Home Demand and Trade Pattern : A Support for the Linder Conjecture In the Environmental Sector

This paper theoretically and empirically explores the Linder conjecture (the home market effect (HME) in terms of trade pattern) in the environmental sector. Using a general-equilibrium model for a two-country two-sector economy, we demonstrate the existence of a strong/weak HME and the crucial role of trade costs in the HME. Empirically, by utilizing the international air purifier trade dataset and the PM2.5 concentration, we explore the causal relationship between the environmental demand and the trade pattern. The results show that for every 1% rise in PM2.5, the exports and net exports of air purifiers increase by 4.337% and 3.835%, respectively. We also demonstrate that the strong secondary magnification effect exists in the environmental sector, especially for developing countries. In conclusion, a country with a larger environmental home demand tends to be a net exporter of environmental products. It provides a new path for high-polluting countries to upgrade their traditional manufacturing toward an environmentally friendlyeconomy