The Impact of Trade Openness on Environmental Pollution: A Panel Cointegration and Causality Analysis

The Impact of Trade Openness on Environmental Pollution: A Panel Cointegration and Causality Analysis

Murat Cetin (Namik Kemal University, Turkey), Fahri Seker (University of Bozok, Turkey) and Hakan Cavlak (Namik Kemal University, Turkey)
Copyright: © 2015 |Pages: 12
DOI: 10.4018/978-1-4666-7308-3.ch017

Abstract

This chapter analyzes the impact of trade openness on environmental pollution in the newly industrialized countries that have focused on trade over the period 1971-2010 by using recently developed panel unit root, cointegration, and causality tests. The results indicate a cointegration relationship between the variables. The results also show that trade openness increases carbon dioxide emissions with the elasticity of 0.53 and there is a Granger causality running from trade openness to carbon dioxide emissions in the long run. These findings may provide some policy implications. Without taking into account impact of trade on pollutions, optimistic environmental Kuznets curve hypothesis would be invalid. Therefore, policymakers who decide on environment policies should pay attention to not only growth effects but also trade effects on pollutions. Future empirical analysis would expose the new evidences for governmental policies and environmental regulations to change these effects positively.
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Introduction

In this study, the impact of trade openness on environmental pollution is investigated in a sample of 10 newly industrialized countries for the period 1971-2010 by conducting a panel data analysis. For this purpose, panel unit root, cointegration and causality methods are employed. Several studies (e.g. Baumol, 1971; Baumol & Oates, 1988; Anderson & Blackhurst, 1992; Tsai, 1999; Gallagher & Ackerman, 2000; Savard & Bohman, 2003; Saunders & Cagatay, 2004) examined the link between trade and environment by developing the partial equilibrium models. On the other hand, several studies (e.g. Walter, 1974; Pethig, 1976; Asako, 1979; Siebert, 1992; Perroni & Wigle, 1994; Lee & Roland-Holst, 1997; and Beladi & Oladi, 2011) contributed to the theoretical literature within the framework of general equilibrium models.

Baumol & Oates (1988) analyzing the effects of environment on trade suggested that the international pollution problems may discredit the idea of free trade. They concluded that tariffs may be appropriate to improve resource allocation in the world. Anderson & Blackhurst (1992) examined the relationship between trade liberalization and environment in a small and large country which have open economy. They exhibited that when a suitable environmental policy is applied the welfare and environmental quality of these countries could be improved. Unlike Baumol (1971), Baumol & Oates (1988) and Anderson & Blackhurst (1992), Perroni & Wigle (1994) developing a general equilibrium model suggested that the trade has a weak effect on environmental quality.

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