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Unformatted text preview: 7 Journal of Economic Literature Vol. XLII (March 2004) pp. 771 Trade, Growth, and the Environment 1 B RIAN R. C OPELAND and M. S COTT T AYLOR 1 Copeland: University of British Columbia. Taylor: University of Wisconsin. We are grateful for helpful com- ments from John McMillan, Gene Grossman, and the ref- erees. Copeland acknowledges funding from the Social Sciences and Humanities Research Council of Canada. 1. Introduction F or the last ten years environmentalists and the trade policy community have engaged in a heated debate over the envi- ronmental consequences of liberalized trade. The debate was originally fueled by negotiations over the North American Free Trade Agreement and the Uruguay Round of GATT negotiations, both of which occurred at a time when concerns over glob- al warming, species extinction, and industri- al pollution were rising. Recently it has been intensified by the creation of the World Trade Organization (WTO) and proposals for future rounds of trade negotiations. The debate has often been unproductive because the parties differ greatly in their trust of market forces and typically value the environment differently. It has been ham- pered by the lack of a common language and also suffered from little recourse to eco- nomic theory and empirical evidence. This is perhaps not surprising, because much of the work in this area is still quite new. The purpose of this essay is to set out what we currently know about the environmental consequences of economic growth and inter- national trade. We critically review both theory and empirical work to answer three basic questions. What do we know about the relationship between international trade, economic growth, and the environment? How can this evidence help us evaluate ongoing policy debates in this area? Where do we go from here? To answer these questions, we discuss both the empirical and theoretical literature with the aid of a relatively simple general equilibrium model where government policy and private sector behavior interact to deter- mine the equilibrium level of pollution. The model is developed in section 2 of the paper and then employed in various guises throughout. Our use of a model to organize our review reflects an overarching theme of our essay: economic theory needs to play a much larger role in guiding empirical inves- tigation, suggesting alternative hypotheses, and disciplining inferences. The vast major- ity of empirical work in this field has little connection to explicit theory, and we argue that this has left important policy debates, which hinge on the relative importance of various theoretical magnitudes, badly informed. The economic literature on these issues came in two waves, with an initial surge of activity in the 1970s and a resurgence of interest stimulated by the policy debates 8 Journal of Economic Literature, Vol. XLI (March 2004) 2 See, for example, William Baumol (1971), Ingo Walter (1973), James Markusen (1975), Rudiger Pethig (1976), and Horst Siebert (1977).and Horst Siebert (1977)....
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