ABSTRACT
In theory, environmental control costs encourage reduced specialization in the production of polluting outputs in countries with stringent environmental regulations. The premise that trade suffers from the imposition of environmental policy has a strong element of a priori plausibility but, surprisingly, has little empirical support. This chapter considers 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. The location-of-industry studies have explored the related ideas that stringent pollution control measures push industries out of the US, and that less-developed countries compete to attract multinational industries by minimizing their own environmental policies. The effect of domestic environmental policy on trade may be getting lost in the 'noise'. 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.
