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Isolating Trade’s Effect

We now investigate several relatively simple hypotheses regarding the effect of international trade on pollution concentrations by adding various measures of “openness” to the random effect implementation of our model. We are forced to limit ourselves to a random effect implementation because many of the candidate measures of openness are not identified in a fixed effect implementation. The estimated coefficient for the openness variable introduced in each regression is reported in table 2 below. All other estimates are suppressed because the inclusion of the additional variable had very little if any impact on the other estimates as reported in table 1.

The new variables are: (1) the ratio of exports plus imports to GDP (i.e. trade intensity); (2) a measure of the black market premium in foreign exchange markets over the 1970s and 1980s (BMP); (3) the average level of tariffs on imports over 1985-88 (Tariffs); (4) the percent of imports affected by a quota over 1985-1988 (Quotas); and (5), an indicator variable created by Sachs and Warner (1995) reflecting a country’s policy stance toward trade (Sachs). All of these measures except for the trade intensity measure were taken from Sachs and Warner (1995, p65-66).
In their study of the NAFTA, Grossman and Krueger (1993) employ the trade intensity measure and report a significant and negative relationship between concentrations and trade intensity. We establish a similar result although the variable is not significant at conventional levels.