Is Trade Good or Bad for the Environment? Sorting Out the Causality

We seek to contribute to the debate over globalization and the environment by asking: What is the effect of trade on a country's environment, for a given level of GDP? We take specific account of the endogeneity of trade, using exogenous geographic determinants of trade as instrumental variables. We find that trade tends to reduce three measures of air pollution. Statistical significance is high for concentrations of SO₂, moderate for NO₂, and lacking for particulate matter. Although results for other environmental measures are not as encouraging, there is little evidence that trade has a detrimental effect on the environment. © 2005 President and Fellows of Harvard College and the Massachusetts Institute of Technology.