While this earlier work produced several insights, it was limited because it ignored the potential role factor abundance could play in determining trade patterns. In contrast, the model we develop here allows income differences and factor abundance differences to jointly determine trade patterns. This extension is important, especially in an empirical investigation, because many of the most polluting industries are also highly capital intensive.
The empirical literature in this area has progressed in three distinct ways. First, there are studies that primarily concern themselves with growth and pollution levels and interpret their results as indicative of the relative strength of scale versus technique effects (for example, Grossman and Krueger (1993, 1995), Shafik (1994), Seldon and Song (1994), Gale and Mendez (1996), and Dean (1998)). Many of these studies also add a measure of openness as an additional explanatory variable. There is a second group of studies that examines how trade flows may themselves be affected by the level of abatement costs or strictness of pollution regulation in the trading partner countries. This approach was pioneered by Tobey (1990), and then employed in the context of the NAFTA agreement by Grossman and Krueger (1993) and for a large cross section of countries by Antweiler (1996). Finally there are those studies that employ the U.S. Toxic Release Inventory to infer how changes in production and trade flows has altered the pollution intensity of production in both developed and developing countries. Work along these lines includes Low and Yeats (1992).