A Simple Model of Trade, Capital Mobility, and the Environment
U.B.C. Department of Economics, Discussion Paper No. 9701
Posted: 18 Apr 1997
Date Written: February 1996; January 1997
This paper examines the interaction between relative factor abundance and income-induced policy differences in determining the pattern of trade and the effect of trade liberalization on pollution. If a rich and capital abundant North trades with a poor and labour abundant South, then free trade lowers world pollution. Trade shifts the production of pollution intensive goods to the capital abundant North despite its stricter pollution regulations. Pollution levels rise in the North while those in the South fall. These results can be reversed however if the North- South income gap is "too large" for in this case, the pattern of trade is driven by income-induced pollution policy differences across countries. Capital mobility may raise or lower world pollution depending on the pattern of trade.
JEL Classification: Q38
Suggested Citation: Suggested Citation