IPD AI Insights

Trade and the Environment in Developing Economies

10/10/2003
Working Paper
Global Governance

In this paper we present a survey of the literature that studies the interaction between international trade, capital mobility, and environmental quality. Our focus is on three main issues relevant to developing countries. First we evaluate whether trade moves a country's growth path in a direction that systematically favors or harms various aspects of environmental quality. For this purpose, we critically evaluate the pollution haven hypothesis. We draw attention to sources of comparative advantage usually more important than pollution policy. And we also discuss the potential changes in environmental policy that accompany freer trade.

Secondly, we distinguish between the interaction of natural resources and international trade, and the interaction of industrial pollution and international trade. We argue that there are fundamental differences here. In the case of industrial pollution the increase in income from an increase in trade can bring about lower pollution in the long run. On the other hand, in the case of natural resources, freer trade can lead to a deterioration of resource stocks, and a decline in long run real income. In the case of natural resources, there is a distinct possibility that trade can contribute to a downward ecological spiral.

The third and final issue we discuss is the link between trade policies and environmental concerns. We evaluate the use of environmental policy as a means to support domestic industry. We also study motives for linkage arising from the presence of global environmental problems. Finally, several recent trade disputes (such as the tuna/porpoise and shrimp/turtle cases) involve a rich country attempting to make imports contingent on the environmental practices used in harvesting renewable resources. We discuss the implications of current trade rules on these issues for developing countries.