Chapter 27 International Trade, Foreign Investment, and the Environment

Abstract

The 1990s produced a large literature on foreign trade and the environment, including both theoretical and empirical contributions. The paper surveys this literature. It starts by looking at the traditional Heckscher–Ohlin type models of international trade and then moves to noncompetitive models and the strategic use of environmental policy in open economies. A shorter section is devoted to public-choice approaches to environmental policy. Moreover, the paper deals with factor mobility and interjurisdictional competition, with intertemporal issues such as renewable resources and foreign indebtedness, with the empirical evidence, and with institutional issues related to the World Trade Organization and international environmental agreements. Basically three questions are addressed from different points of view: Are trade liberalisation and increased factor mobility good or bad for the environment? Are there larger incentives to relax environmental policies if economies are more open? Do we have to expect a race towards the bottom in environmental regulation if trade and international factor movements are liberalised?