This book sets out to examine one of the most important issues on trade and the environment namely, the trade effects of domestic environmental policy. The central question addressed is whether stringent domestic environmental policies reduce the international competitiveness of environmentally sensitive industries. This study is distinguished by two major innovations that go beyond the established literature: the examination of time-series evidence to explore the relationship between environmental regulations and trade patterns, and the introduction of technology factors, together with endowment factors, to explain the empirical evidence. To theoretically explore the dynamic linkage between environmental regulation, technological innovation and economic growth the author sets up an intertemporal dynamic general equilibrium model in which the more fundamental, dynamic determinant of economic growth is its capacity for technological innovation. The basic findings are that (1) changes in thestringency of environmental regulations do not have long-run growth effects; and (2) technological innovation is an important determinant of a country's long-run growth. The emphasis of this book is that the trade effects of domestic environmental policy can be better understood if one allows for a dynamic Ricardian technology factor in the conventional Heckscher-Ohlin framework. Innovation and subsequent increases in relative labour productivity, together with factor endowments, are important factors in determining the relationship between environmental regulation and international competitiveness. This result should help refocus the debate on the relationship between environmental regulationand competitiveness in international trade.

The main purpose of this dissertation is to examine one of the hottest issues in environmental and international economic literature that deals with whether environmental regulations disadvantage a nation's trade position. The issue is not a conclusion but a hypothesis that is susceptible to empirical investigation. Thus, this thesis aims at improving on past efforts at empirical investigation by employing better models and data, and providing fresh insight into this important policy issue. Although the dissertation focuses on the empirical study of effect of environmental regulations on trade, we explored the factors that influence the regulatory stringency and how they are related to each other as well. This theoretical work is discussed in Chapter 2. We identified a number of factors influencing regulatory stringency. They include sensitivity to pollution, industrial structure, pollution density, and so on. Of most interest is a finding that in the case of developed countries, per capita GNP may not accurately represent the regulatory stringency. This implies that using per capita GNP as a proxy for the regulatory stringency in the analysis of the relationship between environmental regulation and trade might be misleading. In Chapter 3, we examine the hypothesis that environmental regulations of the U.S. significantly affect international competitiveness of domestic industries. We also test the hypothesis that the extent of the effect has decreased in recent years. Based on the cross-industry Heckscher-Ohlin theoretical framework, we have tested these hypotheses using panel data for U.S. manufacturing industries. Our empirical results provide the evidence that supports both hypotheses. In other words, the effect was significant in the past, but not any more. In Chapter 4, we developed an index that can represent the regulatory stringency for 41 countries and tested the hypothesis that international competitiveness is significantly eroded by environmental regulations across countries. Our empirical test based on the Heckscher-Ohlin-Vanek model does not give strong support to the hypothesis. Notwithstanding, the results of the test suggest that polluting industries are affected by environmental regulations substantially more than non-polluting industries.

This book attempts to answer these questions using case studies of three pollution-intensive industries: iron and steel, leather tanning, and fertilizers. Based on in-depth interviews with managers and regulators in Western and Eastern Europe, Asia, Africa and Latin America, the book illustrates the variety of responses to the conflicting pressures of globalization and environmental protection at corporate and industry levels.