Trade and Environment Nexus: A Theoretical Appraisal

Trade and Environment Nexus: A Theoretical Appraisal

Debashis Mazumdar (The Heritage College, India), Mainak Bhattacharjee (Loreto College, India) and Jayeeta Roy Chowdhury (Jadavpur University, India)
DOI: 10.4018/978-1-5225-8547-3.ch001


One major concern that has emerged in the post-globalization period is climate change. Given that pollution and environmental degradation is a public bad, the adverse change in the climate of one region will have ubiquitous effect and therefore will hamper the process of sustainable development across the globe. There are substantial links between international trade and environmental issues – one being that of the perverted comparative advantage which evolves mainly out of the neglect of environmental damage caused by productive activities. In this chapter, an attempt has been made to build a theoretical framework related to intra-industry trade with production differentiation based on the environmental quality of the goods and price to address how liberalization of trade happens to affect the environment of the trading nations. The study shows a steep decline in the environmental quality of the good that was relatively cleaner under autarky while a meagre improvement in the environmental quality of the relatively dirtier good. Hence, it is revealed hereby how trade alters the nature of international inequality in the environmental quality of the productive activities.
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Literature Review

With increased integration of the global economy, it has now become difficult to ignore the consequences of domestic environmental policy on the global environment. Research on trade and environment is nothing new. Since 1970s, several issues relating to trade and its impact on environment have been debated. These researches, which became more intense during 1990s, have suggested that commitment to free trade may create incentive to distort environment.

Two contradictory views emerged around that time namely, pollution haven hypothesis and Porter hypothesis. The pollution haven hypothesis postulated by Copeland and Taylor (1994) illustrates between two countries, the higher income country with stronger environmental protection will specialize in relatively clean goods while the lower income country with lax environmental laws will become a safe haven for pollution intensive industries. In this context, Copeland and Taylor (1994, 2004) have isolated three broad effects of trade on environment, viz. scale, technique and composition effects. Scale effect refers to increased pollution and environmental deterioration due to increased economic activity. Technique effect is due to the move towards cleaner production methods which is made possible by greater wealth arising out of expanded trade and better access to advanced technology. Composition effect captures the change in the share of dirty goods in national income due to trade. Among various works trying to give empirical support to pollution haven hypothesis, Jaffe et. al (1995) examining the effects of environmental regulations on net exports and plant-location decisions have produced estimates that are small, statistically insignificant and not robust. Similarly, Tobey (1990) found that world distribution of dirty industries has not been affected by differing country levels of environmental stringency.

Key Terms in this Chapter

Intra-Industry Trade: Intra-industry trade (IIT) is export and import of identical or similar products. Similar products may be products of different varieties or different qualities.

Globalization: The process of integration and interaction among different nations (through trade agreements), companies (through investment in other countries) and people is called globalization. It influences the environment, political systems, as well as economic development of societies around the world.

Trade Openness: Trade openness refers to the orientation of a country’s economy in the context of international trade. The degree of openness is measured by the actual size of registered imports and exports of an economy.

Perverse Comparative Advantage: It is comparative advantage generated by environmental factors and rests on the weakness rather than the strength of the economy. It is a perverse, rather than genuine comparative advantage because it is based on an under-estimation of social cost.

Environment: The sum total of all surroundings of a living organism, including physical, chemical and other natural forces and other living things, which provide conditions for development and growth.

Product Differentiation: It is the process of distinguishing a good or a service from others. Firms use product differentiation to showcase their product’s attributes and uniqueness to the buyers.

Sustainable Development: It is the development that meets the needs of the present, without compromising the ability of the future generations to meet their own needs. It is the delicate balance between the human need to improve lifestyles on one hand and preserving natural resources and ecosystems on which both present and future generations depend.

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