ABSTRACT
This chapter complements the results of the less rigorous location of industry studies by providing an empirical test of the hypothesis that stringent environmental policy has caused trade patterns to deviate in commodities produced by the world’s “dirty” industries. It provides an empirical test of the hypothesis that stringent environmental policy has caused trade patterns to deviate in commodities produced by the world’s dirty industries. Thus, the effect of domestic environmental policy on trade may be getting lost in the “noise.” Under a ‘fixed-effects’ specification, assume that, except for the environmental endowment, the change in factor endowments equals zero. If environmental policies reduce countries’ international comparative advantage in the most pollution-intensive commodities, then the sign on the environmental endowment coefficient should be negative and significant. Such a methodology would also be effective in capturing the effect of environmental policy even if there was a significant lag in the impact of pollution controls on international competitiveness.
