The Last Step: Putting it all Together
We argued previously (in section 2.3) that because we could not quantify the impact of trade liberalization on either GDP or GDP per person we could not identify the impact of trade liberalization on pollution through either the scale or the technique effect. Our empirical strategy could at best provide an estimate of the composition effect created by trade. We would now like to suggest that this admission of defeat was in fact a strategic retreat from the question posed in our title – not an outright surrender.
Our estimates in table 4 indicate that a change in GDP that creates both a scale and technique effect (but leave a country’s K/L unchanged) will lower pollution. One possible cause for such a change is neutral technological progress. Trade liberalization is another: taking factor endowments as fixed, a lowering of transport costs or trade barriers raises the value of domestic output and real income for a small open economy. The value of output and the value of income rise by the same percentage and this creates both scale and technique effects.
Our estimates indicate that the net effect of this trade-induced increase in output and income will be a fall in concentrations. For example, if we use the estimates from the fixed-effects regression from table 4, the scale elasticity for an average country is .193 while the technique elasticity is -1.611. Taken together, they imply a net effect of -1.418 with a 95% confidence interval of (-2.110, -0.726). The composition effect of trade for our average country is also negative. It is apparent then that for an average country in our sample, the full impact of further openness to international trade – through scale, technique and composition effects – will be a reduction in SO2 concentrations!
How large a reduction any one country reaps from a reduction in trade frictions will of course depend on country characteristics, the impact further trade has on domestic income and output, and how the ongoing process of globalization is affecting country characteristics elsewhere in the world. Since countries will differ somewhat in their particular scale, technique and trade intensity elasticities, some may indeed be made dirtier from a reduction in trade frictions, but we expect that trade’s effect – whether positive or negative – will be small.
After all the estimated impact of even a large trade liberalization on GDP is small, and when this small increase in GDP is then filtered through our estimated scale and technique elasticities the net effect is likely to be smaller still. While in theory, trade’s impact on the pollution intensity of output can be large, in practice our estimates suggest a much more muted response.