Environmental regulations and international trade: A quantitative economic analysis of world pollution emissions

We develop and quantitatively evaluate a general equilibrium trade model with pollution as a byproduct of production to study the interactions between international trade, the environment, and environmental regulations. Our analysis suggests that environmental regulations provide a source of comparative advantage, but we fail to find evidence that reducing trade barriers causes pollution-intensive industries to concentrate in countries with weak environmental regulation stringency. The reason is that as a crucial determinant of pollution emissions and abatement, environmental regulations are weak in determining international specializations. By comparing environmental regulation stringency with other determinants of international trade, we identify productivity and trade costs as being the major forces that suppress the influence of environmental regulations on deciding international production and trade. Furthermore, we incorporate endogenous environmental policy into our framework and explore how environmental policy responds to trade liberalization. We allow for strategic environmental policy, but find its use as a substitute for tariffs to be quite limited. We also evaluate various forces that determine the overall impacts of international trade on worldwide pollution emissions.