trade on a country's environment, for a given level of GDP? Some have observed an apparent positive correlation between openness to trade and measures of environmental quality. But this could be due to endogeneity of trade, rather than causality. This paper uses exogenous determinants of trade geographical variables from the gravity model as instruments to isolate the effect of openness. The finding is that trade may indeed have a beneficial effect on three measures of air pollution. Statistical significance is lacking for Particulate Matter, but is moderate for NO2, and high for SO2. Results for broader environmental measures are not as encouraging, but one can at least say that there is little evidence that trade has the detrimental effect on the environment that the race-to-the-bottom theory would lead one to expect. The larger effect appears to come via income itself: our results generally support the environmental Kuznets curve, which says that growth harms the environment at low levels of income and helps at high levels, and to support the proposition that openness to trade accelerates the growth process.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9201.

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Date of creation: Sep 2002
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Handle: RePEc:nbr:nberwo:9201

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Find related papers by JEL classification:
Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
F1 - International Economics - - Trade

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