Essays on environmental regulations and international economics.

Abstract

This dissertation is a collection of three essays that study the links between environmental regulations and international trade and capital flows. The first essay investigates the relative importance of environmental regulations in shaping trade patterns of manufactured goods with particular reference to the OECD countries. I introduce environmental regulation and factor endowment differentials into a multi-country general equilibrium model of bilateral trade with random productivities and trade barriers along the line of Eaton and Kortum (2002) and Alvarez and Lucas (2007). In this framework, comparative advantage is determined by an interaction of both country and industry characteristics. I calibrate the model for the OECD countries by estimating trade barriers and productivity parameters so as to match bilateral manufacturing trade shares in year 2000. I show that the calibrated model is capable of generating home trade shares and specialization patterns in pollution-intensive and clean manufacturing goods that are consistent with the data. Next, the model is used to analyze trade and pollution impacts of two types of environmental harmonization policies and trade liberalizations. I find that harmonization of environmental taxes across the OECD countries is predicted to be more effective than the harmonization of pollution quotas in reducing aggregate pollution while under both policies trade impacts are relatively small. I also predict that full trade liberalizations not only have substantial impact on trade but also help to lower OECD pollution emissions by 32%, on average and about half of the decline in pollution is due to international productivity differences. In the second essay, I specifically consider global pollution problems and theoretically investigate the effects of trade liberalization on the level and concentration of world pollution in presence of endogenous and strategic environmental policy making by involved countries. I study a variation of Copeland and Taylor (1995) two-country Heckscher-Ohlin model of trade with global pollution by incorporating an environment where the incentive to trade is based on differential factor endowments rather than differential environmental standards. First, I show that the model's predictions on trade patterns are qualitatively in agreement with the data. Next, I use the model to analyze the effects of globalization. I find that free commodity trade can actually lead to improvements in global environmental quality when the two countries are sufficiently different. However, when goods are traded freely, allowing international trade of emission permits or international capital mobility can produce harmful effects on the global environment. The last essay provides a survey of a broad literature on the relationship between foreign direct investment and environmental policy. First, it focuses on empirical studies that analyze the impact of environmental costs on foreign investment locations. Next, the essay reviews main studies that attempt to explain the lack of evidence for the pollution haven hypothesis. Then, it discusses the literature on the impact of foreign direct investment on local environmental regulations by concentrating on two recent political economy models. Finally, it concludes by summarizing the main findings of the literature and suggesting some future research directions.