Intraindustry Trade and the Environment: Is There a Selection Effect?

This paper develops a pollution model of trade in differentiated goods. Our analyses show the following: first, the production of dirty, differentiated goods is explicitly shown to lead to three environmental effects: scale, technique and selection effects. Second, we present a comparative statics analysis of the effects of a change in the stringency of environmental policy on the firm’s level of abatement, the price level, the consumption level, the scale of production and the number of firms in the economy. Third, we examine the relationship between openness to trade and the environment. The impact of intra-industry trade is shown to be the sum of the scale, technique and selection effects. Fourth, we undertake an empirical analysis to test the integrated theoretical predictions of the pollution models of intra-industry as wells as inter-industry trade. We use panel-data from 23 OECD countries, for the years 1995-2004. Statistical evidence suggests the following. First, the emissions of sulfur oxides, nitrogen oxides and volatile organic compounds are increasing in the selection, scale, technique and composition effects. Second, the selection effect is an important and relevant variable in the estimation of the full impact of international trade on emissions level; its omission may lead to biased estimations. Third, results conform to the realizations of data generated by the framework of intra-industry as well as inter-industry trade. Fourth, greater openness to trade or increased trade liberalization leads to a decrease in emissions level.