Does trade liberalization harm the environment? A new test

Some believe that relatively lenient environmental standards give developing countries a comparative advantage in pollution-intensive goods. Thus, freer trade will harm their environment. This paper brings together the literature on openness and growth, and on the environmental Kuznet's curve, to demonstrate that the opposite may be true. A simultaneous-equations system is derived which incorporates multiple effects of trade liberalization on the environment. Estimation using pooled provincial-data on Chinese water pollution, suggests that freer trade aggravates environmental damage via the terms of trade, but mitigates it via income growth. Simulations suggest that the net effect in China was beneficial.