Abstract

This paper analyses the role of the world trade network on the environment. We rely on methods developed for social network analysis to identify the most important countries in connecting trade between all the other countries in the world trade network. We then estimate how the network or indirect effects from trade affect the environmental quality of a country. As the trade networks are endogenously determined by trade and environmental conditions, we use as instrumental variables the growth in the population of trade partners and the growth in the population of trade partners’ partners to exploit exogenous variation in the world trade network. Once we simultaneously estimate the environmental, trade, income, and network equations using a three-stage least square procedure, we find that network effects harm the environmental quality of developed countries but improve the environment of developing countries.

Introduction

The significant increase of trade flows among developed and developing countries have led to a more integrated and globalised international market (De Benedictis and Tajoli, 2011). Globalisation may exert a positive effect on economic growth by facilitating specialisation among countries according to their comparative advantage and facilitating the transfer of resources across countries (Antweiler et al., 2001). On the other hand, the increase of trade flows may also have detrimental effects on the environment. In theory, the effect of trade on the environment is ambiguous. According to the traditional theoretical literature, trade affects the environment through three main different channels (Antweiler et al., 2001): the scale effect states that higher GDP leads to higher pollution; the change in the sectoral composition of a country as a consequence of trade, composition effect, could affect positively or negatively the environmental conditions of a country (e.g. a change from agriculture to industry may lead to higher energy consumption and air pollution while a change from industry or agriculture to service is expected to decrease the level of emissions); and the technique effect that predicts a positive effect of trade on the environment through the use of cleaner techniques of production. Since these are effects of trade between a particular country a and other countries in the world on the environment of country a, we call them direct effects from trade. These direct effects from trade on environmental degradation has been widely examined in the empirical literature. However, there is no agreement as to whether the relationship between trade and environmental quality is positive, negative, or non-existent.