Free trade and the environment-development system

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