Environmental Engineering Reference
In-Depth Information
no other source of comparative advantage in their model, this leads to the prediction that
South has a comparative advantage in the pollution-intensive good. Trade liberalization
shifts pollution-intensive production to South, and so the relatively poor country becomes
a pollution haven when trade is liberalized.
The Copeland/Taylor model also highlights the importance of distinguishing between
positive and normative predictions concerning the pollution haven hypothesis. In their
model, pollution policy in each country is assumed to be fully optimal. The model pre-
dicts that trade will shift pollution-intensive production to the low-income country.
However, it also predicts that trade will be welfare increasing in each country. South could
choose to tighten up its environmental policy to the same level as North's and prevent
itself from attracting polluting industry; however, it prefers not to do so because South is
more willing than North to trade o
a deterioration in its environmental quality in return
for increased income. Hence the fact that trade causes pollution-intensive production to
move in or out of a country is not su
ff
cient information to conclude that trade is 'bad'.
On the other hand, if environmental policy is not optimal because governments are
corrupt, responsive to special interest groups, or ine
ectual, then a country that becomes
a pollution haven as a result of pollution policy that is too weak may lose from trade
because the increased environmental damage can more than o
ff
ff
set other gains from trade
(see Copeland and Taylor, 2003).
If capital is internationally mobile, the tendency for countries with weak environmen-
tal policy to become pollution havens can be reinforced. Rauscher (1997) develops a
simple model in which capital is mobile and North has more stringent pollution policy
than South. South's weak environmental policy increases its rate of return on capital;
hence it attracts capital from North and becomes a pollution haven.
The models described above all generate predictions consistent with the pollution
haven hypothesis by setting up a scenario in which a di
erence in pollution policy is the
only motive for trade and investment. In reality, there are many motives for trade. To
develop a model of the pollution haven hypothesis suitable for empirical testing,
Antweiler et al. (2001) and Copeland and Taylor (2003) consider a model in which
North is both richer and more capital abundant than South. Pollution-intensive
production is assumed to be capital intensive and so capital in this model should
be thought of as a proxy for factors that make a country attractive as a location for
pollution-intensive production. North's richness results in stringent pollution policy,
which tends to give South a comparative advantage in the polluting good. But North's
capital abundance makes it an attractive place for pollution-intensive manufacturing,
and this tends to give North a comparative advantage in the polluting good. If the
e
ff
ects of pollution policy in
determining the direction of trade, then North will have a comparative advantage in the
polluting good, and trade liberalization will shift pollution-intensive production from
South to North. That is, even if the competitiveness hypothesis is correct, trade liberal-
ization may nevertheless shift pollution-intensive production to countries with relatively
stringent environmental policy if such countries have other attributes which make them
cost-e
ff
ects of capital abundance are more important than the e
ff
ective producers in those sectors. Testing the pollution haven hypothesis
amounts to determining which of these factors are more important in a
ff
ff
ecting the
pattern of trade.
