Testing for Pollution Havens Inside and Outside of Regional Trading Blocs

This paper examines the composition of bilateral manufacturing trade in terms of its pollution intensity. A growing share of world trade takes place between nations who are members of the same regional trade agreement (RTA). We analyze how the formation of RTAs affects the composition of trade. We focus on whether richer or poorer nations specialize in exporting dirty goods. Using bilateral trade data over the years 1980 to 1997 for 128 nations for 34 manufacturing industries, we document that low-, middle-, and high-income nations differ with respect to their income elasticity in exporting dirty goods. Outside of RTA blocs, we find general support for the pollution haven hypothesis. As a nation’s income rises, its exports of dirty goods decrease relative to its exports of clean goods. When we compare, low-income, middle-income and high-income nations, we find that middle-income nations have the largest dirty trade income elasticity. Participation in a RTA slightly weakens the pollution haven effect observed outside of regional trading blocs. We also document cross-RTA heterogeneity in the composition of trade across 13 major RTAs in our sample.