Does trade liberalization lead to environmental burden shifting in the global economy?

Abstract

Does trade liberalization lead to the outsourcing of pollution from industrialized countries to developing countries? According to the pollution-haven hypothesis, international trade is a key channel through which richer countries can geographically dissociate consumption from production of goods. We examine whether and how trade liberalization via preferential trade agreements (PTAs) facilitates the shifting of consumption-based environmental burdens from developed countries (via imports) to poorer countries (via exports). Based on panel data analysis of 183 countries from 1987 to 2013 we find partial evidence for trade-induced environmental burden shifting. While we observe an increase in footprint exports from low-income countries when these countries liberalize trade, this is not matched by an increase in footprint imports of high-income countries. Our results also show that environmental clauses in PTAs and participation in international environmental agreements do not influence the relationship between trade liberalization and ecological footprint movements. However, domestic institutions have a significant effect on the trade-induced distribution of environmental burdens. These findings suggest that PTAs as a policy tool for trade liberalization are, per se, unlikely to induce exploitation of low-income countries' natural capital by wealthier nations. However, they suggest that political incentives inherent to democratic institutions encourage environmental burden shifting.