Re-exploring the Trade and Environment Nexus Through the Diffusion of Pollution

Abstract

Some scholars argue that trade liberalization results in the ‘outsourcing’ of pollution to pollution havens, and this may explain the existence of the environmental Kuznets curve (EKC) in industrialized countries. Others claim that trade liberalization effectively lessens pollution by allowing a more efficient use of resources and the diffusion of clean technologies. In part because these theories generate similar predictions for industrialized countries, empirical studies have not provided conclusive evidence for either argument. To identify the role of trade, I draw on the insights of the diffusion literature and estimate a spatial regression model where trade operates as the mechanism through which pollution shifts from country to country. Using the case of per-capita carbon dioxide $(\hbox {CO}_2)$ emissions, I find that once spatial correlation is accounted for, the EKC disappears. The effect is even stronger when looking at trade from developing countries only, providing support for the pollution haven hypothesis. I also show that the $\hbox {CO}_2$ trajectory of developing countries goes above the one previously followed by industrialized countries. This suggests that developing countries carry on an additional carbon burden above the one that would be obtained in the absence of trade. These findings contribute to the literature on the non-economic effects of trade and the constraints of domestic policies when the costs of trade are low.