Is Free Trade Good for the Environment?

By WERNER ANTWEILER, BRIAN R. COPELAND, AND M. SCOTT TAYLOR*

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-
* Antweiler: Faculty of Commerce, University of British
Columbia, 2053 Main Mall, Vancouver, BC, V6T 1Z2
Canada. (e-mail: werner@economics.ca); Copeland: De-
partment of Economics, University of British Columbia,
997-1873 East Mall, Vancouver, BC, V6T 1Z1 Canada
(e-mail: copeland@econ.ubc.ca); Taylor: Department of
Economics, Social Science Building 6448, University of
Wisconsin, 1180 Observatory Drive, Madison, WI 53706
(e-mail: staylor@ssc.wisc.edu). An earlier version of this
paper was circulated under the title, “Trade and the Envi-
ronment: Theory and Empirical Results” (August 1997).
We express our thanks to, without implicating, P. Beaudry,
D. Green, H. Emery, G. Heal, K. Head, K. Scholz, J.
McGregor, two anonymous referees, seminar participants at
numerous universities, the NBER Summer Institute Work-
shop on Public Policy and the Environment, the NBER
Trade, Resources, and the Environment conference, and the
Research Institute for Economics and Business in Kobe,
Japan. Financial support was provided by the SSRHC, the
Hampton Fund, and the NSF.
877
veloped countries with trade. Empirical work by
James A. Tobey (1990), Gene M. Grossman and
Alan B. Krueger (1993), and Adam B. Jaffe et
al. (1995) cast serious doubt on the strength of
the simple pollution haven hypothesis because
they find that trade flows are primarily deter-
mined by factor endowment considerations and
apparently not by differences in pollution abate-
ment costs. Does this mean that trade has no
effect on the environment?
This paper investigates how “openness” to
international markets affects pollution levels to
assess the environmental consequences of inter-
national trade. We develop a theoretical model
to divide trade’s impact on pollution into scale,
technique, and composition effects and then ex-
amine this theory using data on sulfur dioxide
concentrations from the Global Environment
Monitoring Project. The decomposition of
trade’s effect into scale, technique, and compo-
sition effects has proven useful in other contexts
[see Grossman and Krueger (1993); Copeland
and Taylor (1994, 1995)] and here we move one
step forward to provide estimates of their
magnitude.
We find that international trade creates rela-
tively small changes in sulfur dioxide concen-
trations when it alters the composition, and
hence the pollution intensity, of national output.
Combining this result with our estimates of
scale and technique effects yields a somewhat
surprising conclusion: if trade liberalization
878 THE AMERICAN ECONOMIC REVIEW
raises GDP per person by 1 percent, then pol-
lution concentrations fall by about 1 percent.
Free trade is good for the environment.1
We obtain this conclusion by estimating a very
simple model highlighting the interaction of factor
endowments and income differences in determin-
ing the pattern of trade. Our approach, although
relatively straightforward, is novel in four re-
spects. First, by exploiting the panel structure of
our data set, we are able to distinguish empirically
between the negative environmental conse-
quences of scalar increases in economic activity—
the scale effect—and the positive environmental
consequences of increases in income that call for
cleaner production methods—the technique ef-
fect. This distinction is important for many rea-
sons.2 Grossman and Krueger (1993) interpret
their hump-shaped “Kuznets curve” as reflecting
the relative strength of scale versus technique ef-
fects, but they do not provide separate estimates of
their magnitude. Our estimates indicate that a 1-
percent increase in the scale of economic activity
raises pollution concentrations by 0.25 to 0.5 per-
cent for an average country in our sample, but the
accompanying increase in income drives concen-
trations down by 1.25–1.5 percent via a technique
effect.
Second, we devise a method for determining
how trade-induced changes in the composition
of output affect pollution concentrations. Many
empirical studies include some measure of
openness to capture the impact trade has in
altering the composition (and hence the clean-
liness) of national output, but there is very little
reason to believe that openness affects the com-
position of output in all countries similarly.
Both the pollution haven hypothesis and the
factor endowment hypothesis predict that open-
ness to trade will alter the composition of na-
tional output in a manner that depends on a
nation’s comparative advantage.
1
Free trade appears to lower sulfur dioxide concentra-
tions for an average country in our sample, but may of
course worsen the environment through other channels. Our
evidence is specific to sulfur dioxide; however, sulfur diox-
ide emissions are highly correlated with other airborne
emissions.
2
For example, income transfers across countries raise
national income but not output, whereas foreign direct in-
vestment raises output more than national income. To eval-
uate the environmental consequences of either we need
separate estimates of technique and scale effects.
SEPTEMBER 2001
For example, under the pollution haven hy-
pothesis, poor countries get dirtier with trade,
whereas rich countries get cleaner.3 As a result,
simply adding openness to trade as an additional
explanatory variable for pollution (across a
panel of both rich and poor countries) is un-
likely to be fruitful. Instead we look for trade’s
effect by conditioning on country characteris-
tics. We find that openness conditioned on
country characteristics has a highly significant,
but relatively small, impact on pollution.
Third, we show how to combine economic
theory with our estimates of scale, composition,
and technique effects to arrive at an assessment
of the environmental impact of freer trade.
Grossman and Krueger’s influential study of
NAFTA presented an argument based on the
relative strength of these same three effects, but
their estimate of the composition effect of trade
was obtained from methods and data unrelated
to their complementary work estimating the rel-
ative strength of scale and technique effects.
Moreover, their evidence on composition ef-
fects was specific to the situation of Mexico.
Here we estimate all three effects jointly on a
data set that includes over 40 developed and
developing countries.
Finally, our approach forces us to distinguish
between the pollution consequences of income
growth brought about by increased openness
from those created by capital accumulation or
technological progress. We find that income
gains brought about by further trade or neutral
technological progress tend to lower pollution,
whereas income gains brought about by capital
accumulation raise pollution. The key differ-
ence is that capital accumulation necessarily
favors the production of pollution-intensive
goods, whereas neutral technological progress
and further trade do not. One immediate impli-
cation of this finding is that the pollution con-
sequences of economic growth are dependent
on the underlying source of growth.4
3
That is, the composition effect of trade for poor coun-
tries makes them dirtier, whereas the composition effect for
rich countries makes them cleaner. The full effect of trade
may be positive even for poor countries, depending on the
strength of the technique and scale effects. See, for example,
Proposition 2.
4
Another more speculative implication of our results is
that pollution concentrations should at first rise and then fall
VOL. 91 NO. 4 ANTWEILER ET AL.: IS FREE TRADE GOOD FOR THE ENVIRONMENT?
The theoretical literature on trade and the
environment contains many papers in which
pollution policy differences across countries
drive pollution-intensive industries to countries
with lax regulations.5 One criticism of these
papers is that, although they are successful in
predicting trade patterns in a world where pol-
icy is fixed and unresponsive, their results may
be a highly misleading guide to policy in a
world where environmental protection responds
endogenously to changing conditions.
Empirical work by Grossman and Krueger
(1993) suggests that it is important to allow
policy to change endogenously with income
levels, and in our earlier work (Copeland and
Taylor, 1994, 1995) we investigated how income-
induced differences in pollution policy deter-
mine trade patterns. Although this earlier work
produced several insights, it ignored the role
factor abundance could play in determining
trade patterns.
In contrast, the model we develop here allows
income differences and factor abundance differ-
ences to jointly determine trade patterns. The
model contains as one limiting case the canon-
ical Heckscher–Ohlin–Samuelson (HOS) model
of international trade and as another limiting
case a simple pollution haven model. Consider-
ing these two motivations for trade is especially
important in an empirical investigation because
many of the most polluting industries are also
highly capital intensive.6 Moreover, it allows us
to examine whether changes in dirty goods pro-
duction brought about by trade is better ex-
plained by factor abundance motives or by
pollution haven motives arising from an un-
equal distribution of world income.
The empirical literature in this area has pro-
gressed in three distinct ways. One influential
group of studies asks: “How does economic
growth affect the environment?”. This literature
with increases in income per capita, if capital accumulation
becomes a less important source of growth as development
proceeds.
5
For example, Rüdiger Pethig (1976), Horst Siebert et
al. (1980), and Martin C. McGuire (1982) all present models
where the costs of pollution-intensive goods are lower in the
region with no environmental policy.
6
See Muthukumara Mani and David Wheeler (1997)
and Werner Antweiler et al. (1998), Appendix Section B.1,
for evidence linking capital intensity and pollution intensity.
879
was initiated by early work by Grossman and
Krueger (1993, 1995) and has since produced a
sizable and fast growing empirical literature
examining what has come to be known as the
“Environmental Kuznets curve.”7 Many of
these studies also investigate the role of trade by
adding a measure of openness as an additional
regressor. The defining feature of this literature
is its lack of explicit theory. Although the re-
sults from these studies are often interpreted
within the context of scale, composition, and
technique effects, they do not provide separate
estimates of their magnitudes.
Our work is most closely related to this
branch of the literature, but differs in that we
employ an explicit theoretical model to guide
our estimation; we present separate estimates of
scale, composition, and technique elasticities;
and we provide a methodology for adding up
these effects to assess the environmental impli-
cations of freer trade. Despite the fact that this
earlier work lacks a formal theory, some of their
conclusions receive support in our work. Most
notably, Grossman and Krueger’s (1993) study
of NAFTA had at its core the argument that
technique effects offset scale effects—at least
for Mexico—and that the composition effect
created by further United States–Mexico trade
was likely to be driven more by factor endow-
ment considerations than by differences in en-
vironmental regulation. Our work supports
these conclusions: income effects appear to be
economically and statistically significant, and
the trade-induced composition effects are not
driven by differences in pollution regulations.
There is a second group of studies examining
the link between the costs of pollution abate-
ment cost and trade flows. This approach was
pioneered by Tobey (1990) and was employed
in the context of the NAFTA agreement by
Grossman and Krueger (1993).8 This branch of
the literature asks a slightly different question:
“How do environmental regulations affect trade
flows?”. Nevertheless some of their results are
also relevant to our work. For example, a com-
mon result from these studies is that measures
7
Some authors refer to it as the Grossman–Krueger
Kuznets Curve. Other early contributions to this literature
are Thomas M. Selden and Daqing Song (1994) and Nemat
Shafik (1994).
8
Arik Levinson (1996) reviews this work.
880 THE AMERICAN ECONOMIC REVIEW
of environmental stringency have little effect on
trade flows. This result immediately casts doubt
on the pollution haven hypothesis, which holds
that trade in dirty goods primarily responds to
cross-country differences in regulations. Al-
though our work is quite different in approach
and method, we too find little support for the
pollution haven hypothesis. We do not infer
from this, however, that the cost of regulations
does not matter to trade flows; instead, we sug-
gest it is because other offsetting factors more
than compensate for the costs of tight regulation
in developed economies.
Finally, there are those studies that employ
either the U.S. Toxic Release Inventory, U.S.
emission intensity data, or simple rules to cate-
gorize goods industries as dirty or clean, to
construct measures of the toxic (or pollution)
intensity of production and trade flows. Work
along these lines includes Patrick Low and Al-
exander Yeats (1992), Robert E. B. Lucas et al.
(1992), and Mani and Wheeler (1997). The
strength of this branch of the literature is its
broad cross-country coverage; its weakness is
that this coverage arises from the construction
of data under various assumptions regarding the
similarity of emission intensities across coun-
tries. This literature typically asks: “How has
the pollution intensity of exports or production
changed over time?” By comparing the answer
to this question across countries differing in
development level, income, or trade stance, the
authors hope to identify links between various
policy options, country characteristics, and en-
vironmental outcomes. Although this work is
useful in documenting trends in the pollution
intensity of output and trade, it cannot answer
why these trends exist. Our work differs from
this method by using theory to identify those
factors we believe to be crucial to environmen-
tal outcomes, and by using regression analysis
to hold all else equal when evaluating the links
between country characteristics and environ-
mental outcomes.
The overall impression one gets from this
literature is that, even though there are many
interesting findings, a consensus view does not
exist—and the path to building such a consen-
sus view is unclear. The unsettled nature of the
literature arises, at least in part, because existing
studies are hamstrung by the lack of a well-
defined theory. This naturally makes inference
SEPTEMBER 2001
difficult. Additional difficulties arise because
good data on pollution levels are scarce, and
even the best data reflect not only anthropogenic
influences but also the little-understood natural
processes of dispersion and absorption. As a
consequence, our simple first-generation pollu-
tion and trade model carries a heavy burden in
providing us with the structure needed to isolate
and identify the implications of international
trade. Although this is a concern, we suggest
that earlier empirical investigations failed to
find a strong and convincing link between en-
vironmental outcomes and freer trade precisely
because they lacked a strong theoretical under-
pinning. With a more complete theoretical
framework to guide us, we are able to look in
the “right directions” for trade’s effect. More-
over, our simple pollution demand-and-supply
model may play a useful role in focusing future
efforts in this area.
The rest of the paper is organized as follows.
In Section I we develop a relatively simple
general equilibrium model of trade to determine
how a fall in trade barriers affects pollution
levels. In Section II we then describe our strat-
egy for dealing with econometric difficulties
and present our estimating equation. In Section
III we present our empirical results. Section IV
concludes. Appendices A and B contain proofs
of propositions and a description of our data. An
additional Technical Appendix, available on re-
quest from the authors, contains further support-
ing materials.
I. Theory
A. The Model
A population of N agents lives in a small
open economy that produces two final goods, X
and Y, with two primary factors, labor L and
capital K. Industry Y is labor intensive and does
not pollute. Industry X is capital intensive and
generates pollution as a by-product. We assume
constant returns to scale, and hence the produc-
tion technology for X and Y can be described by
unit cost functions c X (w, r) and c Y (w, r). Let Y
be the numeraire, and denote the relative price
of X by p. Because countries differ in their
location, proximity to suppliers, and existing
trade barriers, domestic prices will not be iden-
tical to world prices. Accordingly we write
VOL. 91 NO. 4 ANTWEILER ET AL.: IS FREE TRADE GOOD FOR THE ENVIRONMENT?
(1) p ⫽ ␤ p w,
where ␤ measures the importance of trade fric-
tions and p w is the common world relative price
of X. Note ␤ ⬎ 1 if a country imports X and
␤ ⬍ 1 if a country exports X.9
Pollution Abatement.—We denote pollution
emissions by Z. Pollution is generated by X
production, but firms have access to an abate-
ment technology. Abatement is costly but uses
the same factor intensities as all other activities
in the X industry; hence, we simply treat units
of X as inputs into abatement. If a firm has a
gross output of x units, and allocates x a units to
abatement, then its net output is x n ⫽ x(1 ⫺
␪ ), where ␪ ⫽ x a /x is a measure of the intensity
of abatement. If pollution is proportional to
output and abatement is a constant returns ac-
tivity, then we can write pollution emissions as
(2) z ⫽ e共 ␪ 兲x,
where e( ␪ ) is emissions per unit of X produced
and is decreasing in ␪.10 We assume abatement
is worthwhile [e⬘(0) ⫽ ⫺⬁], but with physical
limits [e(1) ⬎ 0].
The government uses pollution emission
taxes to reduce pollution. Given the pollution
tax ␶, the profits ␲ x for a firm producing X are
given by revenue less factor payments, pollu-
tion taxes, and abatement costs. Using (1) and
our definition of ␪, we may write profits suc-
cinctly as
(3) ␲ x ⫽ p N x ⫺ wL x ⫺ rK x ,
9
For example, let ␷ be the level of iceberg transport costs
(that is, ␷ ⬍ 1 is the fraction of the good that arrives at the
destination when a unit is exported). Then if the good is
exported from home, we have p d ⫽ ␷ p w , and if the good is
imported, we have p d ⫽ p w / ␷ . Freer trade (an increase in ␷)
raises p d if X is exported and lowers p d if X is imported.
10
When x units of gross output are produced, and x a
units are devoted to abatement, emissions are given by
E( x a , x). Given our assumptions, E is decreasing in x a ,
increasing in x, strictly convex in x a , and linearly homoge-
neous in x and x a together. Convexity in abatement inputs
follows from diminishing returns to the variable factor and
implies increasing marginal abatement costs. Linear homo-
geneity follows from constant returns. Using the linear
homogeneity of E, we then write E( x a , x) ⫽ e( ␪ ) x.
881
where p N ⫽ p(1 ⫺ ␪ ) ⫺ ␶ e( ␪ ) is the net
producer price for gross output. Because of
constant returns, the output of an individual
firm is indeterminate, but for any level of
output, the first-order condition for the choice
of ␪ implies
(4) p ⫽ ⫺␶ e⬘共 ␪ 兲.
Hence, we have ␪ ⫽ ␪ ( ␶ /p) with ␪⬘ ⬎ 0 and
we can write emissions per unit output as
(5) e ⫽ e共 ␶ /p兲,
where e⬘ ⬍ 0. The production side equilibrium
conditions are simply (2), (4), and the standard
zero profit and full employment conditions:
(6) p N ⫽ c X 共w, r兲 1 ⫽ c Y 共w, r兲
K ⫽ c rX x ⫹ c rY y L ⫽ cw
X
x ⫹ cw
Y
y.
Consumers.—For most of our analysis, con-
sumers differ only in their preferences over
pollution. There are two groups in society: N g
Green consumers who care greatly about the
environment (Greens), and N b ⫽ N ⫺ N g
Brown consumers (Browns) who care less about
the environment. Each consumer maximizes
utility, treating pollution as given. For simplic-
ity, we write the indirect utility function of a
consumer in the ith group as
(7) V i 共 p, G/N, z兲 ⫽ u 冉 冊
G/N
␳ 共 p兲
⫺ ␦ iz
for i ⫽ { g, b} and where ␦ g ⬎ ␦ b ⱖ 0, G is
national income (so G/N is per capita income),
␳ ( p) is a price index, and u is increasing and
concave. Implicit in (7) is the assumption of
homothetic preferences over consumption
goods. Pollution is a pure public bad, but
Greens suffer a greater disutility than Browns. It
is now convenient to define real per capita in-
come as I ⫽ [G/N]/ ␳ ( p) and rewrite indirect
utility as simply u(I) ⫺ ␦ i z.
Government.—We model the policy pro-
cess very simply. We assume the government
882 THE AMERICAN ECONOMIC REVIEW SEPTEMBER 2001

chooses a pollution tax to maximize a weighted damage per person, and MD iI ⬎ 0 given the
sum of each group’s preferences. It solves concavity of the utility function. Simplifying
allows us to rewrite (9) slightly as:

(8) max N关 ␭ V g ⫹ 共1 ⫺ ␭ 兲V b 兴, (10) ␶ ⫽ T ␾ 共 p, I兲.

␶

where ␭ is the weight put on Greens. ␭ may
vary across governments.11 We introduce this
formulation to allow for the realistic possibility
that government behavior varies across coun-
tries (perhaps across Communist and non-
Communist countries), while allowing for an
endogenous link between pollution policy and
economic conditions.
The optimal pollution tax maximizes the
weighted sum of utilities in (8) subject to pri-
vate sector behavior, production possibilities,
fixed world prices, and fixed trade frictions (see,
however, Section III, subsection E, for a con-
sideration of optimal tariffs). Private sector be-
havior can be represented by a standard GNP
function giving maximized private sector (net
of tax) revenue as R( p N , K, L). 12 Overall in-
come is private sector revenue plus rebated
taxes G ⫽ R( p N , K, L) ⫹ ␶ z. The first-order
condition yields
dI dz
u⬘共I兲 ⫺ 关 ␭␦ g ⫹ 共1 ⫺ ␭ 兲 ␦ b 兴 ⫽ 0.
d␶ d␶
We refer to T ⫽ ␭ N ␦ g ⫹ (1 ⫺ ␭ ) N ␦ b as
“country type” and T ␾ ( p, I) as effective mar-
ginal damage (MD). Pollution policy therefore
varies with economic conditions and govern-
ment type.
B. Pollution Demand and Supply
Our model yields a relatively simple reduced
form linking pollution emissions to a short list
of (predetermined) economic factors. To isolate
the role of trade, it is important to understand
how these different economic factors affect the
demand for, and supply of, pollution. To do so,
we use the terminology of scale, composition,
and technique effects. We start by noting the
private sector’s demand for pollution is implic-
itly defined by (2). To rewrite this demand in a
more convenient form for empirical work, we
define an economy’s scale as the value of na-
tional output at base-year world prices. In ob-
vious notation, our measure of scale S is
(11) S ⫽ p x0 x ⫹ p y0 y.

With world prices fixed we have Choosing units so that base-year prices are
unity, we now write pollution emissions as
dI
⫽
1
d ␶ N ␳ 共 p兲 冋 R pN
dp N
d␶
⫹z⫹␶
dz
d␶ 册 (12) z ⫽ ex ⫽ e ␸ S,

␶ dz where ␸ is the share of X in total output. Equa-

⫽ .
N ␳ 共p兲 d ␶ tion (12) provides a simple decomposition: pol-
lution depends on the pollution intensity of the
Rearranging our first-order condition now dirty industry e( ␪ ), the relative importance of
yields an amended Samuelson rule: the dirty industry in the economy ␸, and the
overall scale of the economy S. In differential
(9) ␶ ⫽ N关␭MDg共p, I兲 ⫹ 共1 ⫺ ␭ 兲MD b 共 p, I兲兴, form,

where MD i ( p, I) ⫽ ␦ i ␳ ( p)/u⬘ is marginal (13) ẑ ⫽ Ŝ ⫹ ␸ˆ ⫹ ê,

where hats denote percent change. The first

11
For example, if the government is utilitarian, then ␭ ⫽ term is the scale effect. It measures the increase
N g /N; if the government is controlled by the Greens, ␭ ⫽ 1,
and if controlled by Browns, ␭ ⫽ 0. in pollution generated if the economy were sim-
12
See Avinash K. Dixit and Victor Norman (1980) and ply scaled up, holding constant the mix of goods
Alan D. Woodland (1982). produced ␸ and production techniques e( ␪ ).
VOL. 91 NO. 4 ANTWEILER ET AL.: IS FREE TRADE GOOD FOR THE ENVIRONMENT?
For example, if all endowments of the economy
grew by 10 percent, and if there was no change in
the composition of output or emission intensities,
then we should expect to see a 10-percent increase
in pollution. The second term in (13) is the com-
position effect. If we hold the scale of the econ-
omy and emissions intensities constant, then an
economy that devotes more of its resources to
producing the polluting good will pollute more.
Finally, we have the technique effect, captured by
the last term. All else constant, an increase in the
emission intensity will increase pollution.
We will use a quantity index of output to
measure the scale effect. Because a change in
prices creates opposing composition and tech-
nique effects, however, it is necessary to divide
each into its more primitive determinants. Using
(6) we can solve for the share of X in total
output ␸ as a function of the capital/labor ratio
␬ ⫽ K/L, the net producer price p N and base-
year world prices (suppressed here). That is, the
composition of output is ␸ ⫽ ␸ ( ␬ , p N ), and we
have the composition effect given by
(14) ␸ˆ ⫽ ␧ ␸␬ ␬ˆ ⫹ ␧ ␸ p p̂ N ,
where the elasticity of ␸ with respect to ␬ and
p N are both positive. Next differentiate p N and
employ (1) and (4) to find
(15) p̂ N ⫽ 共 ␤ˆ ⫹ p̂ w 兲共1 ⫹ a兲 ⫺ a ␶ˆ ,
where a ⫽ e( ␪ ) ␶ /p N . Similarly, using (1) and
(5) we find
(16) ê ⫽ ␧ e,p/ ␶ 共 ␤ˆ ⫹ p̂ w ⫺ ␶ˆ 兲,
where the elasticity of emission intensity with
respect to p/ ␶ is positive.13 Combining (13)–
(16) we obtain a decomposition of the private
sector’s demand for pollution:
(17) ẑ ⫽ Ŝ ⫹ ␧ ␸ , ␬ ␬ˆ ⫹ 关共1 ⫹ a兲␧ ␸ ,p ⫹ ␧ e,p/ ␶ 兴 ␤ˆ
⫹ 关共1 ⫹ a兲␧ ␸ ,p ⫹ ␧ e,p/ ␶ 兴p̂ w
⫺ 关a␧ ␸ ,p ⫹ ␧ e,p/ ␶ 兴 ␶ˆ .
13
It is convenient to define elasticities so that they are
positive. Note that e is decreasing in ␶ /p, and therefore
increasing in p/ ␶ .
883
All elasticities are positive. If we draw this
derived demand in { z, ␶ }-space, then (17)
shows that an increase in scale, capital abun-
dance, or the world price of dirty goods shifts
the pollution demand curve to the right. A
movement of ␤ toward 1 captures a reduction in
trade frictions. However, because ␤ is greater
than 1 for a dirty good importer this implies ␤ˆ ⬍
0; and because ␤ is less than 1 for a dirty good
exporter, a reduction in trade frictions implies
␤ˆ ⬎ 0. Therefore, a reduction in trade frictions
shifts the pollution demand curve to the right for
a dirty good exporter, but to the left for a dirty
good importer.
Increases in the pollution tax reduce the
quantity demanded of pollution through two
channels. First they lower the demand for pol-
lution by raising abatement and lowering the
emissions per unit of X produced. This is cap-
tured by the elasticity ␧ e,p/ ␶ ⬎ 0. Second,
higher pollution taxes lower the producer price
of X and induce a shift in the composition of
output that lowers X output for any given emis-
sions intensity. The strength of this effect de-
pends on the importance of pollution taxes in
the net producer price (a) and the elasticity of ␸
with respect to a change in producer prices,
␧ ␸ ,p .
Pollution supply is in effect given by govern-
ment policy that sets the price for polluting.
From (1) and (10) we obtain a decomposition of
pollution supply:
(18) ␶ˆ ⫽ T̂ ⫹ ␧ MD,p ␤ˆ ⫹ ␧ MD,p p̂ w ⫹ ␧ MD,I Î,
where ␧ MD,p ⬎ 0 and ␧ MD,I ⬎ 0. If we draw
(18) in { z, ␶ }-space, then increases in real
income, relative prices, or country type shift
the pollution supply curve upward. For exam-
ple, if Greens are given a greater weight in
social welfare, or become a larger fraction of
the population over time, then policy becomes
more stringent and pollution supply shifts up-
ward. Similarly, an increase in real income
will increase the demand for environmental
quality and shift up the pollution supply
curve. An increase in the world relative price
of X makes consumption of market goods
more expensive relative to environmental
protection. This creates a pure substitution
effect toward more environmental protection,
884 THE AMERICAN ECONOMIC REVIEW
reflected in (18) by ␧ MD,p ⬎ 0. As a result
pollution supply shifts up. An identical sub-
stitution effect is at work when trade frictions
fall.
A Reduced Form.—Combining supply in
(17) and demand in (18) yields a simple reduced
form linking pollution emissions to a small set
of economic factors:
(19) ẑ ⫽ ␲ 1 Ŝ ⫹ ␲ 2 ␬ˆ ⫺ ␲ 3 Î
⫹ ␲ 4 ␤ˆ ⫹ ␲ 5 p̂ w ⫺ ␲ 6 T̂,
where all ␲ i are positive, and none of the right-
hand-side variables are determined simulta-
neously with emissions. Two features of (19)
warrant further comment. First, because a
change in domestic prices shifts pollution sup-
ply and demand in opposing directions, it is not
obvious that ␲4 and ␲5 are positive. We evalu-
ate this claim more formally in Proposition 1
below. Second, we claim “a reduced form” links
emissions to our economic factors, despite the
fact that emissions and these same factors are
clearly endogenous variables. In our frame-
work, emissions are determined endogenously,
but recursively. As a result, the factors on the
right-hand side of (19) are not simultaneously
determined with or by the level of emissions.14
This feature of our simple general equilibrium
model has the benefit of providing us a simple,
straightforward, and parsimonious reduced
form linking pollution emissions to economic
determinants. We evaluate our first claim
below.
14
To see this, note that R( p N , K, L) ⫹ ␶ z ⫽ p(1 ⫺
␪ ) x ⫹ y, which is independent of z. Next, note that (4), (6),
and (10) solve for I, ␶ , and ␪, given world prices. With ␶, ␪,
and p determined, p N is given. Outputs are determined by
p N , and z follows from z ⫽ e( ␪ ) x. This result follows for
two reasons. First, a society may decide to spend some of its
potential income on improving environmental quality and
the remainder on consumption goods— but higher pollution
does not cause higher real income. Second, because mar-
ginal damage is independent of z, the equilibrium level of
emissions does not affect the pollution tax. As a result, a
change in emissions does not cause second-order changes in
the composition of output or our measures of scale and
income. As a result of these two features, real income, scale,
and the pollution tax are set simultaneously, whereas emis-
sions are set recursively.
SEPTEMBER 2001
The Trade-Induced Composition Effect.
PROPOSITION 1: Consider two economies
that differ only in their trade frictions: (i) if
both countries export the polluting good, then
pollution is higher in the country with lower
trade frictions; (ii) if both import the polluting
good, then pollution is lower in the country with
lower trade frictions.
PROOF:
See Appendix A.
Proposition 1 isolates the trade-induced com-
position effect. The sign of this composition
effect differs across countries. For an exporter
of the polluting good, ␤ rises with freer trade
and this raises the relative price of the dirty
good X. This shifts a dirty good exporter’s
pollution demand curve to the right and shifts its
pollution supply curve up. Pollution demand
shifts out for two reasons: the composition of
national output shifts toward X; and emission
intensities rise because abatement inputs are
now more costly. The shift in the pollution
supply curve dampens this increase in pollution
as the pure substitution effect of the goods price
increase leads the government to raise the pol-
lution tax. However, the direct demand-side ef-
fects swamp the substitution effect in supply,
and pollution rises.15 Consequently, holding all
other determinants of pollution supply and de-
mand constant, emissions must rise. This in-
crease in emissions represents the trade-induced
composition effect for a dirty good exporter.
In contrast, ␤ falls with freer trade for an
importer of the polluting good. This raises the
relative price of the clean good Y, and again shifts
both pollution demand and supply. Demand-
side determinants dominate and emissions fall.
This reduction in emissions represents the trade-
induced composition effect for a clean good
exporter.
15
To see this, note that the increase in ␶ is less than
proportional to the increase in ␤, because the increase in ␶
induced by ␤ is a pure substitution effect, which is propor-
tional to the share of X in consumption (which is less than
one). This ensures both that emission intensity e rises, and
that the share of X in production rises. Details are in the
Appendices.
VOL. 91 NO. 4 ANTWEILER ET AL.: IS FREE TRADE GOOD FOR THE ENVIRONMENT? 885

Proposition 1 therefore implies that, if we

look across all countries and hold other deter-
minants of emissions constant, we should not
expect to find openness per se related in any
systematic way to emissions. Although Propo-
sition 1 is useful, it is limited in two respects.
First, although it isolates the trade-induced
composition effect, any fall in trade frictions
will alter the scale of output and income per
capita of the liberalizing country as well. There-
fore, to account for the full environmental im-
pact of a fall in trade frictions we must also
account for the accompanying scale and tech-
nique effects. Proposition 1 captures the partial
effect of trade liberalization; an overall assess-
ment needs the full effect. Second, the results
from the proposition are conditional on trade
patterns, but the proposition itself is silent on
the determinants of trade patterns. We treat each
of these issues in turn below.

The Full Impact of Openness.—To find the

full impact of a change in trade frictions we
must account for the change created in real
incomes, the scale of output, and its composi-
tion. Differentiate (12) with respect to ␤, hold-
ing world prices, country type, and factor
endowments constant, to find
dz ␤ dS ␤ dI ␤
(20) ⫽ ␲1 ⫺ ␲3 ⫹ ␲4 .
d␤ z d␤ S d␤ I
A fall in trade frictions produces a scale effect,
a technique effect, and the trade-induced com-
position effect, discussed previously. To under-
stand how these three effects interact to
determine the environmental consequences of
trade, we employ Figure 1.
In the top panel of Figure 1 we depict the
production response of a dirty good exporter to
a fall in trade frictions. In the bottom panel we
depict the pollution consequences of these
changes. Before the reduction in trade frictions,
production is at point A, the world price is p w ,
and the net price is p N . We have assumed this
country is an exporter of the dirty good and
therefore has consumption at a point to the
northwest of A along the economy’s budget
constraint (not drawn). Note that the value (in
world prices) of domestic output at A measures
this economy’s scale. In the bottom panel we
FIGURE 1. A DIRTY GOOD EXPORTER
depict the equilibrium pollution level both be-
fore and after the fall in trade frictions. Recall
that z ⫽ e( ␪ ) x. Hence when production is at A,
and emissions intensity is e( ␪ A ), pollution is
given by z A .
When trade frictions fall the domestic price
approaches the world price and production
moves to point C at the new producer price of
p N⬘ . At C, real income is higher and there is a
change in the techniques of production. The
emissions intensity falls to e( ␪ C ) and overall
pollution falls to z C . Our methodology divides
the movement from z A to z C into three compo-
nent parts. First, holding both the scale of the
economy and the techniques of production
fixed, trade creates a change in the composition
of output given by the movement from A to B.
Corresponding to this movement is the increase
in pollution from z A to z B in the bottom panel.
This is the trade-induced composition effect
isolated in Proposition 1.
886 THE AMERICAN ECONOMIC REVIEW
The movement in the top panel from point B
to point C is the scale effect. The increase in
pollution from z B to z S in the bottom panel
gives the pollution consequences of this scale
effect. Finally, note that the value of output
measured at world prices rises because of trade
and this real income gain (indirectly) creates the
technique effect shown in the bottom panel. The
technique effect is the fall in pollution from z S
to z C as producers switch to cleaner techniques
with lower emissions intensity.
In total the diagram shows that trade liberal-
ization for a dirty good exporter leads to less
pollution if the composition and scale effects
are overwhelmed by the technique effect. Be-
cause this is only a possibility, and not a neces-
sity within our model, we formalize our results
in Proposition 2.
PROPOSITION 2: Consider a small reduction
in trade frictions for our small open economy,
then:
(i) if the small open economy exports the
clean good, the full effect of this trade liberal-
ization is to lower pollution emissions;
(ii) if the small open economy exports the
dirty good and the elasticity of marginal dam-
age with respect to income is below one, then
the full effect of this trade liberalization is to
raise its pollution emissions;
(iii) if the small open economy exports the
dirty good and the elasticity of marginal dam-
age with respect to income is sufficiently above
one, then the full effect of this trade liberaliza-
tion is to lower its pollution emissions.
PROOF:
See Appendix A.
The first part of the proposition concerns
dirty good importers. For dirty good importers
the trade-induced composition effect is negative
and because X production falls, the sum of
composition and scale effects must also be neg-
ative.16 Consequently, pollution emissions will
fall for a dirty good importer. For a dirty good
exporter, both the trade-induced composition
16
This is a product of our two-good model. With many
polluting goods the scale effect may dominate the compo-
sition effect, leading to a rise in pollution from these two
sources.
SEPTEMBER 2001
effect and the scale effect are positive. Pollution
demand shifts right from these two forces, and
Proposition 2 indicates that if the policy re-
sponse is sufficiently weak (an elasticity of mar-
ginal damage with respect to income less than
one) emissions will rise. That is, the upward
shift in pollution supply is overwhelmed by the
demand shifts. Alternatively, if the elasticity of
marginal damage is sufficiently strong, then
emissions will fall as the technique effect dom-
inates. The full effect of a trade liberalization
differs from the partial effect because of two
additional effects, and because these new ef-
fects can be strong enough to overwhelm the
composition effect.
C. Adding Up Scale, Composition, and
Technique Effects
The amount of information required to im-
plement an adding-up exercise akin to (20) is
great. In our empirical work we develop esti-
mates for ␲1 , ␲3 , and ␲4. But even with these
estimates in hand we are faced with disentan-
gling the effects of trade liberalization on in-
come growth from all other potential sources.
Because attempts to link trade to growth and
income levels are the subject of an already large
and somewhat controversial literature, we do
not attempt to measure trade’s effect on GDP
(dS/d ␤ ) or GNP per person (dI/d ␤ ). Instead
we employ economic theory to add up our es-
timated scale, composition, and technique ef-
fects. Taking factor endowments as fixed, a
lowering of transport costs or trade barriers raises
the value of domestic output and real income in a
small open economy. The value of output and
income rise by the same percentage and this cre-
ates both scale and technique effects.17 Therefore,
we can simplify (20) slightly and write
dz ␤ dI ␤
(21) ⫽ 关␲1 ⫺ ␲3 兴 ⫹ ␲4 .
d␤ z d␤ I
In some circumstances we can add up these
three effects to come to an overall assessment of
17
If GNP differs from GDP because of receipts or pay-
ments from abroad, then we would need to correct for the
(generally small) share of these payments in GNP.
VOL. 91 NO. 4 ANTWEILER ET AL.: IS FREE TRADE GOOD FOR THE ENVIRONMENT?
trade without knowledge of trade’s effect on
income or scale. For example, consider a dirty
good exporter. Note that dI/d ␤ is positive be-
cause an increase in ␤ represents lower trade
frictions. If we find ␲1 ⬎ ␲3 and ␲4 ⬎ 0, then we
conclude that trade liberalization raises pollution
for a dirty good exporter: scale effects dominate
technique and the trade-induced composition ef-
fect is positive. Under these same circumstances,
trade liberalization would have an ambiguous ef-
fect on emissions for a clean good exporter. Con-
sequently, even to implement our more limited
adding-up exercise, it is necessary to ask: who
exports dirty goods and why?
Pollution Haven versus Factor Abundance
Motives.—In our model comparative advantage
is primarily a function of relative factor abun-
dance and relative incomes. Although limiting
cases of our model reflect only pollution haven
motives or pure factor endowment motives, in
general we expect both determinants of com-
parative advantage to matter. To investigate fur-
ther, we solve for autarky prices. Let RD( p)
denote the demand for good X relative to good
Y. Then the relative price of good X is deter-
mined by the intersection of the (net) relative
supply and demand curves
(22) RD共p兲 ⫽ 共1 ⫺ ␪ 兲 ␹ 共 ␬ , p N 兲,
where ␹ ⫽ x/y is determined from (6), and net
relative supply is (1 ⫺ ␪)␹. Totally differenti-
ating, using (15), (16), and (18), and rearranging
gives an expression linking autarky prices to
real income and endowments:
(23)
p̂ ⫽
冋
␧ MD,I a␧ ␹ ,p N ⫹
␪
␧
1 ⫺ ␪ ␪ , ␶ /p 册
Î ⫺ ␧ ␹ , ␬ ␬ˆ
,
⌬ have the same relative factor endowments, but
where all elasticities and ⌬ are positive.
Equation (23) shows that in general, the pat-
tern of trade is determined by both factor
abundance and income-driven differences in
pollution policy. For example, unless both the
dirty and clean sectors use identical factor
proportions then ␧␹,␬ is not zero and capital
887
abundance matters to comparative advantage.
Similarly, if the environment is a normal
good, then ␧ MD,I is nonzero and real income
matters as well.
The Role of Factor Endowments.—Standard
factor endowment theories predict capital abun-
dant countries export capital-intensive goods. In
our model this need not be true because pollu-
tion policy can reverse this pattern of trade.
Nevertheless, capital abundance is still a key
determinant of comparative advantage in our
model. Because X is relatively capital intensive,
an increase in ␬, holding all else constant, in-
creases Home’s relative supply of X, and lowers
Home’s autarky relative price of X. Using (23)
we obtain p̂ ⬍ 0 because ␧␹,␬ ⬎ 0. All else
equal, an increase in the abundance of the factor
used intensively in the pollution-intensive sec-
tor increases the likelihood that a country will
be an exporter of pollution-intensive goods. We
can show that if the country is sufficiently cap-
ital abundant, it must export the capital inten-
sive (polluting) good:
PROPOSITION 3: Suppose the world price p w
is fixed. Then, for a given level of real income I,
there exists a ␬គ such that if ␬ ⬎ ␬គ , then Home
exports X. Moreover, for such a country, the
trade-induced composition effect will be positive.
PROOF:
See Appendix A.
The Role of Income Differences.—An alter-
native theory of trade patterns is the pollution
haven hypothesis. According to this view, poor
countries have a comparative advantage in dirty
goods because they have lax pollution policy,
and rich countries have a comparative advan-
tage in clean goods because of their stringent
pollution policy.18 This result can be obtained
as a special case of our model: if all countries
differ in per capita incomes, then richer coun-
tries will have stricter pollution policy and this
will lead to a comparative advantage in clean
goods. Using (23) we obtain p̂ ⬎ 0 whenever
18
See Copeland and Taylor (1994) for a model that
explores this issue.
888 THE AMERICAN ECONOMIC REVIEW
Î ⬎ 0. When countries differ in factor endow-
ments and income levels, we can show that if
the country is sufficiently rich, it must export the
labor-intensive (clean) good.
PROPOSITION 4: Suppose the world price p w
is fixed and there exists an ␧ such that ␧ MD,I ⬎
␧ ⬎ 0. Then, for a given level of the capital/
labor ratio ␬, there exists an គI , such that if I ⬎
Iគ , then Home exports Y. Moreover, for such a
country, the trade-induced composition effect
will be negative.
PROOF:
See Appendix A.
From Theory to Estimation.—Proposition 1
contains a very simple message: comparative
advantage matters. If we compare countries
with similar incomes and scale, openness
should be associated with higher pollution in
dirty good exporters and lower pollution in dirty
good importers. Therefore to isolate the trade-
induced composition effect, we must condition
on country characteristics. This observation
begs three questions: how are we to measure
openness, what country characteristics should
we use, and how should we condition on these
characteristics?
Various measures of “openness” exist. We
need a measure with both time-series variation
and a wide cross-country coverage. In our the-
ory a lowering of trade frictions brings domestic
prices closer to world prices and it does not
matter whether this occurs because of a fall in
transport and communication costs or (apart
from revenue effects) because of a GATT-
inspired reduction in trade restrictions.19 How-
ever, because we do not observe movements in
␤ directly we must make use of an observable
consequence of heightened integration: increases
in a country’s trade intensity ratio (defined as the
ratio of exports plus imports to GDP valued at
world prices). We formalize this link below.
PROPOSITION 5: If preferences over con-
sumption goods are homothetic, trade intensity
rises as ␤ approaches 1.
19
See, however, Section III, subsection E, on the tariff-
substitution effect in a large open economy.
SEPTEMBER 2001
PROOF:
See Appendix A.
Proposition 5 links unobservable trade fric-
tions with observable trade intensity. Lower
trade frictions means greater trade intensity, re-
gardless of a country’s comparative advantage.
Therefore, in our empirical application we re-
place unobservable trade frictions with observ-
able trade intensity.20
To address our second question, interpret
the hat notation in equation (23) as describing
small differences across countries. With this
interpretation, (23) links differences in au-
tarky relative prices across countries to dif-
ferences in their relative factor abundance and
real income levels. If we take the rest of the
world as our small country’s partner in this
exercise, then the strength and direction of
country i’s comparative advantage will de-
pend on its capital abundance relative to a
world average (denoted by ␬ i ), and its real
income relative to a world average (denoted
by ␫ i ). Although other factors play a role in
determining comparative advantage, capital
abundance and real income are the key coun-
try characteristics within our model.
Finally, to condition on these characteris-
tics we let ⌿ be a function measuring the
partial effect of an increase in trade intensity
on pollution. Our theory tells us that we can
write ⌿ ⫽ ⌿( ␬ i , ␫ i ), but does not give us
much more guidance in this regard. The in-
teraction between factor abundance and pol-
lution haven motives depends quite delicately
on elasticities of substitution, factor shares,
and (unknown) third derivative properties of
our more basic functions. This is apparent
from (23) because the elasticities in this ex-
pression are functions of prices, incomes, and
trade frictions. Consequently, we adopt a
flexible approach to capturing these influ-
ences by adopting a second-order Taylor se-
ries approximation to ⌿ in our empirical
work. That is, we employ
20
If trade frictions are not exogenous, but are endog-
enously determined along with pollution policy, then our
proxy (trade intensity) may be correlated with unmeasured
determinants of pollution policy. In Section III, subsection
E, we discuss the likely implications of such a link between
trade and pollution policy.
VOL. 91 NO. 4 ANTWEILER ET AL.: IS FREE TRADE GOOD FOR THE ENVIRONMENT?
(24) ⌿ i ⬵ ␺ 0 ⫹ ␺ 1 ␬ i ⫹ ␺ 2 ␬ 2i
⫹ ␺ 3 ␫ i ⫹ ␺ 4 ␫ 2i ⫹ ␺ 5 ␬ i ␫ i ,
and then interact this measure with trade intensity
to capture the trade-induced composition effect.
This method has several advantages. It allows
the impact of further openness on pollution to
depend on country characteristics. It does not
dictate whether one or both motives are present
in the data or how they interact. And we can
evaluate ⌿ using our estimates to provide some
simple reality checks. For example, does the
pollution demand curve shift right for some
countries and not for others (i.e., does ⌿ i vary
in sign depending on country characteristics)?
For which countries does it shift right? Are
these countries poor countries as predicted by
the pollution haven hypothesis, or are they
capital abundant countries as predicted by the
factor abundance hypothesis? Finally, the for-
mulation is a relatively parsimonious and rea-
sonably flexible method for estimating an
unknown nonlinear function.
II. Empirical Strategy
This section describes how we move from
our theory to an estimating equation. To do so
we need to discuss our data, its sources and
limitations (subsection A), and address the links
between theory and our estimating equation
(subsection B).
A. Data Sources and Measurement Issues
A real-world pollutant useful for our purposes
would: (1) be a by-product of goods production;
(2) be emitted in greater quantities per unit of
output in some industries than others; (3) have
strong local effects; (4) be subject to regulations
because of its noxious effect on the population; (5)
have well known abatement technologies avail-
able for implementation; and (6), for econometric
purposes, have data available from a mix of de-
veloped and developing as well as “open” and
“closed” economies. An almost perfect choice for
this study is sulfur dioxide.
Sulfur dioxide (SO2) is a noxious gas pro-
duced by the burning of fossil fuels. Natural
sources include volcanoes, decaying organic
889
matter, and sea spray. Anthropogenic sources
are thought to be responsible for somewhere
between one-third to one-half of all emissions
(United Nations Environment Programme,
1991; Jack J. Kraushaar and Robert A. Ristinen,
1998). SO2 is primarily emitted as either a di-
rect or indirect product of goods production and
is not strongly linked to automobile use. Be-
cause energy-intensive industries are also typi-
cally capital intensive, a reasonable proxy for
dirty SO2-creating activities may be physical
capital-intensive production processes. Readily
available, although costly, methods for the con-
trol of emissions exist and their efficacy is well
established. In addition, in many countries SO2
emissions have been actively regulated for some
time.
The Global Environment Monitoring System
(GEMS) has been recording SO2 concentrations
in major urban areas in developed and develop-
ing countries since the early 1970’s. Our data
set consists of 2,555 observations from 290
observation sites located in 108 cities represent-
ing 43 countries spanning the years 1971–1996.
The GEMS network was set up to monitor the
concentrations of several pollutants in a cross
section of countries using comparable measur-
ing devices.21 The panel of countries includes
primarily developed countries in the early years,
but from 1976 to the early 1990’s the United
Nations Environment Programme provided
funds to expand and maintain the network. The
coverage of developing economies grew over
time until the late 1980’s. In the 1990’s cover-
age fell with data from the United States only
for 1996. The World Health Organization
(1984) reports that until the late 1970’s data
comparability may be limited as monitoring ca-
pabilities were being assessed, many new coun-
tries were added, and procedures were being
developed to ensure validated samples. Accord-
ingly, we investigate the sensitivity of our find-
ings to the time period.
The GEMS data are comprised of summary
statistics for the yearly distribution of concen-
trations at each site. In this study we use the log
21
The range of sophistication of monitoring techniques
used in the network varies quite widely, but the various
techniques have been subject to comparability tests over the
years. Some stations offer continuous monitoring, whereas
others measure only at discrete intervals.
890 THE AMERICAN ECONOMIC REVIEW
of median SO2 concentrations at a given site,
for each year, as our dependent variable. We use
a log transform because the distribution of
yearly summary statistics for SO2 appears to be
lognormal (WHO, 1984). Previous work in this
area by the WHO and others has argued that a
lognormal distribution is appropriate because
temperature inversions or other special pollu-
tion episodes often lead to large values for some
observations. In contrast, even weather very
helpful to dissipation cannot drive the level of
the pollutant below zero.
In addition to the data on concentrations, the
GEMS network also classifies each site within a
city as either city center, suburban, or rural in
land type, and we employ these land-type cate-
gories in our analysis. A list of the cities
involved, the years of operation of GEMS sta-
tions, and the number of observations from each
city along with a frequency distribution of SO2
emissions is given in our Technical Appendix
(available upon request).
In moving from our theoretical model to its
empirical counterpart we need to include vari-
ables to reflect scale, technique, and composi-
tion effects. As well, we have to include site-
specific variables to account for meteorological
conditions. Our estimations will require the use
of data on real GDP per capita, capital-to-labor
ratios, population densities, and various mea-
sures of “openness.” The majority of the eco-
nomic data were obtained from the Penn World
Tables 5.6. The remainder was obtained from
several sources. A description of data sources
and our methods for collection are provided in
Appendix B together with a table of means,
standard deviations, and units of measurement
for the data.
B. The Estimating Equation
In moving from our theoretical model to es-
timation we face several issues. Here we discuss
three: identification, excluded variables, and
functional form.
Identification.—The private sector’s demand
for pollution, written in differential form, is
given by (17). The pollution supply curve is
given by (18). A problem arises because most
measures of the scale of economic activity that
shifts pollution demand (for example real GDP
SEPTEMBER 2001
or real GDP per person) will be highly or per-
fectly correlated with real income per capita that
shifts pollution supply.
We address this problem by exploiting three
different sources of variation in our data. First, we
note that changes in the scale of output must have
contemporaneous effects on pollution concentra-
tions, whereas pollution policy is likely to respond
slowly, if at all, to changes in income levels.
Consequently, we use as our proxy for income a
one-period lagged, three-year moving average of
income per capita, but link pollution concentra-
tions to a contemporaneous measure of economic
activity. To the extent that there is significant
variation over time in activity measures, this source
of variation will help in our identification.22
Second, the scale of economic activity should
be measured by economic activity within a
country’s borders (i.e., GDP), whereas the in-
come relevant to the technique effect should
reflect the income of residents wherever it is
earned (i.e., GNP). Therefore, we can exploit
the difference between GDP and GNP measures
to separate technique from scale effects. Even
though the gap between these two figures is not
large for most economies, it is significant for
some. This cross-country variation will be use-
ful in separating scale from technique.
Finally, we measure the scale of economic
activity S at any site by an intensive measure of
economic activity per unit area. This intensive
measure is GDP per square kilometer. Lacking
detailed data on “Gross City Product,” we con-
struct GDP per square kilometer for each city
and each year by multiplying city population
density with country GDP per person. As a
result, scale is now measured in intensive form,
as is our dependent variable.23 To explain concen-
trations of pollution we need a measure of scale
22
For example, we expect that a significant recession
would drive down concentrations (a scale effect) but not
lead to a rewriting of pollution control laws (i.e., a technique
effect). This source of variation in pollution data has been
exploited before. See Kenneth Y. Chay and Michael B.
Greenstone (1999).
23
This is admittedly a rough measure of economic activity,
and the quality of this proxy may vary systematically with a
country’s development level. To investigate this concern we
have allowed the scale effect to vary across countries divided
by income category, by allowing for nonlinearities in the
response to scale, and by excluding the perhaps most troubling
rural observations. Our results are similar to those reported for
VOL. 91 NO. 4 ANTWEILER ET AL.: IS FREE TRADE GOOD FOR THE ENVIRONMENT?
reflecting the concentration of economic activity
within the same geographical area. Other possible
measures of scale fail this test. Moreover, since we
assume pollution policy is determined by national
averages for income per capita and the number of
exposed individuals, we are in effect fixing the
pollution supply curve for all cities within a given
country. This “allows” us to employ the within-
country variation in scale across cities to separate
the influence of scale from that of technique.
Unobservable Variables: Fixed or Random
Effects?—Several variables relevant to our the-
ory are unobservable. To account for these ex-
clusions we estimate an individual effects
model for ␧ ijkt given by
(25) ␧ ijkt ⫽ ␰ t ⫹ ␪ ijk ⫹ ␯ ijkt ,
where ␰ t is a time-specific effect, ␪ ijk is a site-
specific effect, and ␯ ijkt is an idiosyncratic mea-
surement error for observation station i in city j
in country k in year t.
Our common-to-world but time-specific ef-
fect is included to capture changes in knowl-
edge concerning pollution, changes in the world
relative price of dirty goods, and improvements
in abatement technologies. Although proxies for
some of these variables could be constructed,
choosing proxies will of course introduce new
issues of data quality, coverage, and so forth.
Instead we note that, because each of these
variables affects all countries in a similar way, a
preferred method may be to treat them as un-
observable. For example, a rise in the world
price of dirty goods affects all countries in a
similar way. Accordingly, we capture these
common-to-world excluded variables with a set
of unrestricted time dummies.
␪ ijk is a site-specific effect representing ex-
cluded site (or country-specific) variables such
as excluded economic determinants or excluded
meteorological variables. For example, country
type T appears in (19) but is virtually unobserv-
able in that it relies on both knowledge of the
weight governments apply to Greens and
Browns in their economy and the share of each
our simpler specification. For one such sensitivity test see
Table 2.
891
in the overall population. Because the panel is
relatively short for almost all countries, we take
these country-type and distribution parameters
as fixed over time. As well, there are unmea-
sured topographical and meteorological features
that undoubtedly affect the dissipation of pollu-
tion at each site. Finally, we allow for an idiosyn-
cratic measurement error ␯ijkt. Two sources of this
error would be machine error in reading concentra-
tions and human error in calculation or tabulation.
Throughout we present both fixed- and
random-effects estimates for every model.
Whereas random-effects estimation is in theory
more efficient, it is unclear whether excluded
country-specific effects subsumed in our error
term are uncorrelated with our regressors. Al-
though fixed-effects estimation is preferable in
just these cases, fixed effects limits the cross-
sectional variation we can exploit for separating
scale from technique effects.
Functional Form.—Our model predicts emis-
sion levels but our data are on concentrations.
Meteorological models mapping emissions from a
(single) stack into measured concentrations at a
receptor are functions of emission rates, stack
height, the distance to the receptor, wind speed,
temperature gradients, and turbulence. Much of
this information is not presently available. In view
of these limitations we adopt a linear approxima-
tion to measured concentrations by writing con-
centrations at site ijk, at time t as
(26) Z Cijkt ⫽ X⬘j kt ␣ ⫹ Y⬘i jkt ␥ ⫹ ␧ ijkt
X⬘jkt ␣ ⫽ ␣ 0 ⫹ ␣ 1 SCALEjkt ⫹ ␣ 2 KLkt
⫹ ␣ 3 INCkt ⫹ ␣ 4 ⌿ kt TIkt
⌿ kt ⫽ ␺ 0 ⫹ ␺ 1 REL.KLkt
⫹ ␺ 2 REL.KL2kt
⫹ ␺ 3 REL.INCkt
⫹ ␺ 4 REL.INC2kt
⫹ ␺ 5 REL.KLkt REL.INCkt ,
where SCALE is city-specific GDP/km2, KL is
the national capital-to-labor ratio, INC is a
892 THE AMERICAN ECONOMIC REVIEW
one-period-lagged three-year moving average
of GNP/N, TI is the trade intensity (X⫹M)/
GDP, REL.KL is country k’s capital-to-labor
ratio measured relative to the world average,
and REL.INC is country k’s real income mea-
sured relative to the world average (see Appen-
dix B for further details). Note that world price
and country-type variables are captured in (25),
and trade intensity has replaced trade frictions
in (19), as discussed previously. Y contains
site-specific weather variables and site-specific
physical characteristics (discussed below), and
␧ ijkt is a site-specific error reflecting unmea-
sured economic and physical variables. We re-
fer to equation (26) as Model A in our
estimations.
Model A follows from our reduced form if
we assume linearity in the response to scale,
technique, and composition variables. This lin-
earity assumption is, however, somewhat at
odds with our theory. In theory, the impact of
capital accumulation on pollution depends on
the techniques of production in place. But when
countries differ in income per capita, they will
also differ in producer prices and hence their
techniques of production. Consequently, the
Rybczyinski derivatives embedded in (26) will
differ across countries. As well, the impact of
capital accumulation on the composition of out-
put is not a linear function of KL. Similarly, the
impact of income gains on pollution depends on
the existing composition of output and hence
the existing capital-to-labor ratio and income
per capita. To account for these possibilities we
amend Model A by adding the squares of in-
come per capita (INC2kt ) and the capital-to-labor
ratio (KL2kt ) as well as their cross-product
(INCkt KLkt ). We refer to this amended form of
(26) as Model B. As a consequence, the impact
of factor accumulation can now differ across
countries and over time in closer accord with
our theory. Finally, we consider a further non-
linearity by adding SCALE2kt to Model B. A
nonlinearity in the impact of scale could arise
from nonhomotheticities in production or con-
sumption. We refer to this slightly amended
model as Model C.
Models A, B, and C differ from those previ-
ously estimated in several regards. For example,
empirical work within the Environmental
Kuznets curve tradition employ measures only
of site-specific attributes and income per capita
SEPTEMBER 2001
as regressors, leaving out a role for factor en-
dowments or scale to play independent effects.
Grossman and Krueger (1993, 1995) are the
most prominent examples of this approach, but
there are many others. Lewis Gale and Jose A.
Mendez (1998) add measures of factor endow-
ments to a Kuznet’s curve regression, but their
(one-year) cross-sectional analysis cannot dis-
tinguish between constant-over-time site at-
tributes and scale effects. Empirical work using
(constructed) cross-country emission data or
emission intensity data has tried to link country
characteristics (factor endowments, growth in
income, fuel use, etc.) to environmental out-
comes, but these studies always fail to condi-
tion the impact of openness on country
characteristics. For example, see Low and
Yeats (1992) and Lucas et al. (1992). As a
result, we are not aware of even one study
where the impact of trade is conditioned on
those country characteristics determining
comparative advantage, despite the fact that
the trade-induced composition effect should
vary across countries according to compara-
tive advantage.
III. Empirical Results
A. Main Results
Table 1 presents the main results from our
estimations. We present estimates from Models
A, B, and C in Table 1 using both random and
fixed effects.
Scale, Composition, and Technique Effects.—
Consider our core variables representing scale,
composition, and technique effects. In all col-
umns of Table 1 we find a positive and signif-
icant relationship between the scale of
economic activity as measured by GDP/km2
and concentrations. From the bottom of Table
1 we see that the coefficient estimates imply a
sample-mean elasticity of concentrations to an
increase in scale somewhere between 0.1 and
0.4. The scale elasticity estimates increases in
magnitude as we move from Model A through
to Model C, although the estimates differ only
slightly across random and fixed effects. Be-
cause the models are nested, we can test the
restrictions imposed in Models A and B via a
likelihood ratio (LR) test. It appears there is
VOL. 91 NO. 4 ANTWEILER ET AL.: IS FREE TRADE GOOD FOR THE ENVIRONMENT? 893

TABLE 1—ALTERNATIVE HYPOTHESES TESTS

Estimation method: Random effects Fixed effects

Model specification: A B C A B C
Variable/column: (1) (2) (3) (4) (5) (6)
Intercept ⫺2.865*** ⫺3.279*** ⫺3.311*** ⫺2.506*** ⫺4.324*** ⫺4.299***
City economic intensity GDP/km2 0.042*** 0.058*** 0.070*** 0.024* 0.058*** 0.089*
(City economic intensity)2/1,000 ⫺0.244 ⫺0.340
Capital abundance (K/L) 0.102** 0.293** 0.286* 0.165** 0.461** 0.437*
(K/L)2 0.014 0.013 0.006 0.008
Lagged per capita income ⫺0.982*** ⫺1.248*** ⫺1.312*** ⫺1.326*** ⫺0.096 ⫺0.228
(Income)2 0.708*** 0.669*** 0.559*** 0.578***
(K/L) ⫻ (I) ⫺0.309*** ⫺0.285*** ⫺0.381*** ⫺0.386***
Trade intensity TI ⫽ (X⫹M)/GDP ⫺0.915 ⫺0.488 ⫺0.510 ⫺3.677*** ⫺3.142** ⫺3.216**
TI ⫻ REL.K/L ⫺0.462 ⫺1.952* ⫺1.828* 0.159 ⫺2.252* ⫺2.121
TI ⫻ (REL.K/L)2 0.018 ⫺0.230 ⫺0.248 ⫺0.168 ⫺0.123 ⫺0.176
TI ⫻ REL.INC 0.470 1.056* 1.011* 2.128** 2.687*** 2.614***
TI ⫻ (REL.INC)2 0.118 ⫺0.308* ⫺0.285* ⫺0.108 ⫺0.595** ⫺0.584**
TI ⫻ (REL.K/L) ⫻ (REL.INC) ⫺0.165 0.870*** 0.822*** ⫺0.280 0.900** 0.924**
Suburban dummy ⫺0.299 ⫺0.435* ⫺0.422*
Rural dummy ⫺0.623 ⫺0.674 ⫺0.631
Communist country (C.C.) dummy 0.312 ⫺0.252 ⫺0.257
C.C. dummy ⫻ income ⫺0.283 4.569* 4.641* 1.170 9.621** 9.639**
C.C. dummy ⫻ (income)2 ⫺5.755** ⫺5.788** ⫺8.931*** ⫺8.806**
Average temperature ⫺0.055*** ⫺0.052*** ⫺0.052*** ⫺0.060* ⫺0.057* ⫺0.056*
Precipitation variation: 3.446 5.860 6.158 8.599 10.810* 10.716*
Helsinki Protocol: ⫺0.232* ⫺0.092 ⫺0.114 ⫺0.179 0.016 0.016

Observations 2,555 2,555 2,555 2,555 2,555 2,555

Groups 290 290 290 290 290 290
R2 0.3395 0.3737 0.374 0.2483 0.131 0.1499
Log-likelihood ⫺2550 ⫺2523 ⫺2522 ⫺3964 ⫺3906 ⫺3905
LR test/␹2 (df) 55.596*** 1.604 118.42*** 2.035
Hausman test/Wald ␹2 (df) 65.761** 15.158 53.789

Scale elasticity 0.192*** 0.265*** 0.315*** 0.112* 0.266*** 0.398**

Composition elasticity 0.583** 0.948*** 0.993*** 0.945** 1.006** 0.975*
Technique elasticity ⫺0.905*** ⫺1.577*** ⫺1.577*** ⫺1.222*** ⫺1.153** ⫺1.266**
Trade intensity elasticity ⫺0.436*** ⫺0.388*** ⫺0.394*** ⫺0.641*** ⫺0.864*** ⫺0.882***

Notes: To conserve space, no standard errors or t-statistics are shown. The dependent variable is the log of the median of SO2
concentrations at each observation site. Model A follows directly from our empirical implementation, whereas model B allows
for additional interaction between capital abundance and income. In addition to model B, model C allows for nonlinearity in
our scale variable. All model specifications use time-fixed effects. Elasticities are evaluated at sample means using the Delta
method.
* Significance at the 95-percent confidence level.
** Significance at the 99-percent confidence level.
*** Significance at the 99.9-percent confidence level.

little gained in moving to the slightly more
general Model C from Model B; conversely, the
restrictions imposed by Model A are rejected by
the data as shown by the significant LR test
statistics in columns (1) and (4). These empiri-
cal results together with our knowledge of the-
ory suggest that less emphasis be placed on the
estimates from Model A.
Next consider the impact of a nation’s capital-
to-labor ratio. In all columns of Table 1, we find
a positive composition effect arising from an
increase in capital-to-labor ratios. The esti-
mated effect is typically quite large. With the
exception of column (1), we find a 1-percent
increase in a nation’s capital-to-labor ratio—
holding scale, income, and other determinants
894 THE AMERICAN ECONOMIC REVIEW
constant—leads to perhaps a 1-percent-point in-
crease in pollution. Our success in finding a link
between factor endowments and pollution may
appear surprising given the universal difficulties
researchers have had in finding a strong link
between factor endowments and trade flows.
We would note, however, that the production
side of the HOS model has received some sup-
port (see especially James Harrigan 1995,
1997), and our model focuses on a highly ag-
gregate relationship between overall pollution
intensive output and factor endowments.
The estimates in Table 1 also predict a strong
and significantly negative relationship between
per capita income levels and concentrations.
The elasticity of concentrations to an increase in
income is typically quite large and is always
significant. Using the estimates from Table
1, the technique elasticity varies between ⫺0.9
and ⫺1.5. This technique effect seems surpris-
ingly strong, but the result appears to be robust.
Alternative specifications (discussed below)
lead to somewhat different conclusions, al-
though the elasticity is almost universally esti-
mated to be greater than ⫺1 in magnitude,
suggesting a strong policy response to income
gains.
The Trade-Induced Composition Effect.—
Next consider the estimates for the trade-
induced composition effect. In all columns we
reject the hypothesis that the terms reflecting the
trade-induced composition effect are jointly
zero.24 Although the sign and significance of
some individual coefficients vary across speci-
fications, the results from Model B and Model C
in both random and fixed effects are very sim-
ilar. At the sample mean, the overall elasticity
of concentrations to an increase in trade inten-
sity is relatively constant, ranging from approx-
imately ⫺0.4 to ⫺0.9. Therefore, for an average
country in our sample the trade-induced com-
position effect is negative. Considering the in-
dividual coefficients, it is clear that country
characteristics describing both relative income
and abundance are important, but it is difficult
to evaluate the relative strength of pollution
24
This is in contrast to the case where trade intensity
appears alone or is replaced by other measures of “open-
ness.” We investigated this issue more fully in Antweiler et
al. (1998 Table 2 p. 29).
SEPTEMBER 2001
haven and factor abundance motives. We
present several methods of evaluation below.
Site-Specific and Country-Type Consider-
ations.—Because income gains may not equally
translate into policy responses we note it is
important to distinguish between Communist
and non-Communist countries. The Communist
country interactions with income and income
squared in Models B and C suggest that the
technique effect is very small or nonexistent in
Communist countries. For example, using the
fixed-effects results from column (6), we cannot
reject the hypothesis of a zero technique effect
in Communist countries! In the random-effects
case in column (3), the technique elasticity is
fully one-third of that for our average, non-
Communist country.25 We investigated other
country-type effects by including a dummy
variable for those years a country was bound by
the Helsinki protocol on acid rain. Our results
indicate this variable has little explanatory
power. The results, however, do indicate that
site-specific land use and weather variables
have a bearing on concentrations as expected.
Higher temperatures both dissipate pollution
faster and reduce the need for home heating;
precipitation highly concentrated in one season
reduces the ability of rain to wash out
concentrations.
B. Discussion and Evaluation
Although the results in Table 1 appear to be
supportive of our theory, it is important to go
beyond sign and significance tests to investigate
whether the magnitude of these estimates are in
some sense plausible. We pursue several of
these reality checks below.
To start note that the implied scale, compo-
sition, and technique elasticities are not implau-
sibly high, and all are significantly different
from zero. Together these elasticities provide
some simple reality checks. For example, sup-
pose our average economy experienced neutral
technological progress of 1 percent, raising
both GDP and GNP per person by 1 percent.
25
The technique elasticity in the random-effects case is
much smaller ⫺0.50 but is significantly different from zero;
the technique elasticity in the fixed-effects case is ⫺0.062
with a 95-percent confidence interval of [⫺0.90, 0.78].
VOL. 91 NO. 4 ANTWEILER ET AL.: IS FREE TRADE GOOD FOR THE ENVIRONMENT?
According to our estimates from Table 1, the
positive scale effect from this growth will al-
ways be dominated by the negative technique
effect.26 Although the estimates differ across
columns, in all cases our results indicate neutral
technological progress lowers pollution concen-
trations. Alternatively, when an increase in in-
come and production is fueled entirely by
capital accumulation, the picture is far less fa-
vorable to the environment. If we assume a
share of capital in output of 1⁄3 , then the full
impact of capital accumulation working through
scale, composition, and technique effects is to
raise pollution concentrations.27 Even though
these two exercises are not tests of our theory,
the results are reassuringly close to what we
may have expected ex ante.
To assess the plausibility of our trade inten-
sity elasticity, we calculated the trade intensity
elasticity for all countries in our sample. From
Proposition 1 we note that the sign of the trade-
induced composition effect should reflect a
country’s comparative advantage in clean ver-
sus dirty goods. Therefore it is not plausible that
all countries in the world have negative trade
intensity elasticities. Although we have only a
sample of countries it seems reasonable to ex-
pect both positive and negative elasticities.
As a check on our theory we present in Fig-
ures 2 and 3 below a plot of country-specific
26
Holding input use constant (capital, labor, and pollu-
tion), neutral technological progress raises output in our
model. Each unit of pollution is more productive than be-
fore, and this via a scale effect argues for more pollution.
Because real incomes are now higher, however, pollution
may in fact fall from a technique effect. Whether we have
more or less pollution in equilibrium after the shock there-
fore depends on the relative strength of these two effects.
27
Take, for example, the estimates from column (6).
Then our estimates indicate that a 1-percent increase in the
capital-to-labor ratio raises concentrations by perhaps 1
percent, all else equal. However, an increase in the capital-
to-labor ratio will have accompanying impacts on the scale
of economic activity and on real incomes. If we make a
back-of-the-envelope calculation by taking capital’s share
in the value of domestic output at 1/3, then capital accumu-
lation leading to a 1-percent increase in the capital-to-labor
ratio creates a 1/3-percentage-point increase in GDP per
capita and GDP/km2. Therefore, capital accumulation also
creates an induced technique effect of approximately ⫺1.2/
3 ⫽ ⫺0.4 and an induced scale effect of perhaps 0.13 ⫽
0.39/3. Adding the direct composition effect to these esti-
mates suggests that economic growth fueled entirely by
capital accumulation raises pollution concentrations.
895
elasticities against relative income using esti-
mates from Model B in columns (2) and (5) of
Table 1. Although there are more positive elas-
ticities in Figure 2 than 3, in both there is a
distribution of elasticities around zero. Our in-
ference is simply that some countries’ pollution
demand shifts right with a fall in trade frictions
and some shift left because countries differ in
their comparative advantage.28 For example,
from either Figure 2 or Figure 3 we would
conclude a small trade liberalization in Canada,
all else equal, shifts its pollution demand curve
to the right. The inference is that, despite Can-
ada’s relatively high income, its comparative
advantage lies in capital-intensive dirty prod-
ucts. Alternatively, we would conclude a small
trade liberalization in India shifts its pollution
demand curve to the left, the inference being
that, despite its relatively low income, its com-
parative advantage lies in labor-intensive and
relatively clean goods production. Although
these two countries estimates may accord well
with our intuition, other country-specific elas-
ticities are harder to explain [e.g., why is Ma-
laysia’s elasticity (MYS) so negative and
Switzerland’s (CHE) so positive?]. Because our
country-specific estimates do vary across spec-
ifications, we caution the reader from drawing
too strong an inference from any one of them.
Pollution Haven and Factor Abundance
Motives.—The second feature of note in Figures
2 and 3 is that the elasticity estimates increase
with relative income. Note that if the simple
pollution haven hypothesis were literally true
and the sole determinant of trade in dirty prod-
ucts, we would expect just the opposite—a
strong negative correlation between relative in-
come and the magnitude of our country-specific
elasticities. This is because, under the pollution
haven hypothesis, poor countries specialize in
dirty goods and rich countries specialize in
clean goods. A small movement toward free
trade would shift the pollution demand curve
inward for a rich country and outward for a poor
country. In fact, as shown in the figures, the
relationship is definitely nonnegative and, in
28
The random-effects implementation in Figure 2 has
more positive point elasticities than the fixed effects in
Figure 3, but relatively minor changes in specifications
moves the entire set of fixed-effects estimates upward.
896 THE AMERICAN ECONOMIC REVIEW
FIGURE 2. COUNTRY-SPECIFIC TRADE ELASTICITIES [MODEL B, RANDOM EFFECTS, CORRESPONDING
fact, slightly positive.29 It appears that if any-
thing, high-income countries have a comparative
advantage in dirty capital-intensive products.
In total, although changes in trade intensity
seem to matter, the magnitude of the induced
change in pollution concentrations appears rel-
atively small. In Figure 2 the vast majority of
countries have trade intensity elasticities less
than 1 in absolute value; in Figure 3 the major-
ity of countries also satisfy this requirement.
One explanation for these findings is simple:
low-income countries typically have both low
incomes per capita and low capital-to-labor ra-
tios. The pollution haven hypothesis suggests
that a low-income economy should be made
dirtier by trade, but if pollution-intensive indus-
tries are also capital-intensive then, whatever
benefits accrue from lax pollution regulation
could be largely undone by the relatively higher
price of capital in this capital-scarce country. As
a result, further openness to trade will have a
very small effect on the pollution intensity of
output for low-income countries. Similarly,
high-income countries have both high income
and high capital-to-labor ratios. The former ar-
29
Even excluding the strongly negative elasticities of
Malaysia (MYS) and Iraq (IRQ), the relationship is signif-
icantly positive in both Figures 2 and 3.
SEPTEMBER 2001
TO TABLE 1 COLUMN (2)]
gues in favor of trade lowering the pollution
intensity of output, whereas the latter argues in
favor of trade raising it.
Judging from Figure 2 and 3 it appears that, if
anything, factor endowment motives are offset-
ting tighter pollution policy in relatively rich
countries. This may explain why other investi-
gations have failed to find a significant rela-
tionship between the strictness of pollution
regulations and decreased trade in capital-
intensive dirty goods. It may also explain why
previous researchers have found it quite difficult
to find pollution haven effects in the data. It is
not that the (ceterus paribus) pollution haven
hypothesis is wrong, or that the (ceterus pari-
bus) factor endowment driven basis for trade is
absent. But rather, because these two partial
theories work against each other, the net result
of the potentially very large composition effects
predicted by either theory turn out to be rather
small in practice.
C. An Environmental Assessment
of Freer Trade
Taking factor endowments as fixed, a lower-
ing of transport costs or trade barriers raises the
value of domestic output and real income in a
small open economy. The value of output and
the value of income rise by (approximately) the
VOL. 91 NO. 4 ANTWEILER ET AL.: IS FREE TRADE GOOD FOR THE ENVIRONMENT?
FIGURE 3. COUNTRY-SPECIFIC TRADE ELASTICITIES [MODEL B, FIXED EFFECTS, CORRESPONDING
same percentage, and this creates both scale and
technique effects. Using the estimates from ei-
ther Model B or Model C in Table 1, the net
effect of a 1-percent change in income created
by trade is a 0.8 – 0.9-percent fall in emissions:
that is, using (21) we have ␲1 ⫺ ␲3 ⬍ 0. The
composition effect of trade for our average
country is also negative; that is, from (21) we
have ␲4 ⬍ 0. Therefore, for an average country
in our sample, the full impact of further open-
ness to international trade—through scale, tech-
nique, and composition effects—will be a
reduction in SO2 concentrations!
Similar results follow from all of our speci-
fications: the scale elasticity is dominated by the
technique elasticity, whereas the trade-induced
composition effect of trade is typically small in
magnitude.30 How large a reduction any one
country reaps from a fall in trade frictions will,
of course, depend on country characteristics, the
impact further trade has on domestic income
and output, and how the ongoing process of
globalization is affecting country characteristics
30
In the Technical Appendix we investigate a two-
equation two-stage least-squares (2SLS) fixed-effects model
where our city scale measure and pollution are determined
simultaneously. We find a scale elasticity in excess of 1, but
also a much larger technique elasticity (approaching ⫺2).
As a result, our conclusion on their relative magnitude
remains unchanged.
897
TO TABLE 1 COLUMN (5)]
elsewhere in the world. Given that countries
will differ somewhat in their particular elastic-
ities, some may indeed be made dirtier from a
reduction in trade frictions, but we expect that
trade’s effect—whether positive or negative—
will be small.31 After all, the estimated impact
of even a large trade liberalization on GDP is
small, and when this small increase in GDP is
filtered through our estimated scale and tech-
nique elasticities, the net effect is likely to be
smaller still. Although, in theory, trade’s impact
on the pollution intensity of output can be large,
in practice our estimates suggest a much more
muted response.
These conclusions, however, rely on our
assumption that factor endowments and tech-
nology remain fixed when trade frictions fall.
31
Averaging across countries and years, the average
trade intensity is 41 percent with a standard deviation of 32
percentage points. A one-standard-deviation change in trade
intensity is then equal to a 79 percent change in trade
intensity from its average value, whereas a one-standard-
deviation change in pollution concentrations is equivalent to
a 203-percent change from its average value. Using our
fixed-effects estimate of the trade intensity elasticity from
Table 1, column (6), a 79-percent increase in trade intensity
amounts to a 69-percent reduction in pollution concentra-
tions, or about one-third of a standard deviation of pollution
concentration. Using the random-effects estimate from col-
umn (3) in Table 1, the same one-standard-deviation change
in trade intensity amounts to a change of less than one-sixth
of the standard deviation in pollution concentration.
898 THE AMERICAN ECONOMIC REVIEW
If further trade spurs capital accumulation or
brings knowledge spillovers and hastens tech-
nological progress, then other calculations
must come into play. Whether these trade-
induced changes bring about a net improve-
ment in the environment will depend on their
estimated size because they have opposing
effects on pollution concentrations. There is a
burgeoning empirical literature linking open-
ness to growth and technology adoption and we
have nothing new to add here. But clearly our
estimates, together with input from these other
sources, might provide another method for assess-
ing trade’s full impact.
D. Alternative Specifications
The results from Table 1 and Figures 2 and 3
suggest that our approach of dividing the deter-
minants of pollution into scale, technique, and
composition effects is fruitful. It is, however,
important to investigate whether our results are
robust to reasonable changes in specification,
time period, and so forth. We have conducted
numerous sensitivity tests of our specification
and report four alternatives in Table 2. Addi-
tional results are available in our Technical Ap-
pendix, available upon request from the authors.
In all columns we amend our full Model C from
Table 1 to include other determinants, investi-
gate other time periods, or adopt more flexible
specifications.
In columns (1) and (5) we have restricted
the time period of our analysis to the years
1976 –1991. Before 1976 only a few countries
participated and after funding ceased in 1991
country coverage is reduced. To allow for
possible data quality and sample selection
problems we consider this shorter time pe-
riod. This shortened period has 489 fewer
observations, although as shown in columns
(1) and (5) the results are similar both in
terms of elasticity estimates and significance
levels. Our overall conclusions regarding the
relative strength of scale versus technique
effects remains, as does the muted response to
changes in trade intensity.
In columns (2) and (6) we investigate the
importance of other factor endowments. In our
parsimonious model of pollution demand and
supply “factor endowments” enter directly only
through the inclusion of the capital-to-labor ra-
SEPTEMBER 2001
tio. Other potential factor endowments were
excluded because, even though they are un-
doubtedly relevant to income levels, there is
little reason to believe that they have an inde-
pendent effect on either the demand for a clean
environment or the derived demand for pollu-
tion emissions; however, local abundance either
in clean or dirty fuels may affect emissions. We
investigate this possibility by adding in columns
(2) and (6) country-specific measures of hard
and soft coal deposits per worker. Overall the
results support our earlier conclusions.
Although a greater endowment of high sulfur
soft coal leads to more concentrations, at least in
the random-effects implementation in column (2),
this effect disappears in the fixed-effects estima-
tion in column (6). These results are not surpris-
ing: an abundance of soft coal means that
countries like China will have higher concentra-
tions, all else equal, but because mineral endow-
ments have very little time series variation they
will be well captured by country fixed effects.
Consequently, although abundance of high sulfur
coal surely adds to emissions, its explicit inclusion
has very little effect on our results.
In columns (3) and (6) we investigate the
impact foreign direct investment may have on
our results. If multinational corporations have
common production methods in both developed
and developing countries for engineering, qual-
ity control, or other reasons, then the pollution
intensity of their production will be determined
by the income per capita of the source country.
As a result, a larger multinational presence in a
poor country may mean it is cleaner, all else
equal; however, there is an alternative hypoth-
esis working in the other direction. If multina-
tionals locate in poor countries because of their
lax environmental protection, then we may in-
stead find a positive relationship between for-
eign direct investment (FDI) and pollution. To
investigate this issue we have calculated for
each year and country in our sample the ratio of
its inward stock of FDI to its overall capital
stock.32 We refer to this as FDI intensity: it
measures the share of the domestic capital stock
32
In theory we may want to distinguish between acqui-
sitions of brownfields, capacity expansions, and greenfield
investments because greenfield investors are perhaps more
likely to bring their own plant-specific technology to the
foreign country.
VOL. 91 NO. 4 ANTWEILER ET AL.: IS FREE TRADE GOOD FOR THE ENVIRONMENT? 899

TABLE 2—SENSITIVITY TESTS

Estimation method: Random effects Fixed effects

Model specification: Time Factors FDI Scale Time Factors FDI Scale
Variable/column: (1) (2) (3) (4) (5) (6) (7) (8)

Intercept ⫺2.545*** ⫺3.141*** ⫺3.650*** ⫺3.635*** ⫺1.697 ⫺4.679*** ⫺4.679*** ⫺4.345***

City economic intensity GDP/km2 0.068*** 0.075*** 0.070*** 0.154*** 0.091* 0.087* 0.092* 0.029
(City economic intensity)2/1,000 ⫺0.054 ⫺0.275 ⫺0.231 ⫺0.254 ⫺0.329 ⫺0.373
Capital abundance (K/L) ⫺0.115 0.289* 0.439*** 0.279* ⫺0.077 0.426* 0.754*** 0.489**
(K/L)2 0.036** 0.012 ⫺0.002 0.010 0.032 0.008 ⫺0.024 0.006
Lagged per capita income ⫺1.771*** ⫺1.629*** ⫺1.451*** ⫺0.852* ⫺3.109** ⫺0.428 ⫺0.981 ⫺0.052
(Income)2 0.585*** 0.717*** 0.660*** 0.611*** 0.512* 0.757*** 0.563*** 0.564***
(K/L) ⫻ (I) ⫺0.147* ⫺0.276*** ⫺0.255*** ⫺0.278*** ⫺0.041 ⫺0.401*** ⫺0.297*** ⫺0.400***
Trade intensity TI ⫽ (X⫹M)/GDP ⫺2.466*** ⫺0.671 ⫺0.198 ⫺0.501 ⫺7.161*** ⫺3.333** ⫺3.747*** ⫺2.964**
TI ⫻ REL.K/L 0.934 ⫺1.758* ⫺2.879** ⫺1.890* 1.699 ⫺2.281* ⫺2.737* ⫺2.541*
TI ⫻ (REL.K/L)2 ⫺0.876** ⫺0.252 0.304 ⫺0.142 ⫺1.043** ⫺0.131 0.811 ⫺0.112
TI ⫻ REL.INC. 1.344** 1.167* 1.518** 1.212* 4.495*** 3.097*** 2.720** 2.677***
TI ⫻ (REL.INC.)2 ⫺0.228 ⫺0.309* ⫺0.308* ⫺0.354** ⫺0.742** ⫺0.723*** ⫺0.360 ⫺0.617**
TI ⫻ (REL.K/L) ⫻ (REL.INC.) 0.333 0.803*** 0.519 0.784** 0.164 0.922** 0.092 0.993**
Suburban dummy ⫺0.284 ⫺0.424* ⫺0.445* ⫺0.490**
Rural dummy ⫺0.519 ⫺0.620 ⫺0.655 ⫺0.730*
Inward FDI stock/capital stock 0.039 1.234*
FDI/K ⫻ poor countries 4.736 6.314
FDI/K ⫻ rich countries ⫺0.362 ⫺0.828
Communist country (C.C.) dummy ⫺0.971* ⫺0.326 ⫺0.110 ⫺0.475
C.C. dummy ⫻ income 7.785*** 4.602* 4.201 5.668** 16.809*** 11.751*** 10.271** 9.819**
C.C. dummy ⫻ (income)2 ⫺8.683*** ⫺5.683* ⫺5.677* ⫺7.127** ⫺14.13*** ⫺10.84*** ⫺8.840** ⫺9.039***
Average temperature ⫺0.061*** ⫺0.056*** ⫺0.051*** ⫺0.052*** ⫺0.072* ⫺0.055* ⫺0.049 ⫺0.062*
Precipitation variation 8.867* 5.859 7.633 5.882 14.298** 10.893* 13.972** 11.471*
Hard coal (per worker) ⫺0.690 4.217
Soft coal (per worker) 2.998* 4.120
Helsinki Protocol ⫺0.242* ⫺0.157 ⫺0.092 ⫺0.094 ⫺0.173 ⫺0.054 0.036 0.035

Observations 2066 2555 2525 2555 2066 2555 2525 2555

Groups 274 290 284 290 274 290 284 290
R2 0.3243 0.3779 0.3684 0.389 0.1677 0.0605 0.1577 0.1337
Log-likelihood ⫺2030 ⫺2519 ⫺2496 ⫺2512 ⫺2982 ⫺3900 ⫺3858 ⫺3899
Hausman test/Wald ␹2 (df) 94.211*** 55.536 84.269*** 59.331*

Scale elasticity (all/middle) 0.314*** 0.333*** 0.318*** 0.499*** 0.414* 0.388* 0.412** 0.094
Scale elasticity (poor countries) 0.643*** 0.355*
Scale elasticity (rich countries) 0.537*** 0.598***
Composition elasticity 0.985*** 1.008*** 1.026*** 0.803*** 1.442** 0.864* 1.150** 1.056**
Technique elasticity ⫺1.425*** ⫺1.740*** ⫺1.551*** ⫺1.218*** ⫺2.220*** ⫺1.230** ⫺1.505*** ⫺1.204**
Trade intensity elasticity ⫺0.266** ⫺0.351*** ⫺0.364** ⫺0.292** ⫺0.543** ⫺0.791*** ⫺1.189*** ⫺0.899***
FDI elasticity (poor countries) 0.091 0.143
FDI elasticity (middle) 0.004 0.121*
FDI elasticity (rich countries) ⫺0.039 0.049

Notes: No standard errors or t-statistics are shown. The dependent variable is the log of the median of SO2 concentrations
at each observation site. All model specifications use time fixed effects. Elasticities are evaluated at sample means using the
Delta method. Model “Time” includes only the years 1976 –1991 of the primary GEMS phase; model “Factors” introduces
factor endowment-related variables; and model “FDI” allows for an an inward foreign direct investment stock relative to the
overall capital stock, interacted with income. The terms rich countries and poor countries refer to the top and bottom 30
percent of countries in the Penn World Tables with respect to per capita GDP.
* Significance at the 95-percent confidence level.
** Significance at the 99-percent confidence level.
*** Significance at the 99.9-percent confidence level.

that may have cleaner than expected techniques
of production. We then interact this measure
with a categorical variable representing a coun-
try’s income per capita to allow the multina-
tional effect to differ across rich and poor
countries. The results from this exercise are
mixed. In the fixed-effects estimation, there is a
slight positive relationship between FDI and
concentrations for poor, middle-income, and rich
countries. Only the middle-income relationship
900 THE AMERICAN ECONOMIC REVIEW
is statistically significant. Moreover, the coeffi-
cient estimates imply that a 10 percentage point
increase in the ratio of the FDI stock to K stock
would raise concentrations by about 1 percent.
This is a small effect on pollution concentra-
tions arising from a very large change in FDI. In
the random-effects estimation, none of the co-
efficients is significantly different from zero.
Overall, we find little relationship between the
extent of FDI in an economy (even a poor one)
and its pollution level. Again our elasticity es-
timates are changed only slightly from our ear-
lier specification.
Finally, in columns (4) and (8) we investigate
whether our scale effect differs significantly
across countries categorized by income per cap-
ita levels. If there were important nonhomothe-
ticities in production or consumption, or if our
method of constructing scale was more appro-
priate for some income categories than others,
this may show up when we allow for disaggre-
gation. The results in column (4) indicate that,
whereas separate estimation of scale across in-
come categories tends to raise the overall elas-
ticity estimates to approximately 0.5 or 0.6, the
results are very similar to those presented ear-
lier. In column (8) we find similar results for the
poor and rich categories, but the middle-income
group has a much lower elasticity and it is not
precisely estimated. The middle-income group
results may be a consequence of the exclusive
reliance of fixed effects on the (now smaller)
within-group variation for estimation. Despite
these caveats, the elasticity estimates, although
different across classes, are not significantly
different from each other.33
E. Alternative Theories: Tariff Substitution
and Distributional Motives
In our framework, governments use pollution
policy only to target pollution, and not for other
purposes, such as to influence the terms of trade
33
In our random-effects implementation we can go fur-
ther and divide the components of our scale measure into
population density and contemporaneous GDP/N. Doing so
yields an elasticity of concentrations to population density
of 0.57; an elasticity with respect to contemporaneous
GDP/N of 0.25; and an overall scale elasticity of 0.65. We
cannot reject our restriction that both population density and
contemporaneous GDP/N share the same elasticity.
SEPTEMBER 2001
or to redistribute income. As a result, the pol-
lution tax is always equal to effective marginal
damage, and changes in openness affect our
pollution supply curve only through its impact
on real income and relative prices. More gener-
ally, pollution policy and openness may be
linked through other channels if governments
use pollution policy for other purposes. To ex-
amine this possibility further we need to specify
the potential theoretical links involved and then
ask what variation in the data such a link would
create. There are (at least) two reasons why
trade and environmental policies may be linked.
Each of these links is probably deserving of a
paper-length treatment of both theory and fur-
ther empirical work, but here our goal is merely
to sketch two possibilities and identify their
probable impact on our empirical results.
Tariff Substitution.—The first link arises
from market power. If countries were large and
had complete discretion in setting both trade
and pollution policy, then both instruments
would be targeted: the tariff would be set at its
optimal level according to the inverse elasticity
rule, and the pollution tax would equal effective
marginal damage as in our small open economy
case. But if tariff choices are constrained by
international agreements, then governments
may find it useful to substitute environmental
policy for trade policy. We will refer to this as
the tariff substitution motive. To proceed further
consider the optimal pollution tax for a large
open economy:
(27) 冉
␶ ⫽ T ␾ 共 p, I兲 ⫹ pE *p t ⫺
1
␧* 冊冏 冏
dp/d ␶
dz/d ␶
,
where ␧* is the elasticity of foreign export sup-
ply, E *p is the price derivative of foreign export
supply, and t is the ad valorem tariff. To high-
light the tariff substitution motive, rewrite (27)
to obtain the gap between the pollution tax and
effective marginal damage:
(28) 冉
␶ ⫺ T ␾ 共 p, I兲 ⫽ pE *p t ⫺
1
␧* 冊冏 冏
dp/d ␶
dz/d ␶
.
This gap reflects the tariff substitution motive.
Consider first a dirty good importer. When the
VOL. 91 NO. 4 ANTWEILER ET AL.: IS FREE TRADE GOOD FOR THE ENVIRONMENT?
tariff is set at its optimal level, the right-hand
side of (28) is zero: each instrument is targeted
and there is no tariff substitution motive. If the
tariff is constrained to be below its optimal
level, then the right-hand side of (28) is nega-
tive and a dirty good importer sets the pollution
tax below marginal damage to substitute for the
tariff. Increased openness therefore induces a
loosening of pollution policy that was not ac-
counted for in our empirical work.34 For a dirty
good exporter, a similar argument works in re-
verse: as trade restrictions are reduced below
their optimal level, there is an incentive to
tighten pollution policy because pollution taxes
can be used as a substitute for an export tax.
Increased openness in this case leads to a tight-
ening of pollution policy not accounted for in
the empirical work.
The Redistribution Motive.—Even if coun-
tries are small in world markets, governments
may adjust pollution taxes to try to undo the
redistribution of income caused by increased
openness. We refer to this as the redistribu-
tive motive. To illustrate this motive, retain
our small open economy framework, but now
assume Greens and Browns differ in factor
ownership, with Browns having greater capi-
tal per person than Greens; for simplicity, let
u(I) ⫽ ln(I). Then given the government’s
weight ␭ on Greens, the pollution tax will be
used both to target pollution and also to in-
fluence the income distribution. This again
yields a gap between the pollution tax and
effective marginal damage:
(29) ␶ ⫺ T ␾ 共 p, I兲 ⫽
␭⫺s
s共1 ⫺ s兲
G 冏
ds/d ␶
dz/d ␶
, 冏
where s is the share of Greens in national in-
come. Note that if the weight given to Greens
exceeds their current share of national income,
then the pollution tax is higher than marginal
34
We know that the gap is zero when tariffs are optimal
and is negative when tariffs are zero, so “on average” we
expect an increase in openness to widen the gap. However,
it should be noted that because the right-hand side of (28)
includes the elasticity of foreign export supply, world
prices, and so forth, the gap between ␶ and marginal damage
may not increase monotonically as tariffs fall.
901
damage. This is because higher pollution taxes
lower the producer price of X and raise the real
return to labor. Alternatively, if the weight
given to Browns is greater than their current
income share, the right-hand side of (29) is
negative: the pollution tax is set below marginal
damage to raise the real return to capital.
Consider the effects of increased openness,
starting from the position where ␭ ⫽ s. In this
case, the pollution tax in a dirty good exporting
country rises above marginal damage to com-
pensate for the Greens’ loss in income.35 In-
creased openness hurts workers in this case, and
the government cushions the blow by tightening
the pollution tax to raise wages. For a dirty good
importer, the result is reversed: increased open-
ness leads to a loosening of pollution policy to
compensate for Browns’ loss in income.
Implications of the Theories.—Each theory
adds a country-specific unmeasured factor to
our simpler determinants of pollution. The fac-
tor is a country-type effect, and it is relevant to
both a country’s degree of openness and its
pollution supply curve. In the large-country
case, the unmeasured country type is described
by its trade pattern and market power; and in the
redistributive theory, by its preferred and actual
income distribution.
The impact these country-type effects have
on our empirical results depends on whether
they are time varying. If the country differences
are simple level effects and do not vary over
time, then our fixed-effects implementation is
appropriate, even if country type is correlated
with other right-hand-side regressors. If country
type is uncorrelated with the right-hand-side
variables, then our random-effects estimation is
more efficient and still unbiased. On average,
countries of different types would have different
pollution levels, but they would respond simi-
larly to changes in openness, scale, and so forth.
Given that the panel is quite short for many
countries, this constant-over-time country-type
assumption may be appropriate.
If these country-type effects are time varying,
then they will be correlated with our measure of
35
Let ⌫ ⫽ ␶ ⫺ T ␾ ( p, I). Then, evaluating at ␭ ⫽ s, we
have d⌫/d ␤ ⫽ ⫺s ␤ G兩s ␶ 兩/[兩z ␶ 兩s(1 ⫺ s)] ⬎ 0, because
s ␤ ⬍ 0 (an increase in openness reduces workers’ share of
income).
902 THE AMERICAN ECONOMIC REVIEW
openness. Consequently, our results concerning
the effects of further openness and income
on pollution may be undermined. To assess
whether these motives could be responsible for
our results, consider what is left out by our
simpler specification. Start with tariff substitu-
tion. When tariffs are reduced and openness
rises, tariff substitution creates an unaccounted-
for upward shift in pollution supply for a dirty
good exporter. This leads to less pollution than
our model would predict. Alternatively, tariff
substitution produces an unaccounted-for down-
ward shift in pollution supply for a dirty good
importer. In this case, tariff substitution leads to
more pollution than our model would predict. In
both cases, unaccounted-for shifts in supply
work against the shift in pollution demand cre-
ated by further openness. Similarly, the redis-
tributive motive shifts the pollution supply
curve up for a dirty good exporter and down for
a dirty good importer in response to increased
openness. Again, we find that this additional
potential determinant of pollution tends to
dampen the composition effect created by fur-
ther openness.
Could tariff substitution or redistribution mo-
tives be responsible for the large technique ef-
fects we find? Both of these alternative theories
lead to an unmeasured positive relationship be-
tween pollution and openness for some coun-
tries. Therefore, it is difficult to see how the
omission of either of these two additional de-
terminants would manifest itself in a stronger
measured negative relationship between income
and pollution.
These two alternative theories, however, do
suggest a smaller (than we would otherwise
predict) change in the composition of output
created by a fall in trade frictions. As such,
another interpretation of our findings of a small
trade-induced composition effect is that govern-
ments may be simultaneously dampening the
impact of increased openness on pollution with
compensating changes in pollution taxes. To
disentangle the additional shifts in pollution
supply suggested by either theory from the other
effects in our data would require us to obtain
information on changes in both tariff levels and
pollution regulations over time for many coun-
tries in our sample; or employ knowledge about
the preferred and actual income distribution in
many countries over time. But good cross-
SEPTEMBER 2001
country and time-series data on pollution regu-
lations and trade protection are unavailable, and
the preferred income distribution is unobserv-
able. These two alternative theories are perhaps
best examined within a single country context
where data on regulations, tariffs, and income
distribution are available.36
IV. Conclusions
This paper investigates how openness to trad-
ing opportunities affects pollution concentra-
tions. We started with a theoretical specification
highlighting scale, technique, and composition
effects and then showed how this theoretical
decomposition is useful in thinking about the
relationship between openness to international
markets and the environment. In our empirical
section we adopted a specification directly
linked to our earlier theory. We then estimated
this specification, paying special attention to the
potentially confounding influences introduced
by the panel structure of our data set. Our re-
sults consistently indicate that scale, technique,
and composition effects are not just theoretical
constructs with no empirical counterparts;
rather, these theoretical constructs can be iden-
tified and their magnitude measured. Moreover,
once measured they can play a useful role in
determining the likely environmental conse-
quences of technological progress, capital accu-
mulation, or increased trade. These estimates
may also be useful in aggregate CGE modeling
of the effects of various free trade agreements
and other trade reforms [see, e.g., Michael J.
Ferrantino and Linda A. Linkins (1996)].
Our work is distinguished by the endogeneity
of pollution policy and the close connection we
have tried to draw between theory and empirical
estimation. Although it represents a useful first
step toward answering our title’s question, it is
clearly not the last. The benefits of our approach
are transparency, simplicity, and explicitness.
36
We discuss here the extreme case where pollution
policy is the only available instrument. There are many
other instruments (such as production subsidies), which are
a better substitute for a tariff; and similarly there are many
other instruments (such as income transfers), which can
redistribute income. To the extent that these other instru-
ments are available, then the dampening shift in pollution
supply that we find above will be less relevant.
VOL. 91 NO. 4 ANTWEILER ET AL.: IS FREE TRADE GOOD FOR THE ENVIRONMENT?
We have presented an explicit model of trade
and pollution and we have moved from theory
to empirical estimation in a transparent manner.
Transparency immediately leads to suggestions
for extension along both theoretical and empir-
ical lines. Simplicity means additional questions
can be addressed within our framework. And
the benefit of presenting an explicit pollution
demand-and-supply model is that researchers
should now be drawn to deeper questions con-
cerning endogeneity, omitted variables, and sam-
ple selection. We view this paper’s attempt at
integrating theory with empirical work as its ma-
jor contribution to ongoing research in this area.
Several extensions seem natural. One cost of
reduced-form estimation is that structural pa-
rameters remain hidden. Reduced-form estima-
tion was essentially forced on us by the lack of
data on regulations in many developing coun-
tries. If we adopt similar methods but restrict
the sample to industrialized countries, we could
then employ measures of pollution stringency
as proxies for pollution regulations. With data
on both the quantity and “price” of pollution,
the identification of structural parameters seems
possible. A shift to a narrower set of countries
with more detailed data may also allow us to
examine the tariff substitution and redistributive
motives we discussed, but did not estimate,
here. Finally, our method for adding up scale,
composition, and technique effects could be en-
hanced by direct estimates of the income gains
brought about by trade liberalization, and im-
proved by explicit consideration of foreign di-
rect investment and technology transfer.
As with any empirical exercise some questions
remain unanswered, but overall our estimates in-
dicate that increases in a country’s exposure to
international markets create small but measurable
changes in pollution concentrations by altering the
pollution intensity of national output. Although
our estimates indicate that greater trade intensity
creates only relatively small changes in pollution
via a composition effect, economic theory and
numerous empirical studies demonstrate that trade
also raises the value of national output and in-
come. These associated increases in output and
incomes will then exert an impact on pollution
concentrations via our estimated scale and tech-
nique effects. Our estimates of the scale and tech-
nique elasticities indicate that, if openness to
international markets raises both output and in-
903
come by 1 percent, pollution concentrations fall
by approximately 1 percent. Putting this calcula-
tion together with our earlier evidence on compo-
sition effects yields a somewhat surprising
conclusion with regard to sulfur dioxide: freer
trade is good for the environment.
APPENDIX: A: PROOF OF PROPOSITIONS
PROOF OF PROPOSITION 1:
Use (17) and (18), and hold T, S, I, K/L, and
p w constant:
ẑ ⫽ 关共1 ⫹ a兲␧ ␸ ,p ⫹ ␧ e,p/ ␶ 兴 ␤ˆ
⫺ 关a␧ ␸ ,p ⫹ ␧ e,p/ ␶ 兴 ␶ˆ
⫽ 关␧ ␸ ,p ⫹ 共a␧ ␸ ,p ⫹ ␧ e,p/ ␶ 兲共1 ⫺ ␧ MD,p 兲兴 ␤ˆ .
Using Roy’s identity, we can show that ␧MD,p is
equal to the share of x in consumption (note that
when calculating this elasticity, real income I is
held constant, and so we obtain a pure substitution
effect). Hence, ␧MD,p ⬍ 1, and z rises as ␤ rises.
For a dirty good exporter, increased openness cor-
responds to an increase in ␤, and hence all else
equal, a reduction in trade frictions raises pollu-
tion. For a dirty good importer, a reduction in
trade frictions lowers ␤, and pollution falls.
PROOF OF PROPOSITION 2:
Note z ⫽ ⫺R ␶ (where R ␶ ⫽ ⫺eR p N and
R ␶␶ ⬎ 0). Then
dz ⫽ ⫺ 关R ␶␶ d ␶ ⫹ p w 共1 ⫺ ␪ 兲R ␶ p N d ␤ 兴
冋 冏 册
d␶
⫽ R ␶␶ p w d␤ ⫺ d␶ ,
dp z
where the last step follows from differentiating
z ⫽ ⫺R␶, holding z constant. Next eliminate d␶ by
differentiating (10), noting that I ⫽ G/(N␳) and
that dG ⫽ pw(1 ⫺ ␪ ) RpN d␤ ⫹ ␶ dz. Rearranging
and converting to elasticity form yields
dz
d␤
⫽ 冋 冏
p d␶
␶ dp z
⫺ ␧ MD,p ⫹ ␧ MD,I
pM
G 册冒 H,
where M is imports of X and H is a positive
expression. From the proof of Proposition 1,
904 THE AMERICAN ECONOMIC REVIEW
␧ MD,p ⬍ 1. But ( p/ ␶ )(d ␶ /dp)兩 z ⬎ 1 because
z ⫽ ex and e is decreasing in ␶ /p. (An increase
in p raises x, and so to keep z constant, we need
␶ /p to rise.) Hence, if M ⬎ 0, then dz/d ␤ ⬎ 0
and so increased openness reduces pollution for
a dirty good importer (␤ falls). For a dirty good
exporter, M ⬍ 0 and ␤ rises when openness
rises. From the proof of Proposition 1, ␧ MD,p is
the share of X in consumption, and so with
␧ MD,I ⱕ 1, we have
dz
d␤
⬎ 冋 冏 册冒
p d␶
␶ dp z
⫺
px
G
H ⬎ 0,
where px/G ⬍ 1 is the share of X in output at
domestic prices. So pollution rises for a dirty
good exporter if ␧ MD,I ⱕ 1. Finally, if ␧ MD,I is
sufficiently large, the sign of dz/d ␤ is reversed
for a dirty good exporter and pollution falls as
openness rises.
PROOF OF PROPOSITION 3:
For a given p and I, Home’s relative de-
mand RD( p) is fixed. For given p and I, the
unit input coefficients given in (6) are fixed,
and hence ␹ approaches infinity as ␬ rises.
Consequently, there exists a ␬គ such that for
␬ ⬎ ␬គ , ␹ exceeds relative demand, and Home
exports X. The increase in pollution via the
trade-induced composition effect follows
from Proposition 1.
PROOF OF PROPOSITION 4:
The relative producer price of X is p N ⬍
p(1 ⫺ ␪ ) ⫺ ␶ e(1), where e(1) ⬎ 0. Because
␧ MD,I ⬎ ␧ ⬎ 0, ␶ increases without bound as
income rises given (18). Moreover, ␪ rises
from (4), and hence there exists some I for
which p N falls to 0, in which case X output
is 0. The relative demand for X is, how-
ever, independent of income. Hence for suf-
ficiently large I, Home must import X and
export Y. The fall in pollution from the trade-
induced composition effect follows from
Proposition 1.
PROOF OF PROPOSITION 5:
Define trade intensity as the value of exports
plus imports at world prices (excluding trans-
portation services). Using the trade balance con-
straint,
SEPTEMBER 2001
兩M x 兩
TI ⫽ 2p w ,
p 共1 ⫺ ␪ 兲x ⫹ y
w
where M x is imports of X. Consider first an
importer of X (M x ⬎ 0). Let G w ⫽ p w (1 ⫺
␪ ) x ⫹ y, and G ⫽ ␤ p w (1 ⫺ ␪ ) x ⫹ y. By
homotheticity, we can write the demand for X
as D x ⫽ h( p)G. Letting ␦ x ⫽ p w D x /G w , and
␸ ⫽ pw(1 ⫺ ␪ )x/Gw, we have TI ⫽ 2(␦x ⫺ ␸).
With some rearranging, we can write
␦ x ⫽ p w h关1 ⫹ 共 ␤ ⫺ 1兲 ␸ 兴.
Then
1 ⭸TI ⭸ ␦ x ⭸ ␸
⫽ ⫺
2 ⭸␤ ⭸␤ ⭸␤
⫽ 冋 冏
共p w 兲 2 ⭸D x
G w ⭸p u
⫺
⭸D x
⭸G x
M 册
⫹ 关p w h共 ␤ ⫺ 1兲 ⫺ 1兴 ␸ ␤ ⬍ 0,
where we have used the Slutsky decomposition.
Note that the substitution effect in demand is
negative (⭸D x /⭸p兩 u ⬍ 0) and the income effect
(⭸D x /⭸G) is positive, so the bracketed term
involving demand changes is negative. As well,
p w ␤ h ⬍ 1 from the consumer’s budget con-
straint, and ␸␤ ⬎ 0 (an increase in ␤ shifts
production toward X) and so the last term is
negative as well. Thus ⭸TI/⭸␤ ⬍ 0 for an im-
porter of X. Hence a fall in ␤ (a movement
toward 1) increases trade intensity. For an ex-
porter of X, one can proceed most simply by
replacing 兩p w M x 兩 with imports of Y, M y in the
definition of trade intensity and following a
similar analysis as earlier to conclude that an
increase in ␤ (a movement toward 1) raises
trade intensity.
APPENDIX B: DATA SET DESCRIPTION
The dependent variable in our study is the
concentration of sulfur dioxide at observation
sites in major cities around the world as ob-
tained through the GEMS/AIR data set supplied
by the World Health Organization. Measure-
ments are carried out using comparable meth-
VOL. 91 NO. 4 ANTWEILER ET AL.: IS FREE TRADE GOOD FOR THE ENVIRONMENT?
ods. Each observation station reports annual
summary statistics of SO2 concentrations such
as the median, the arithmetic and geometric
mean, as well as 90th and 95th percentiles.
We have chosen to use a logarithmic trans-
formation of the median SO2 concentration as
our dependent variable. The distribution of con-
centrations is highly skewed toward zero when
viewed on a linear scale. As was pointed out in
the WHO (1984) report about the GEMS/AIR
project, concentrations are more suitably de-
scribed by a lognormal distribution with a num-
ber of observations concentrated at the
measurement threshold of the measurement de-
vices. There is also an ambient level of SO2 in
the air that has natural causes.
A large share of observations were from the
United States because of this country’s exten-
sive network of air quality measurement sta-
tions. Other large contributor countries were
China, Canada, and Japan. Many of the other
observation stations provided short or discon-
tinuous streams of data while participating in
the GEMS/AIR project. All in all, our analysis
is based on over 2,600 observations from 293
observation stations in 109 cities around the
world; these cities are located in 44 countries.
The primary source for our data is the AIRS
Executive International Database that contains
information about ambient air pollution in na-
tions that voluntarily provide data to the GEMS/
AIR program sponsored by the United Nations
World Health Organization.37 We had problems
with the identification of several observation
stations. The longitude and latitude information
provided in one of the ancillary files was in
some cases incorrect and was corrected case by
case based on the description of the location.
Additional data sources for our regressors
include the Penn World Tables38 for macroeco-
37
This package is available from the United States
Environmental Protection Agency (US-EPA) at http://
www.epa.gov/airs/aexec.html. The US-EPA kindly pro-
vided a much more complete version of this data set that
included not only averages but also median and other per-
centiles of SO2 concentrations. We would like to express
our gratitude to Jonathan Miller of the US-EPA for provid-
ing additional GEMS/air data not contained in the public
release of the data base, and for patiently answering our
numerous technical questions.
38
Robert Summers and Alan Heston, “The Penn World
Table (Mark 5): An Expanded Set of International Compar-
905
nomic data, the World Investment Report39 for
inward FDI stock data, the CIESIN Global Pop-
ulation Distribution Database40 for population
density data, the World Resources Institute
World Resources Database41 for natural re-
sources and physical endowments, and data
from the Global Historical Climatology Net-
work42 (GHCN) for weather conditions at the
observation stations. Yet more time series were
obtained for tariff and nontariff trade barriers43
and educational attainment.44
Summary statistics for the major variables
appear in Table B1. Some of the variables war-
rant further explanation. First, our scale mea-
sure of economic activity GDP per square
kilometer is calculated by multiplying a
country’s real per capita GDP ($/person) with
each city’s population density (people/km2).
Extrapolations for per capita GDP were carried
out for the years past 1993 based on real growth
rates obtained from the IMF/IFS statistics. Pop-
ulation densities were available only for 1990.
The capital abundance (K/L) of countries was
obtained from the physical capital stock per
worker variable in the Penn World Tables. We
have adjusted this series for human capital by
applying a 0 –1 average education index (in
isons, 1950 –1988.” Quarterly Journal of Economics, May
1991, 106(2), pp. 327– 68. Available in revision 5.6 from
the Center for International Comparisons at the University
of Pennsylvania at http://pwt.econ.upenn.edu/.
39
United Nations Centre on Transnational Corporations,
1992 and 1999 volumes.
40
This data set from the Consortium for International
Earth Science Information Network (CIESIN) is available
only for 1990. It can be obtained freely from the United
Nations Environmental Programme server maintained by
the U.S. Geological Survey at http://grid2.cr.usgs.gov/
globalpop/1-degree/description.html.
41
World resources 1998 –1999: A guide to the global
environment, Oxford: Oxford University Press, 1998.
42
Information is available on monthly average temper-
atures, monthly precipitation, and atmospheric pressure.
The raw data and description file are available from the
National Climatic Data Center of the U.S. National Oceanic
and Atmospheric Administration at ftp://ftp.ncdc.noaa.gov/
pub/data/ghcn/.
43
See Jeffrey D. Sachs and Andrew M. Warner: “Eco-
nomic Convergence and Economic Policies.” National Bu-
reau of Economic Research (Cambridge, MA) Working
Paper No. 5039, February 1995.
44
These figures were obtained from Robert J. Barro and
Jong-Wha Lee’s (1994) study, available from the NBER
website at http://www.nber.org/pub/barro.lee/ZIP/.
906 THE AMERICAN ECONOMIC REVIEW SEPTEMBER 2001

TABLE B1—SUMMARY STATISTICS

Number of
Variable Dimension observations Mean SD Min Max
Log of SO2 log10 (ppm) 2,555 ⫺2.112 0.481 ⫺3.000 ⫺0.939
City economic intensity $m per km2 2,555 0.790 0.878 0.010 5.934
GDP per capita (current) $10k 2,555 1.478 0.862 0.109 2.718
Population density 1,000 people/km2 2,555 0.063 0.055 0.001 0.276
Capital abundance (adjusted) $10k/worker 2,555 5.612 2.497 0.829 17.189
Capital abundance
(unadjusted) $10k/worker 2,555 3.207 1.763 0.130 7.750
Education attainment 0–1 range 2,555 0.540 0.226 0.088 0.799
GNP per capita, 3-yr average $10k 2,555 1.396 0.815 0.111 2.635
Communist country (C.C.) [—] 2,555 0.125 0.331 0.000 1.000
C.C. ⫻ income $10k 319 0.302 0.208 0.127 0.716
Trade intensity (X⫹M)/GDP [—] 2,555 0.409 0.322 0.088 2.617
Relative (K/L) (adjusted) World ⫽ 1.00 2,555 1.357 0.605 0.203 4.174
Relative income World ⫽ 1.00 2,555 2.500 1.392 0.221 4.138
Inward FDI stock/capital stock [—] 2,525 0.106 0.250 0.001 2.193
Average temperature °C 2,555 14.689 5.600 2.617 28.967
Precipitation coefficient of
variation [—] 2,555 0.011 0.006 0.001 0.054
Hard coal reserves GJoule/worker 2,555 0.040 0.043 0.000 0.146
Soft coal reserves GJoule/worker 2,555 0.038 0.052 0.000 0.348

Notes: All monetary figures are in 1995 U.S. dollars. The interaction term for income with the Communist countries dummy
shows the case only where the dummy is equal to 1; thus the mean for this line is the mean for the Communist countries only.

which 1 represents 16 years of schooling) ob-
tained from the Barro/Lee data set. Relative
capital abundance is obtained by dividing each
country’s capital abundance by the correspond-
ing world average for the given year, where
“world average” is defined by all the countries
in the Penn World Tables.
Our income (I) variable is the three-year
average of lagged GNP per capita. This ad-
dresses two problems. First, contemporaneous
income and the level of pollution may be deter-
mined simultaneously. Lagged income, how-
ever, is exogenous. Second, it is reasonable to
assume that income changes translate only
slowly into policy changes. We therefore
smooth out some of the variation introduced
through business cycles and include three years
of data. (We also experimented with longer
lags, without much effect on our results.) More
concretely, for a given year t we compute I t ⫽
( y t ⫺ 1 ⫹ y t ⫺ 2 ⫹ y t ⫺ 3 )/3. Relative income is
constructed in the same fashion as our relative
capital-abundance measure. GNP figures were
obtained by adjusting GDP figures with a GNP/
GDP correction factor obtained from the Inter-
national Monetary Fund’s International Financial
Statistics. However, such correction factors were
unavailable for the former Czechoslovakia, Egypt,
Hong Kong, Iraq, Peru, Poland, and the former
Yugoslavia. Unadjusted GDP figures were used in
these cases.
The data on foreign direct investment (FDI)
were obtained as percentages of the stock of
inward FDI relative to GDP, and interpolated
where necessary. These figures were then di-
vided by GDP to capital stock ratios obtained
from the Penn World Tables to obtain the per-
centage of inward FDI stock relative to a coun-
try’s entire capital stock.
The suburban and rural location type dummy
variables are from the original GEMS/AIR data
set. The third (default) location type is central
city. Our trade intensity measure is calculated as
the sum of exports and imports expressed as a
percentage of gross domestic product. The
Communist country dummy used in our study
identifies the following countries: China,
Czechoslovakia, Poland, and Yugoslavia. The
country dummy for the Helsinki Protocol iden-
tifies Austria, Belgium, Bulgaria, Canada,
Czechoslovakia, Denmark, Finland, France,
Germany, Hungary, Italy, Luxembourg, The
Netherlands, Norway, and Switzerland, in the
years after 1985.
VOL. 91 NO. 4 ANTWEILER ET AL.: IS FREE TRADE GOOD FOR THE ENVIRONMENT?
For the purpose of calculating sample-mean
elasticities we used averages of the relevant
variables calculated as follows. An average
country value for variable X is calculated by
first averaging X’s values over time for each
country, and then averaging across countries.
This procedure gives equal weight to all
countries.
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