Trade and the Environment with Heterogeneous Firms

Bajona, Claustre and Pierce, Andrea and Missios, Paul (2010): Trade and the Environment with Heterogeneous Firms.

Abstract

As the world is becoming more globalized and international trade agreements proliferate, there is a rising concern that trade liberalization may be detrimental to the environment. In a seminal paper Antweiler, Copeland, and Taylor (2001) identify three channels through which may trade affect the environment: Reducing trade barriers increases output (scale effect), abatement expenditures (technique effect), and changes the composition of goods produced (composition effect). All these channels operate at the country level and/or the industry levels. In this paper we focus on the effect that trade liberalization has on the pollution behavior of individual firms. We develop a theoretical framework that is able to account for differences in pollution behavior across firms within the same industry by embedding a model of trade with heterogeneous firms into the classical literature of trade and the environment following Antweiler, Copeland and Taylor (2001). The model shows that firm heterogeneity is important in determining the economy’s aggregate behavior. In particular, more productive firms are less pollution intensive and are more likely to be exporters than less productive firms. The model identifies a new channel through which trade affects the environment: a “selection effect”. International trade causes the less productive firms within an industry to exit. Since less productive firms are more pollution intensive, through this channel international trade reduces pollution intensity by “selecting” these firms out of the industry.

• Item Type: MPRA Paper
• Language: English
• Keywords: trade, environment, heterogeneous firms, Melitz model, productivity, pollution
• Subjects: F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies ; Fragmentation; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q56 - Environment and Development ; Environment and Trade ; Sustainability ; Environmental Accounts and Accounting ; Environmental Equity ; Population Growth

References

Antweiler, Werner, B. Copeland and M. S. Taylor. (2001). “Is free trade good for the environment?” American Economic Review. 91, 877-908.

Baldwin, J. R. and W. Gu (2006). “The Impact of Trade on Plant-Scale, Production Run Length, and Diversification,” Analytical Studies Research Paper Series, catalog number 11F0027MIE No. 027, Ottawa: Statistics Canada.

Bernard, A. B., and J. B. Jensen (1995). “Exporters, Jobs, and Wages in U.S. Manufacturing, 1976-1987,” Brookings Papers on Economic Activity, Microeconomics, 67-119.

Bernard, A., Jensen B., S. Redding S., and Schott P. (2007). “Firms in International Trade,” Journal of Economic Perspectives, 21, 105-130.

Copeland, T. and M. S. Taylor. (2003). “Trade and the Environment: Theory and evidence.” Princeton University Press, Princeton.

Eaton, J. and S. S. Kortum (2002). “Technology, Geography and Trade,” Econometrica 70, 1741-79.

Ergodan, A. M. (2008). “Environmental Regulations and Bilateral Manufacturing Trade: The Case of OECD Countries,” Mimeo, University of Minnesota.

Holladay, J. S. (2010). “Are Exporters Mother Nature’s Best Friends?” Mimeo. Available at SSRN: http://ssrn.com/abstract=1292885

Klassen, R.D. and M. Biehl (2008). “Building the Business Case for Sustainable Manufacturing: Linking Green and Lean Management to Performance,” Industry Canada, Policy and Sector Service Branch.

Li, Z. (2008). “Productivity Dispersion across Plants, Emission Abatement and Environmental Policy”. Department of Economics, University of Toronto, Toronto.

Mazzanti, M., Zoboli, R. (2009). “Environmental E?ciency and Labour Productivity: Trade-o? or joint dynamics? A theoretical investigation and empirical evidence from Italy using NAMEA”. Ecological Economics, 68, 1182-1194.

Melitz, M. (2003). “The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity,” Econometrica, 71, 1695-1726.

Pavcnik, N. (2002). “Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants”. The Review of Economic Studies, 69, No. 1, 245-276.

Shadbegian, R. J. and W. B. Gray (2003). “What Determines Environmental Performance at Paper Mills? The Roles of Abatement Expenditures, Regulation, and Efficiency,” Topics on Economic Analysis and Policy 3(15).

Statistics Canada (2006). “Environmental Protection Expenditures in the Business Sector,” Environment Accounts and Statistics Division, System of National Accounts, catalogue no.16F0006X. Ottawa.

Yokoo, H. (2009). “Heterogeneous Firms, the Porter Hypothesis and Trade”. Institute of Economic Research Kyoto University, Japan.