Is Free Trade Good for the Environment

This paper investigates how openness to international goods markets affects pol-lution concentrations. We develop a theoretical model to divide trade’s impact on pollution into scale, technique, and composition effects and then examine this theory using data on sulfur dioxide concentrations. We find international trade creates relatively small changes in pollution concentrations when it alters the composition of national output. Estimates of the trade-induced technique and scale effects imply a net reduction in pollution from these sources. Combining our estimates of all three effects yields a somewhat surprising conclusion: freer trade appears to be good for the environment. (JEL F11, Q25) The debate over the role international trade plays in determining environmental outcomes has at times generated more heat than light. Theoretical work has been successful in identi-fying a series of hypotheses linking openness to trade and environmental quality, but the empir-ical verification of these hypotheses has seri-ously lagged. Foremost among these is the pollution haven hypothesis that suggests rela-tively low-income developing countries will be made dirtier with trade. Its natural alternative, the simple factor endowment hypothesis, sug-gests that dirty capital-intensive processes will relocate to the relatively capital-abundant de-veloped countries with trade. Empirical work b