The Effects of Trade Liberalization of the Environment: An Empirical Study

We seek to contribute to the emerging economic theory on trade, the environment and development. Using panel data across countries, econometric models are estimated to predict the effects of openness on organic water pollutant (BOD) and carbon dioxide (CO2) emissions. Results indicate that freer trade significantly increases emissions of both pollutants, thus reducing environmental quality. Moreover, the panel nature of the data allows heterogeneity across countries to be controlled, so that comparisons can be made of how different national characteristics influence the environmental impact of freer trade. By testing the effects of democratic versus autocratic governance, it is found that while greater democracy can induce significant reductions in BOD emissions as openness increases, it may also lead to increased CO2 levels. Meanwhile, by testing for and failing to reject the pollution haven hypothesis, it is suggested that environmental gains from openness in relatively rich countries may be coming at the expense of environmental degradation in poorer countries.