Free trade and the environment-development system

We develop a simulation model to analyze the trade-environment-development system that contains a number of important advances over the earlier and current theoretical models. Our model, like other models, has an income-induced pollution policy, allows country factor endowments to influence trade patterns, and allows production factors to be mobile intersectorally. Unlike other theoretical models, our model treats pollution stemming from both production and consumption in a way that does justice to empirical observations. We model pollution policy explicitly as an abatement investment, thus effectively allowing for differences in pollution-intensive technology across countries. In addition, we allow for an internationally traded intermediate good (a natural resource). As a result of this novel approach, we find that (1) the benefits of trade (i) can be either positive or negative, and (ii) depend on country endowments; and (2) the pollution effects of trade are closely tied to the benefits of trade. Our model generally shows higher pollution levels under free trade than autarky; however, our results do not support the pollution haven hypothesis (i.e. trade causes less pollution in developed countries and more pollution in developing ones). Some developing countries produce more of the pollution-intensive good, but ultimately consume less pollution under autarky because they have higher per capita income and, thus, invest more heavily in environmental upgrading under autarky. (C) 2001 Elsevier Science B.V. All rights reserved.