Propositions 1, 2 and 3 contain the major implications of our model. Proposition 1 tells us that international trade has an impact on environmental quality that varies with the comparative advantage of a country. If we compare countries with similar incomes and scale, we expect to find openness associated with higher pollution in countries with a comparative advantage in the polluting good, and openness associated with lower pollution in countries with a comparative advantage in the clean good.
This observation suggests that conditioning on country characteristics is important if we are to isolate trade’s composition effect. Proposition 2 and 3 give us some limiting results concerning the determinants of comparative advantage. Even though comparative advantage is set by the complex interplay of income differences and relative factor abundance, these results indicate that if a country is sufficiently rich then the pollution haven motive for trade will eventually outweigh factor endowment considerations and this country will export the clean good in trade.
Similarly, if a country is sufficiently capital abundant then the factor endowment basis for trade will eventually outweigh any pollution haven motive for trade and this country will export the dirty good. The theory is perhaps at its weakest here because it does not provide a simple definition of either sufficiently rich or sufficiently capital abundant. But it should be recognized that these definitions would have to be functions of the entire distribution of both factor abundance and per-capita income in the world as a whole.
This section describes how we move from our theory to an estimating equation. To do so we need to discuss our data, its sources and limitations (section 3.1) and then address the links between theory and our estimating equation (section 3.2).