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Trade and the Environment with Heterogeneous Firms

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  • Bajona, Claustre
  • Pierce, Andrea
  • Missios, Paul

Abstract

As the world is becoming more globalized and international trade agreements proliferate, there is a rising concern that trade liberalization may be detrimental to the environment. In a seminal paper Antweiler, Copeland, and Taylor (2001) identify three channels through which may trade affect the environment: Reducing trade barriers increases output (scale effect), abatement expenditures (technique effect), and changes the composition of goods produced (composition effect). All these channels operate at the country level and/or the industry levels. In this paper we focus on the effect that trade liberalization has on the pollution behavior of individual firms. We develop a theoretical framework that is able to account for differences in pollution behavior across firms within the same industry by embedding a model of trade with heterogeneous firms into the classical literature of trade and the environment following Antweiler, Copeland and Taylor (2001). The model shows that firm heterogeneity is important in determining the economy’s aggregate behavior. In particular, more productive firms are less pollution intensive and are more likely to be exporters than less productive firms. The model identifies a new channel through which trade affects the environment: a “selection effect”. International trade causes the less productive firms within an industry to exit. Since less productive firms are more pollution intensive, through this channel international trade reduces pollution intensity by “selecting” these firms out of the industry.

Suggested Citation

  • Bajona, Claustre & Pierce, Andrea & Missios, Paul, 2010. "Trade and the Environment with Heterogeneous Firms," MPRA Paper 71405, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:71405
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    References listed on IDEAS

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    1. Nina Pavcnik, 2002. "Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(1), pages 245-276.
    2. John Baldwin & Wulong Gu, 2009. "The Impact of Trade on Plant Scale, Production-Run Length and Diversification," NBER Chapters, in: Producer Dynamics: New Evidence from Micro Data, pages 557-592, National Bureau of Economic Research, Inc.
    3. Shadbegian Ronald J & Gray Wayne B, 2003. "What Determines Environmental Performance at Paper Mills? The Roles of Abatement Spending, Regulation, and Efficiency," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-20, November.
    4. Li, Zhe, 2008. "Productivity Dispersion across Plants, Emission Abatement, and Environmental Policy," MPRA Paper 9564, University Library of Munich, Germany.
    5. Werner Antweiler & Brian R. Copeland & M. Scott Taylor, 2001. "Is Free Trade Good for the Environment?," American Economic Review, American Economic Association, vol. 91(4), pages 877-908, September.
    6. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    7. Mazzanti, Massimiliano & Zoboli, Roberto, 2009. "Environmental efficiency and labour productivity: Trade-off or joint dynamics? A theoretical investigation and empirical evidence from Italy using NAMEA," Ecological Economics, Elsevier, vol. 68(4), pages 1182-1194, February.
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    Citations

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    Cited by:

    1. Joseph S. Shapiro & Reed Walker, 2018. "Why Is Pollution from US Manufacturing Declining? The Roles of Environmental Regulation, Productivity, and Trade," American Economic Review, American Economic Association, vol. 108(12), pages 3814-3854, December.
    2. Jing Cao & Larry D. Qiu & Mohan Zhou, 2016. "Who invests more in advanced abatement technology? Theory and evidence," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 49(2), pages 637-662, May.
    3. Chen, Fenglong & Wang, Meichang & Pu, Zhengning, 2022. "The impact of technological innovation on air pollution: Firm-level evidence from China," Technological Forecasting and Social Change, Elsevier, vol. 177(C).
    4. Shapiro, Joseph S. & Walker, Reed, 2015. "Why is Pollution from U.S. Manufacturing Declining? The Roles of Trade, Regulation, Productivity, and Preferences," IZA Discussion Papers 8789, Institute of Labor Economics (IZA).
    5. Juin-Jen Chang & Yi-Ling Cheng & Shin-Kun Peng, 2019. "Trade, Emissions, and Regulatory (Non-)Compliance: Implications of Firm Heterogeneity," IEAS Working Paper : academic research 19-A005, Institute of Economics, Academia Sinica, Taipei, Taiwan.
    6. Yoshifumi Konishi & Nori Tarui, 2013. "Intra-Industry Reallocations and Long-run Impacts of Environmental Regulations," Working Papers 201307, University of Hawaii at Manoa, Department of Economics.
    7. Juin‐Jen Chang & Yi‐Ling Cheng & Shin‐Kun Peng, 2022. "Trade, emissions, and regulatory (non‐)compliance: Implications of firm heterogeneity," Review of International Economics, Wiley Blackwell, vol. 30(1), pages 57-82, February.
    8. Rodrigue, Joel & Soumonni, Omolola, 2014. "Deforestation, foreign demand and export dynamics in Indonesia," Journal of International Economics, Elsevier, vol. 93(2), pages 316-338.

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    More about this item

    Keywords

    trade; environment; heterogeneous firms; Melitz model; productivity; pollution;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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