The established view among many economists is that trade increases economic growth and welfare. However, the impact of trade liberalization on the environment still remains open to debate. As noted by Frankel and Rose (2002), growth could potentially be damaging the environment at lower levels of income, but could be improving the environment at high levels of income. This relationship is also known as the Environmental Kuznets Curve. At the same time, in the context of international trade and environment, the “pollution haven” hypothesis has recently gained attention. The idea is that multinational firms in high income countries migrate their operations to countries with low environmental policy stringency (EPS) in an effort to escape increased environmental regulation and higher production costs at home. This can lead to the emergence of pollution havens, typically low-income countries, which provide environmentally sensitive goods (ESGs) to high income countries through trade.
In this paper, I test the pollution haven hypothesis by estimating how membership in certain trade organizations may impact trade in ESGs. I use UN Comtrade database to obtain bilateral trade statistics in ESGs over the time period 1962 – 2020. I use the year a country joined the WTO and the OECD as indicators of an environmental policy shift and income proxy. I find that high income OECD countries are linked with increased ESG import demand from WTO countries. This implies that OECD import activity could lead to environmental degradation in countries that step up to meet the ESG product demand in advanced countries, giving support to the pollution haven hypothesis.