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date: 25 September 2017

International Political Economy and the Environment

Summary and Keywords

How does liberalization of trade and investment (i.e., economic globalization) as well as membership in international organizations (i.e., political globalization) affect the natural environment? Does economic and/or political globalization lead to ecological improvement or deterioration? This article reviews the existing literature on international political economy (IPE) and the environment in view of these and related questions.

While globalization has various dimensions—economic, social, and political—IPE focuses mainly on the economic dimension when analyzing the effect of globalization on the environment. In particular, IPE puts most emphasis on the environmental implications of trade in goods and services as well as foreign direct investment (FDI). Even though both trade and investment are thought to have a substantial impact on the natural environment, the existing literature demonstrates that the effects of economic globalization on the environment are neither theoretically nor empirically one-dimensional. This means that existing research does not allow for a clear-cut overall assessment in terms of whether globalization leads to an improvement or deterioration of the environment. This is the case because the impact of economic globalization on the environment materializes via different mechanisms, some of which are supposedly good for the environment, and some of which are bad.

On the one hand, economic globalization may improve environmental quality via its positive effect on economic growth, since trade and FDI facilitate specialization among countries according to their comparative advantage and the transfer of resources across countries. On the other hand, relevant economic theory gives little reason to believe that free trade and FDI will influence all countries in the same way. Instead, when considering the relationship between economic globalization and the environment, it is important to consider the interactions between scale, composition, and technique effects created by different national characteristics and trade and investment opportunities. In particular, the scale effect of openness to trade and capital mobility increases environmental degradation through more intensive production. The technique effect predicts a positive effect of trade and FDI on the environment through the use of cleaner techniques of production. And the change in the sectoral composition of a country as a consequence of trade and FDI, the composition effect, could positively or negatively affect the environment of a country (e.g., a change from agriculture to industry may lead to higher energy consumption and air pollution while a change from industry or agriculture to service is expected to decrease environmental degradation). Consequently, the overall effect of trade and FDI on environmental quality can be positive, negative, or nonexistent strongly depending on the specific situation of the country under investigation.

Furthermore, both theory and empirical research highlight the potential for government policy and environmental regulations to affect the relationship between trade/FDI and the environment. On the one hand, increased competition between economic actors (usually companies) due to increased market openness (globalization) might cause a race to the bottom or at least regulatory chill in formal and informal environmental standards as well as pollution havens attracting foreign direct investment. The reason is that countries might weaken (or at least not increase) their environmental policies in order to protect industries from international competition or attract foreign firms and FDI motivated by the expectation of lower costs of environmental protection. Hence the (theoretical) expectation here is that developed countries will refrain from adopting more stringent environmental regulations and might even reduce existing standards due to competition with countries that have laxer environmental regulation. And less-developed countries will adopt lax environmental standards to attract FDI flowing into pollution-intensive sectors and export the respective goods to jurisdictions with higher environmental standards.

In contrast, the Porter hypothesis states that a tightening of environmental regulations may stimulate technological innovation and thus help improve economic competitiveness. In addition, trade openness may induce an international ratcheting up of environmental standards (trading up) as higher environmental standards of richer and greener countries spread—via trade and investment relationships—to countries starting out with lower environmental standards. Furthermore, multinational corporations engaging in FDI and applying universal environmental standards throughout their operations tend to transfer greener technology and management practices to host countries, thus promoting the upgrade of local environmental standards and improving the environmental quality in those countries (the so-called pollution halo effect).

Echoing the many theoretical pathways through which globalization can affect the natural environment, empirical studies estimating the impact of trade and FDI on environmental standards and environmental quality deliver quite heterogeneous results. In particular, the literature points to various factors mediating the effect of trade and FDI on the environment, such as differences in technology between industrial and developing countries, stringency of environmental regulations, property rights and political institutions, corruption levels as well as the pollution intensity of multinationals.

More recently, IPE scholars have started to study the political dimensions of globalization and how they are related to environmental protection efforts. Memberships in international organizations are at the center of this research and recent studies analyze, for example, how they may affect the quality of the environment. Other studies focus more on specific organizations, such as the World Trade Organization, and, for instance, evaluate whether in trade disputes over environmental standards economic or environmental concerns prevail. Finally, a new strand of the IPE and environment literature deals with the micro level and studies how citizens evaluate economic openness in light of potential environmental concerns.

Keywords: globalization, trade, FDI, environment, Environmental Kuznets Curve, pollution havens, pollution halo, race to the bottom, race to the top, international organizations

Introduction

One of the most contentious issues in current debates on the economy–environment nexus concerns the environmental impact of international economic liberalization (i.e., free trade and free capital movement). This controversy began with the formation of the World Trade Organization (WTO) and negotiations on the North American Free Trade Agreement (NAFTA), and gained further momentum in the context of the 1997 Kyoto Protocol and other international environmental agreements.

So, how does liberalization of trade and investment (i.e., economic globalization) affect the natural environment? Under which circumstances does economic globalization lead to a deterioration or amelioration of a country’s natural environment? And what about other forms of globalization, such as memberships in international organizations? Do these forms of globalization also have profound impacts on countries’ natural environment? This article reviews the existing literature on international political economy (IPE) and the environment in view of these and related questions.

While globalization has various dimensions—economic, social, and political—IPE focuses mainly on the economic dimension when analyzing the effect of globalization on the environment. In particular, IPE puts most emphasis on the environmental implications of trade in goods and services as well as foreign direct investment (FDI). Even though both trade and investment strongly affect the environment, the existing literature demonstrates that the effect of economic globalization on the environment at large materializes via different mechanisms, some of which may be good for the environment, and some of which may be bad. Hence an overall, that is, unconditional, assessment of the impact of economic globalization on the environment is hardly possible, since this impact depends on a specific country’s situation, for example, on its economic wealth, its political institutions, or the type of environmental regulation. This review therefore evaluates different mechanisms through which globalization might affect the environment.

Starting with globalization-induced adverse environmental effects, increased competition between economic actors (usually firms) due to increased market openness (globalization) might, in the worst case, cause a regulatory race to the bottom or at least regulatory chill in formal and informal environmental standards. And it might induce some jurisdictions to serve as pollution havens attracting dirty foreign direct investment. The reason is that countries might weaken (or at least not strengthen) their environmental policies in an attempt to protect their industries from international competition or attract foreign firms and FDI motivated by the expectation of lower environmental protection costs. The most common (theoretical) expectation here is that developed (industrialized) countries will refrain from adopting more stringent environmental regulations and might even reduce existing standards due to competition with countries that have laxer environmental regulation. And less-developed countries presumably adopt lax environmental standards to attract FDI flowing into pollution-intensive sectors and export the respective goods to jurisdictions with higher environmental standards.

In contrast, the so-called Porter hypothesis states that a tightening of environmental regulations may stimulate technological innovation and may thus help improve economic competitiveness while also producing environmental benefits (Porter, 1990). Trade openness may therefore engender an international ratcheting up of environmental standards (trading up), as higher regulatory environmental standards of richer and greener countries spread—via trade and investment relationships—to countries starting out with lower environmental standards (Bernauer & Caduff, 2004; Bernauer, Engel, Kammerer, & Nogareda, 2007). In addition, multinational corporations engaging in FDI and applying universal environmental standards throughout their operations tend to transfer greener technology and management practices to host countries, thus promoting the upgrading of local environmental standards and improving the environmental quality in those countries (the so-called pollution halo effect).

More recently, IPE scholars have also started to study the political dimensions of globalization and their effects on environmental protection efforts. Memberships in international organizations are at the center of this research. Recent studies analyze, for example, how these organizations may affect the quality of the environment across countries. Other studies focus more on specific organizations, such as the WTO and for instance, evaluate whether in trade disputes over environmental standards economic or environmental concerns prevail. Finally, a new strand of the “IPE and environment” literature deals with the micro level and studies how citizens evaluate economic openness in light of potential environmental concerns.

The remainder of this article reviews existing research in each of these areas, and concludes by highlighting and assessing some of the theoretical and empirical challenges and pointing to avenues for further research.

Economic Globalization (Trade/FDI) and Environmental Degradation

The existing literature on the effect of international economic liberalization on the environment is extensive and highly elaborated; nevertheless, it does not allow (neither theoretically nor empirically) for a clear-cut overall assessment of this relationship. As stated above the main reason for this stems from the fact that some effects of economic liberalization on the environment are indirect, as they run via economic growth, and some are direct; that is, they hold for a given level of income. In both cases, the effects can be either beneficial or detrimental for the environment. In the following, we elaborate on these effects.

Indirect Effect via Income

Economic globalization can have an effect on countries’ natural environment via its impact on welfare. In particular, it is argued that international economic integration (openness) allows countries to specialize in those industries in which they have a comparative advantage and hence allows for a more efficient allocation of resources. Due to the resulting welfare-enhancing gains, a country’s national income tends to increase (Frankel & Rose, 2005). In the long run, it can be argued that these increases in general welfare lead to a rise in demand for public goods provision as the demand for most public goods such as better environmental quality, education, or health care usually increases with growing income (Deacon, 2009; Selden & Song, 1994). In the short run, however, the effect of an increase in income depends on the current income level of the respective country.

The linkage of income and the environment has evoked much discussion and has provoked ample empirical research over the last decades. The common thread in these studies is that environmental quality is claimed to deteriorate at low levels of income and then improve at higher income levels after a tipping point is reached (Grossman & Krueger, 1991). This inverted U-shaped relationship between income and environmental quality has become generally known as the Environmental Kuznets Curve (EKC) (see Figure 1).1

International Political Economy and the EnvironmentClick to view larger

Figure 1: Stylized environmental Kuznets curve.

Four factors arguably influence the particular shape of the EKC: the scale of the economy, its structure or composition, the level of technology, as well as the income elasticity of the demand for environmental quality.2

More precisely, over the course of a country’s economic development, rising national income increases the scale of economic activity, which—all else equal—leads to rising pollution levels (scale effect). However, after a certain threshold of national income has been reached, pollution is hypothesized to decline due to two effects: First, the composition of the economy is likely to change from manufacturing to a larger share of services (composition effect). Second, with rising national income, technological progress tends to lead to less environmental pollution (technology effect).

Grossman and Krueger’s (1991) original arguments on the EKC motivated a lot of empirical studies aimed at confirming or refuting the EKC based on a variety of environmental indicators, such as air pollution (Bruvoll & Medin, 2003; Deacon & Norman, 2006; Du, Li, & Yan, 2014; Grossman & Krueger, 1995; Hettige, Mani, & Wheeler, 2000; Holtz-Eakin & Selden, 1995; Managi, Hibiki, & Tsurumi, 2009; Selden & Song 1994; Shafik & Bandyopadhyay, 1992; Verbeke and De Clercq, 2006); carbon dioxide (CO2) emissions (Azomahou, Laisney, & Van, 2006; Heil & Selden, 2001; Managi et al., 2009; Plassmann & Khanna, 2006); water pollution (Paudel, Zapata, & Susanto, 2005); deforestation (Barbier, 2000; Barbier & Burgess, 2001; Culas, 2007); hazardous waste and toxins (Rupasingha, Goetz, Debertin, & Pagoulatos, 2004); and biodiversity loss (Dietz & Adger, 2003; Lantz & Martínez-Espiñeira, 2008; McPherson & Nieswiadomy, 2005; Tevie, Grimsrud, & Berrens, 2011).

However, criticism concerning inconsistencies or ambiguities in the theoretical modeling as well as concerns over econometric analyses have arisen, and critics have challenged both the findings and the policy implications of EKC studies (Dasgupta, Laplante, Wang, & Wheeler, 2002; Stern, 2004). Overall, the existing research suggests that the EKC model holds for different pollutants in different ways, depending on the choice of the pollutant, study area, time period, and statistical procedures (Harbaugh, Levinson, & Wilson, 2002; Managi et al., 2009; Millimet, List, & Stengos, 2003).

Moreover, one strand in the EKC literature posits that there may be a political component to the EKC, which implies that at early stages of economic development, environmental quality is generally considered a luxury good; since states at this stage of economic development have only limited resources available, environmental performance usually ranks far behind the demand for better living conditions, for example. However, once people attain a certain standard of living, environmental quality turns into a normal public good, and citizens demand that their government takes actions to reduce or avoid pollution, for example, by enacting appropriate environmental regulations (Grossman & Krueger, 1995; Selden & Song, 1994; Shafik, 1994). Dasgupta and Mäler (1995) and others also note that political rights and civil liberties are important components in protecting the environment.

The importance of political institutions in the EKC relationship has also been examined empirically in papers that consider political variables, in particular, political rights, civil liberties as well as bureaucratic quality, in addition to income in the EKC regression (e.g., Barrett & Graddy, 2000; Bättig & Bernauer, 2009; Bernauer & Koubi, 2009; Cao & Prakash, 2012; Congelton, 1992; Culas, 2007; Farzin & Bond, 2006; Harbaugh et al., 2002; Li & Reuveny, 2006, 2009; Lin & Liscow, 2013; Maxwell & Reuveny, 2005; Panayotou, 1997; Torras & Boyce, 1998; Ward, 2008; You, Zhu, Yu, & Peng, 2015). Most of these studies report that more democratic political institutions tend to significantly increase both environmental standards and environmental quality.

To summarize, the indirect effect of trade and FDI on the environment via income depends on the particular country’s position on the EKC. For countries still on the upward-sloping part of the curve an increase in income caused by trade and/or FDI should imply a further deterioration of its natural environment. In contrast, for countries having passed the turning point, an increase in income should be associated with improvement of environmental quality.

Direct Effects: Scale, Technique, and Composition

Turning to the direct effects of trade and FDI on the environment, these effects can be divided into a scale, technology, and composition effect, similar to the decomposition of income in the literature on the Environmental Kuznets Curve (Antweiler, Copeland, & Taylor, 2001; Barrett, 2000; Copeland & Taylor, 1994; Frankel, 2003; Frankel & Rose, 2005). The effects are similar for trade and FDI with a few notable differences. Hence we start our discussion in the context of how trade affects the environment and then lay out in which ways FDI effects differ.

The scale effect posits that due to expanded economic activity caused by an increase in trade, pollution will rise, all else equal (Antweiler et al., 2001; Cole, 2004; Shandra, Leckband, & London, 2009). However, trade also allows access to better technologies and management practices such as catalytic converters for cars or scrubbers on smokestacks, which implies that this technology effect has a positive impact on environmental quality (Esty, 2001). Furthermore, growing trade may also lead to a more efficient allocation of resources, which means that industries should settle where they have a comparative advantage. This is labeled the composition effect of trade. Whether this change in the allocation or composition of industry brings about an increase or decrease in pollution depends on whether a particular country has a comparative advantage in a more or a less polluting industry (Antweiler et al., 2001; Cole, 2004). We discuss this aspect in more detail further below in the context of FDI.

In one of the first studies to investigate the relationship between trade and the environment, Antweiler and colleagues (2001) examine SO2 concentrations in 43 countries from 1971 to 1996. They find positive, that is, pollution increasing scale and composition effects, and negative technique effects. Since the technique effects were sufficiently large so as to offset the negative effects arising from scale and composition effects, they conclude that trade openness is in total associated with reduced air pollution. Frankel and Rose (2005) also examine the effects of trade on seven different indicators of environmental quality. They address the potential simultaneity of trade, environmental quality, and income by applying instrumental variable estimations in the context of a gravity model of bilateral trade with endogenous growth equations. Using cross-section data from 41 countries in the 1990s, they find support for the optimistic view that trade reduces sulfur dioxide emissions.3 In addition, Sigman (2002, 2004) examines the effects of trade on water pollution. She reports that country pairs with higher levels of bilateral trade are characterized by lower levels of transboundary river water pollution. A later study by Bernauer and Kuhn (2010) partially supports but also qualifies these earlier findings in that it shows that trade has either a negative or insignificant effect on transboundary water pollution. Li, Xu, and Yuan (2015), on the other hand, report that trade openness has a significantly negative impact on the environment, that is, reduces air visibility in both developing and developed countries. Similarly, Shandra and colleagues (2009) find evidence that poor nations with higher levels of forestry export flows to rich nations tend to have higher rates of deforestation.

Analogous to trade, the influence of FDI on the environment can be divided into a scale, composition, and technology effect. The arguments are quite similar to the trade context, with slight differences concerning the technology and composition effects. While the technology effect in the context of trade rests on the assumption that trade ties lead to access of better (greener) technology, in the context of FDI a foreign investor opens a production plant in the host country with its corresponding technology. In particular, it is argued that foreign investors typically rely on newer and greener technologies, which supposedly lead to technology development, diffusion, and transfer (Araya, 2002). One example is Novo Nordisk, a Danish pharmaceutical company, which opened a joint venture in China and used the latest technology to treat the plant’s wastewater (Eriksen & Hansen, 1999).

In addition to such firm-level technology transfer, it is argued that there can also be a spillover effect. In general, technology spillovers can occur via human capital upgrading and employment turnover; increased competition forcing local firms to become more efficient; and supply chain requirements as well as imitation of technology by local firms (Birdshall & Wheeler, 1993; Chudnovsky & Lopez, 2003). Moreover, foreign firms that invest in developing countries are usually large and have more resources available for research and development as well as for environmental management systems. As local firms in developing countries are mostly reliant on learning and copying from more advanced firms, they might be compelled to adopt the more stringent environmental practices of those advanced firms (Zarsky, 1999, p. 8). However, it is also possible that foreign firms adapt to the local context, implying that the environmental standards might ultimately be below those in their home country. Evidence on the diffusion of technologies by MNCs has so far been mixed (Chudnovsky & Lopez, 2003).

Finally, the composition effect holds that FDI is supposed to lead to a more efficient allocation of resources among economies. That is, the production of goods will take place with lower capital per unit of output and lower input than without economic liberalization, which would imply a positive effect of both FDI and trade. However, whether this composition effect is indeed ultimately positive for the environment will depend also on the particular situation of a country (e.g., whether the investment implies a change from the first (agrarian, resource extraction) to the second (manufacturing) or to the third (services) sector) (Araya, 2002).

The most debated effect of trade and FDI on environmental quality is exactly this composition effect. An important consequence of trade and FDI is that they allow each country to specialize in those activities in which they have a comparative advantage, that is, activities that they perform relatively well (Caves, Frankel, & Jones, 2002; Cole, 2004). Whether this change in the allocation or composition of industry will bring about an increase (decrease) in pollution depends on whether a particular country has a comparative advantage in a more (less) polluting industry (Cole, 2004). However, the literature provides two competing approaches for determining comparative advantage: the factor endowment theory (FET) and the pollution haven hypothesis (PHH).

On the one hand, standard trade theory (i.e., the Hecksher-Ohlin model) asserts that trade leads to more production of goods that are intensive in that factor that is relatively abundant in the country concerned. If the comparative advantage derives from the distribution of world endowments of factors of production,4 countries where capital is relatively abundant will export capital-intensive goods (Rogowski, 2006). For developing countries, this would imply a specialization in labor-intensive industries. Since polluting industries, such as chemicals, pulp and paper, or oil refining industries tend to be capital intensive, this would imply that they should remain located in industrialized countries (Antweiler et al., 2001; Nordstroem & Vaughan, 1999). Consequently, standard trade theory would predict that an increase in trade leads to a reduction of pollution in developing countries since their comparative advantage lies in labor intensive and thus less pollution-intensive production.

The pollution haven hypothesis (PHH), on the contrary, holds that because of their usually rather low levels of environmental regulation, developing countries have a comparative advantage in pollution-intensive production (Copeland & Taylor, 1994; Dasgupta & Mäler, 1995; see also Taylor, 2005). Therefore, due to the composition or allocation effect of FDI, more polluting industries would tend to settle in those countries that have laxer environmental regulations (Hoffmann, Lee, Ramasamy, & Yeung, 2005; Jaffe, Peterson, Portney, & Stavins, 1995; Stafford, 2000). Consequently, it is argued that the effect of trade and FDI on pollution may only be positive for countries with stricter environmental regulations, which will most likely be higher-income countries. Some authors even claim that the threat of polluting industries locating in countries with laxer environmental regulations will lead to a competition between countries to offer those industries a better production environment and therefore to a regulatory race to the bottom (Drezner, 2001; Revesz, 1992). We discuss this latter argument in the next section.

In contrast, several studies argue that along with trade and foreign direct investment, newer and cleaner technologies tend to spread since firms from industrialized countries possess better and usually also greener technology (Eskeland & Harrison, 2003), leading to a pollution halo instead of a pollution haven effect.5 In this view “the best way to diffuse best practice production techniques” (Zarsky, 1999, p. 5) is via FDI (see also Gallagher & Zarsky, 2007; Prakash & Potoski, 2006a, 2007).

Despite these rather clear-cut theoretical arguments, empirical studies testing the pollution haven and pollution halo hypotheses and trying to estimate the impact of FDI on the environment have not yet delivered conclusive results. For instance, while some studies find, albeit modest, support for the pollution haven hypothesis with its negative consequences on the environment (e.g., Aklin, 2016; Cole & Elliott, 2003; He, 2006; Hoffmann et al., 2005; Kleemann & Abdulai, 2013; Koubi, Böhmelt, & Bernauer, 2015; Mani & Wheeler, 1998; Xing & Kolstad, 2002), others fail to do so and tend to support the concept of pollution halos in explaining a beneficial impact of FDI on the environment (e.g., Elliott & Shimamoto, 2008; Eskeland & Harrison, 2003; Kearsley & Riddel, 2010; Kellenberg, 2009; Potoski, 2006a, b; Wheeler, 2001; Zeng & Eastin, 2007).6 Yet others find no effect (Javorsik & Wei, 2004; Spilker, 2013), find support for both arguments (Kim & Adilov, 2012), or point to conditional effects (Lan, Kakinaka, & Huang, 2012; Manderson & Kneller, 2012). For instance, Lan and colleagues (2012), using data on Chinese provinces and conditioning the relationship between FDI and pollution on human capital levels, show that the pollution haven hypothesis holds only in provinces with low human capital, whereas FDI is associated with less pollution in provinces with the higher levels of human capital, due to a “technology effect.”

Concerning evidence on the production plant level, many studies show that foreign-owned plants are usually less pollution intensive and use greener technology than domestic plants in developing countries (Blackman & Wu, 1999; Eskeland & Harrison, 2003; Gentry, 1998; Ivarsson & Alvstam, 2005; Li & Yeung, 1999). In contrast, using survey evidence from Mexico, Dasgupta and colleagues (1998a, p. 17) find that foreign investment has no separate effect on environmental effort. They measure environmental effort by the adoption of ISO 14000 type procedures for pollution management, and by the use of plant personnel for environmental inspection and control. Hettige, Huq, Pargal, and Wheeler (1996) provide a summary of three studies from Asia that also do not find significant influence of FDI on firm-level environmental performance after controlling for firm size and the age of the plant. This means that larger and newer firms, whether they are foreign or not, are usually greener. In addition, these studies find that it is not ownership structures that matter, but rather regulation and community pressure. “Apparently, richer and more educated communities are able to bargain effectively with firms” (Zarsky, 1999, p. 14) to pressure them to introduce higher environmental standards.

These heterogeneous results suggest that the influence of trade and FDI on the environment is likely to depend, among other things, on (i) differences in technology between industrial and developing countries (Dean, Lovely, & Wang, 2009) and the human capital necessary to reap the technological benefits (Lan et al., 2012); (ii) the stringency level of environmental regulations (Ben Kheder & Zugravu, 2012); (iii) well-defined property rights and functioning political institutions (Jayadevappa & Chhatre, 2000; Spilker, 2013); (iv) corruption levels in the host country7 (Cole, Elliott, & Fredriksson, 2006); and (v) the pollution intensity of multinationals (Manderson & Kneller, 2012).

An additional reason for why in most studies no pollution haven effects have been found is that abatement costs are small compared to other production costs, such as investments in infrastructure (Jaffe et al., 1995). This would imply that the reason for why studies do not find pollution haven effects is not because abatement costs are too low in developing countries but because they are too low in industrialized countries, implying that firms do not need to fully internalize the environmental costs they are causing (Zarsky, 1999). A further reason seems to be that firms are afraid of negative reputation effects if they violate environmental norms (Dasgupta et al., 1998).

Economic Globalization (Trade/FDI) and Environmental Regulation/Standards

Economic globalization also affects the environment via its effects on national regulation and standards. The theoretical literature postulates again different pathways through which economic globalization affects environmental regulation, and again some of them are positive and some negative for the environment.

“Race to the Bottom”

Several scholars argue that increased competition between companies induced by economic liberalization may cause a “race to the bottom” in environmental standards, because countries may weaken their environmental policies in order to (i) protect their industry from international competition (e.g., Esty & Geradin 1998; Prakash & Potoski, 2006a, b); or (ii) to attract foreign firms and foreign direct investment based on low costs of environmental protection, which operate in a similar fashion as low labor costs (e.g., Copeland & Taylor, 2004; Sheldon, 2006). Hence, the expectation is that developed countries will refrain from adopting more stringent environmental regulations and might even weaken existing standards due to competition with countries that have laxer environmental standards. Conversely, less-developed countries will adopt laxer environmental standards in order to attract multinational corporations and export pollution-intensive goods (Esty & Geradin, 1998).

While various studies seek to provide empirical evidence on the nature and impact of these linkages, there is actually rather little evidence that countries lower their environmental standards in order to remain competitive (Grey & Brack, 2002; Wheeler, 2001). Recent exceptions are Cao and Prakash (2010) and Andonova, Mansfield, & Milner (2007). In particular, Cao and Prakash (2010) show that trade competition between countries that export similar products to the same countries results in both countries having higher air pollution, as measured by SO2 emissions. Similarly, Andonova and colleagues (2007) report that increasing trade openness in post-Communist countries is connected with laxer environmental regulation. These findings provide some of the rare evidence in favor of a race to the bottom (or at least a regulatory chill) argument.

Overall, however, it seems that multinational firms’ location decisions are determined more by other factors, such as labor costs, natural resources endowments, taxes, transportation, and market access, rather than the stringency of local environmental regulations (Drezner, 2001; Grey & Brack, 2002; Jaffe et al., 1995; Potoski, 2001). Yet, there is some anecdotal evidence with regard to the regulation of energy and taxation that favors the regulatory chill hypothesis, which states that countries abstain from tightening their environmental standards in order to stay competitive (Neumayer, 2001).

“Race to the Top”

The “race-to-the-top” argument, in contrast to the “race-to-the bottom” argument, suggests that economic liberalization induces an international improvement of environmental standards and, in turn, has a positive effect on the environment (e.g., Porter & van der Linde, 1995). For instance, Zeng and Eastin (2007) argue that in order to maintain access to foreign markets in developed countries, exporting firms in developing countries often fulfill the stricter environmental standards of those export destinations. In addition, fearing a potential dispute in the WTO, those firms tend to comply ex ante with stricter environmental standards. The “race-to-the-top” effect is often called the “California Effect,” after the example of California, which introduced stricter car emission controls than mandated by the U.S. Clean Air Act (Vogel, 1997). In 1990, the Californian standard even became the national standard, thus serving as the most prominent example of a race to the top.

This argumentation is in line with the so-called Porter hypothesis, which states that a country can benefit from stricter environmental regulations because those foster innovation and efficiency and therefore improve competitiveness (Porter, 1990). Vogel (2000) reports another country example, namely, Israel: In order to be able to export to the EU market, Israel introduced EU pesticides standards. This evidence in favor of the California effect is further supported by several studies (Bernauer & Caduff, 2004; Christmann & Taylor, 2001; Prakash & Potoski, 2006a, b; 2017; Zeng & Eastin, 2011). However, Vogel (2000) cautions against too much optimism since the California effect may only take place in very narrow circumstances, for example, if a country is aiming to enter into a trade agreement with the European Union or other industrialized countries. In addition, this effect seems to hold predominantly for products (e.g., cars that have a catalytic converter), and not for production processes (Bernauer & Caduff, 2004). Furthermore, there exists only weak evidence that environmental regulations actually stimulate innovation (Ambec & Barla, 2006).

Overall, the literature therefore suggests that while statements of a “race to the bottom” in environmental standards are largely exaggerated, hopes of a “race to the top” in environmental standards triggered by economic competition are also likely to be too optimistic.

Political Globalization and the Environment

As mentioned in the introduction, in addition to trade and FDI, the recent literature on IPE and the environment more recently also examines how international organizations (IOs) may affect environmental policy and environmental outcomes. Some studies analyze how country membership in IOs as a whole affects the quality of any given country’s environment (Bernauer, Kalbhenn, Koubi, & Spilker, 2010; Spilker, 2012; Ward, 2006). Other studies focus more on specific organizations, such as the World Trade Organization (WTO), and evaluate, for instance, whether in trade disputes over environmental standards economic or environmental concerns tend to prevail.

IOs and the Environment

The existing literature hypothesizes that memberships in IOs tend to improve both environmental performance and the likelihood of joining international environmental treaties (Bernauer et al., 2010; Spilker, 2012, 2013; Ward, 2006). With regard to environmental treaty ratification, Bernauer and colleagues (2010) provide evidence that countries that are already part of a larger network of IOs also behave more cooperatively when it comes to environmental treaty ratification. Since IOs tend to discourage environmentally damaging behavior, allow for mediation and problem solving, the sharing of information and the generation of norms and trust, countries that are members to more general IOs tend to join more environmental treaties. Spilker and Koubi (2016), on the other hand, show that IO membership does not affect treaty ratification.

With regard to environmental outcomes, Ward (2006) examines whether countries that are more central to the network of international environmental regimes act more sustainably at the national level. Using social network analysis, he finds that countries that are more central also care more about domestic environmental quality. Moreover, it seems that membership in IOs affects the capability of developing countries to improve their environmental performance by allowing for information and technology transfer. This channel of influence is especially important since developing countries often lack the necessary resources and technologies to mitigate environmental degradation (Dasgupta et al., 2002; Porter, Brown, & Chasek, 2000). This view is supported by Spilker (2012, 2013) who argues that membership in IOs can improve the environmental performance of developing countries, by linking different issues, promoting the general idea of environmental sustainability, and providing a channel through which these countries receive technology and resources necessary to reduce pollution. Examples of IOs that spread information and technology that also benefit the environment include, for instance, the World Bank, the Food and Agriculture Organization (FAO), and the World Health Organization (WHO). For example, the World Bank as part of its general “greening” strategy created the Global Environment Facility (GEF), which provides mainly developing countries with grants and technical assistance to address environmental problems such as climate change, ozone depletion, biodiversity loss, and air and water pollution (El-Ashry, 1993).

World Trade Organization

One of these organizations, the World Trade Organization (WTO), has received particularly strong attention in the context of the trade–environment debate. This is due to two reasons. First, some environmental regulations of WTO member countries have been challenged via the WTO dispute settlement mechanism (DSM) because of their trade inhibiting effects. Second, the literature has focused on whether environmental disputes in the WTO are as such more difficult to settle relative to other disputes, for example, disputes over tariff barriers or subsidies.

The WTO and its predecessor, the General Agreement on Tariffs and Trade (GATT), have been established to promote trade liberalization between member countries. It is based among other things on the principle of “national treatment.” This implies that WTO member countries are not allowed to discriminate against other member countries’ products based on their national origin. However, some exceptions to this general rule exist, which are important for the environmental context, as member countries can justify trade barriers with reference to a variety of public policy-based concerns (Kelemen, 2001; Kelly, 2003). In particular, trade restrictions, as long as they do not represent arbitrary or unjustifiable discrimination and are thus disguised trade barriers, can be justified with reference to the protection of human, animal, or plant life and health (GATT Article XX[b]) and the conservation of exhaustible natural resources (GATT Article XX[g]).

Over the course of its existence, the DSM of the GATT/WTO has had to deal with a number of trade disputes over environmental issues. In the first of a series of important environment–trade disputes, Tuna-Dolphin I, Mexico challenged a U.S. tuna import ban that was motivated by U.S. regulation to prevent the killing of dolphins in the context of tuna fishing. This dispute differed from previous GATT disputes on several accounts (Kelemen, 2001). It was the first dispute in which the defendant country, in this case the United States, tried to protect a species globally, and not a domestic resource. Furthermore, the United States intended to influence another country’s environmental policy, in this case the use of dolphin-safe fishing nets. Also, there was much public attention. The dispute panel ruled in favor of Mexico, stating that the U.S. trade embargo was unjustified because (i) the regulation aimed at production processes, and not at a product; and (ii) the regulation intended to change another country’s regulations (Kelemen, 2001).

While most trade–environment disputes that followed Tuna-Dolphin I were also ruled in favor of trade liberalization, the GATT and the WTO DSM is thought to have become more “environmental friendly” over time (Kelemen, 2001; Kelly, 2003; Young, 2005). For example, in Tuna-Dolphin II, which was initiated only one year after Tuna- Dolphin I, the dispute panel slightly changed the direction of the first dispute ruling by stating that trade barriers can be justified in terms of trying to influence another country’s environmental regulation if they are based on an international environmental agreement. In one of the following environment–trade disputes, Shrimp-Turtle, which was similar to the Tuna-Dolphin disputes, the WTO DSM again issued a general pro-trade liberalization ruling, but introduced further pro-environment principles (Kelemen, 2001; Kelly, 2003). First, the panel upheld the idea, already put forward in Tuna-Dolphin II, that a country can use trade restrictions to protect an environmental resource outside its borders. Second, the panel ruled that not only environmental regulation based on product standards can be the basis of trade restrictions but also regulation aiming at production processes. And third, the panel allowed the submission of reports by non-governmental actors, such as NGOs and business groups. Hence, if designed properly, that is, by not discriminating between different WTO member states, countries do in principle have some room to maneuver in setting up or maintaining environmental policies that do have, simultaneously, trade-restricting effects.

In addition to these purely environmental disputes, the WTO DSM ruled on several disputes relating to sanitary and phytosanitary (SPS) measures, that is, on issues related to human, plant and animal health (Kelly, 2003). In the context of the SPS agreement of the WTO, the WTO allows trade restrictions if they are based on a scientific risk assessment (Bernauer, 2003; Kelly, 2003). Only one of these disputes, Asbestos, has so far been ruled in favor of the defendant country, in that case France. More precisely, the environmental measure, a ban on the import of asbestos, was upheld. In all other disputes, for example, Canada v. Australia on Salmon, the United States v. Japan on Agricultural Products, and the United States v. the EU on Beef-Hormones and on Genetically Modified Crops, the panel ruled against the defendant and thus the environmental measure because of issues relating to risk assessment. In probably the most famous of these cases, Beef-Hormones, the panel criticized that the EU’s ban on hormone-treated beef lacked a scientific basis (Bernauer, 2003; Kelly, 2003).

Overall, it appears that free trade does not consistently trump the environment in WTO disputes, as many critics like to point out. Studies on trade–environment disputes in the European Court of Justice (ECJ) have arrived at similar findings (e.g., Kelemen, 2001). While critics are right in the sense that many trade–environment disputes have been ruled in favor of trade liberalization, the WTO DSM has established more stringent trade–environmental principles over time. As long as environmental measures do not “arbitrarily or unjustifiably discriminate between producers operating under similar conditions or constitute disguised restrictions on trade” (Kelly, 2003, p. 136), the WTO and also the ECJ tend to regard them as legitimate, even if they implicate trade barriers.

Furthermore, in contrast to what critics of the WTO often point out, disputes on environmental issues are clearly a minority of all disputes (Kelly, 2003; Sattler & Bernauer, 2011; Young, 2005). As shown by Bernauer and Sattler (2006), these environmental disputes are even less likely than other disputes to escalate from the first dispute process step, consultation between the disputing parties, to the second dispute process step, the official panel proceeding. However, once these disputes escalate to the panel stage they are less likely to be settled successfully than other types of disputes.

Globalization and the Environment: The Micro Level

In this section we discuss the most recent strand of the IPE and environment literature dealing with the micro level, that is, how citizens evaluate economic openness in light of potential environmental concerns. This literature is relevant in our context here because public opinion is an important factor in policy making, and because the tension between globalization and the environment manifests itself not only at the macroscopic scale (e.g., in the WTO, government regulation, or environmental conditions), but also at the level of the individual citizen. The fact that public pressure has led governments to include environmental clauses in most of the recent preferential trade agreements is one obvious expression of this.

While the literature discussed so far focuses on the implications of trade for the environment, the micro-level literature turns this focus around and asks to what extent environmental concerns matter when citizens form preferences about globalization. There is a plethora of studies on individual-level trade attitudes (Baker, 2003, 2005; Beaulieu, 2002; Fordham & Kleinberg, 2012; Hainmueller & Hiscox, 2006; Mansfield & Mutz, 2009; Mayda & Rodrik, 2005; O’Rourke & Sinnott, 2001; Schaffer & Spilker, 2016; Scheve & Slaughter, 2001; Spilker, Schaffer, & Bernauer, 2012). However, only recently have scholars begun to examine how environmental concerns may shape preferences (public opinion) concerning international trade or economic globalization more broadly.

Bechtel, Bernauer, and Meyer (2012) argue that the environmental consequences of intensified international economic exchange are, for many individuals in industrialized countries, an important element in their evaluation of trade policies. The authors contend that especially individuals with strong pro-environmental attitudes are likely to associate trade liberalization with increased environmental degradation and hence are less supportive of free trade. Their findings, relying on survey data from Switzerland, are in line with this expectation: individuals with greener attitudes tend to be less supportive of economic globalization.

Bernauer and Nguyen (2015) build on this earlier work in their study on environmental attitudes and trade preferences in developing countries. Relying on a combination of new survey data and survey experiments in Costa Rica, Nicaragua, and Vietnam, they show that the implications of post-material value arguments (Franzen & Meyer, 2010; Inglehart, 1995, 1997) do not seem to hold for those countries. Despite low-income levels, citizens in developing countries appear to care about negative effects of free trade on the environment.8 Interestingly, however, in contrast to the respondents in the Swiss study by Bechtel et al. (2012), environmental concerns of citizens in the developing countries under study do not translate into reduced support for free trade.9

These findings are supported by two other recent studies on trade preferences in developing countries. Using conjoint experiments to understand how citizens evaluate different aspects of preferential trade agreements and the involved partner countries, Spilker, Bernauer, and Umaña (2016a, b) show that people prefer trade agreements including environmental provisions and trade partner countries with higher environmental standards. That is, in contrast to expectations based on post-material value arguments, citizens in developing countries tend to support environmental protection; and, in contrast to their industrialized counterparts, they do not seem to view environmental protection as conflicting with trade liberalization.

Conclusion

This review of existing research on the globalization–environment nexus shows that we have come a long way in understanding, both theoretically and empirically, the mechanisms that link, both indirectly and directly, different facets of globalization to environmental policy and environmental outcomes at national and international levels. It also reveals that the relationship between globalization and the environment cannot be adequately understood without considering the simultaneously occurring trends and underlying mechanisms that operate through changes in economic growth; the scale, composition and technique effects of economic globalization; as well as political globalization and public opinion.

The general picture emerging from this research defies simplistic statements in contemporary public debates on the globalization–environment nexus, notably those arguing in unqualified form that globalization is good or bad for the environment. Counter to optimistic claims that economic globalization increases welfare, which according to the EKC logic then quasi-automatically results in better environmental protection, both theoretical and empirical findings clearly point to environmental damage resulting from economic openness. Yet, counter to pessimistic claims associated with a race-to-the-bottom logic and pollution havens, the scientific literature on the trade–environment nexus has come up with convincing theoretical and empirical findings that point to conditions under which environmental damage resulting from economic globalization can be minimized. The most important antidotes in this regard seem to emanate from trading-up effects, Porter-hypothesis effects, entanglement of countries in international organizations, and also domestic-level factors such as public demand for minimizing environmental damage from economic openness and development. Table 1 provides an overview of all empirical studies discussed in this article. It also provides details on the variables used, the sample and estimation procedures, as well as a short overview of the results of each study.

Table 1: Overview of Empirical Studies

Author

Dependent Variable

Independent Variables

Sample

Estimation

Main Results

Environmental Degradation

Grossman and Krueger (1991)

SO2, dark matter, suspended particles concentrations

GDP pc. Trade openness

Cities in 42 countries for the years 1977, 1982, 1988

Random effects models

EKC for SO2 and dark matter. Trade openness decreases SO2 concentrations

Shafik and Bandyopadhyay (1992)

Lack of clean water, lack of urban sanitation, SPM, SO, change in forest area between 1961–1986, annual rate of deforestation, dissolved oxygen in rivers, fecal coliforms in rivers, municipal waste per capita and carbon emissions per capita

EKC: Economic growth. Trade openness, Dollar’s index of trade orientation, and the parallel market premium; Political and civil liberties indices

Up to 149 countries 1960–1990

Fixed effects models

EKC: Some environmental indicators improve with rising incomes (water and sanitation), others worsen and then improve (particulates and SO2) and others worsen steadily (dissolved oxygen in rivers, municipal solid wastes, and carbon emissions)

Trade: Inconclusive results for lack of water and sanitation, municipal waste, and deforestation; weak evidence that river quality improves with trade. Results for local air quality is mixed: weak evidence that more open economies have lower levels of SO2, ambient particulates and carbon emissions

Politics: Mixed results: depends on the environmental indicator

Selden and Song (1994)

SO2 emissions pc, SPM, oxides of nitrogen (NOx) and CO

GDP pc

30 countries; averages for 3 periods: 1973–1975, 1979–1981, and 1982–1981

Fixed effects models.

Per capita emissions of all pollutants exhibit inverted U-shaped relationships with per capita income

Grossman and Krueger (1995)

Concentrations of SO2, SPM, smoke, BOD and fecal coliform

GPD pc

Air pollution: 42, 29 and 19 countries for SO2, particulate matter and smoke respectively for the period 1977–1988; Water pollution: 59 countries 1979–1990

Random city-specific effect model

Most pollutants display an inverted U-shaped relationship with GDP

Holtz-Eakin and Selden (1995)

Per capita emissions of CO2

GDP pc

130 countries (108 complete data) 1951–1988

Quadratic polynomial models with fixed effects

Diminishing marginal propensity to emit CO2 as economies develop

Panayotou (1997)

SO2 concentrations

GDP pc. GDP per square km Industry share of GDP Institutions: Respect/enforce-ment of contracts

30 countries 1982–1994

Generalized least squares with either fixed or random effects

EKC can be flattened if good policies, i.e. respect of contracts, is in place

Torras and Boyce (1998)

Concentrations of SO2, SPM, smoke, BOD, and fecal coliform; Access to drinking water and sanitation

GDP pc. Political rights and civil liberties; Income inequality

Grossman and Krueger (1995) dataset

OLS

EKC effects become weaker if income inequality is introduced

Hettige et al. (2000)

BOD at plant level

GDP pc

Brazil, China, Finland, India, Indonesia, Korea, Mexico, the Netherlands, Philippines, Sri Lanka, Taiwan, China, Thailand and the USA 1989–1995

OLS, fixed effects without time dummies, and random-effects models

BOD pollution intensity declines continuously with income

Barbier and Burgess (2001)

Percentage change in agricultural land area

GDP pc. Trade: agricultural export share of total merchandized exports; Corruption, property rights, and political stability indices

Tropical countries

Fixed effects models for the period 1961–1994

Income effects vary from region to region and an EKC is not always apparent. Share of agricultural exports increase agricultural land area. Institutions matter

Heil and Selden (2001)

CO2 emissions

GDP pc

135 countries 1951–1992

Fixed effects models

Monotonously increasing relationship between CO2 emissions and income per capita in both the levels model and the logarithmic model (an out-of-sample EKC was found in the levels model)

Harbaugh et al. (2002)

SO2, TSP, and smoke concentrations

GDP pc. Trade openness Polity score

Grossman and Krueger (1995) data extended to 1971–1992

Fixed effects, panel

No clear EKC pattern. Trade and democracy lower concentrations

Sigman (2002)

BOD concentrations

GDP pc. Trade openness Civil rights

247 river monitoring stations (72 international) 1978–1996

Fixed effects models

Some evidence for an EKC in water pollution

Xing and Kolstad (2002)

FDI outflows from U.S. chemicals and primary metals sectors

SO2 emissions

Cross-section data for 22 countries including 7 developing and 015 developed One time point in 1985–1990

OLS

Sectors with more SO2 emission tend to attract more dirty foreign investment

Bruvoll and Medin (2003)

Emissions of different pollutants: Lead SO2, NOx, CO2, CO, PM, NMVOC, N2O, CH4, NH3

EKC: Scale, composition, technique, energy mix, and intensity

Norway for the period 1980 to 1996

Decomposition analysis

Growth in all emissions has been significantly lower than economic growth, and negative for some pollutants

Cole and Elliott (2003)

Intra-Industry trade within total trade

Stringency of environmental regulations: Index of environ-mental regulation and environ-mental policy (energy use to GDP)

60 countries

Two-stages least squares

Inter- and intra- industry trade is affected by environmental regulation. Evidence for PHH

Dietz and Adger (2003)

Predicted species richness in any year compared to the reference year 1970; National parks and protected areas as a percentage of national land territory; Percentage of expected CITES reports actually submitted in 1999

GDP pc and GNP pc Political rights and civil liberty indices

Various number of countries and years

OLS, fixed and random effects models

No EKC relationship exists between income and biodiversity loss; but conservation effort increases with income

Eskeland and Harrison (2003)

FDI (United States to Mexico and Venezuela; France to Morocco and Cote d’Ivoire)

Pollution abatement cost (PACE)

Plant level data from Mexico (1984–1990), Morocco (1985–1990), Cote d'Ivoire (1977–1987), Venezuela (1983–1988)

Fixed effect models

Pollution abatement costs do not have a systematic impact on the pattern of foreign investment

Millimet et al. (2003)

SO2 and NOx emissions

GDP pc

US states 1929–1994

Different parametric and semi-parametric models

Support for EKC, however, exact shape is strongly model dependent

Cole (2004)

10 air and water pollutants: CO2, NOx, SO2, CO, SPM, VOC, nitrates, phosphorous, BOD, dissolved oxygen

Trade openness Structural change (manufacturing share of GNP); ‘dirty’ North–South trade flows

Sample of OECD countries 1980–1997

Generalized least squares

EKC for most pollutants Trade per se improves the environment; trade openness and the proportion of dirty imports increase emissions in developed countries, offering support for the PHH. But the effect is small relative to other determinants of emissions

Javorcik and Wei (2004)

Decision of firm whether to invest in post-Communist transition country

Various measures of pollution intensity of firms’ sectors (e.g., Toxic Release Inventory data, pollution abatement index, etc.). Environmental regulation in host country (treaty membership, environmental sustainability index, etc.); Political rights and civil liberty indices

143 firms

Probit regression

No support for PHH

Rupasingha et al. (2004)

Per capita pounds of toxic waste release (to air, water, land, and total on-and off-site release)

GDP pc. Scale of economic activity: percentage of manufacturing employment

U.S. counties

Two-stage IV estimation process and spatial econometric techniques

EKC exists. However, incorporation of a cubic term for income reveals that toxic pollution eventually increases again as income continues to rise

Sigman (2004)

BOD concentrations

GDP pc. Trade openness Civil rights.

247 river monitoring stations (72 international) 1978–1996

Fixed effects models

Trade lowers water pollution in rivers shared between countries

Frankel and Rose (2005)

SO2, NO2, and PM, CO2; deforestation, energy depletion (‘genuine savings’); rural clean water access

GDP pc. Trade openness Democracy.

41 countries in the 1990s

OLS

Little evidence that trade has a detrimental effect on the environment

Hoffmann et al. (2005)

CO2 emission from industrial processes

Net inflow of FDI

112 countries (37 low-income 50 middle-income and 25 high-income countries); Time period varies between 15 and 28 years depending on data

Time-series cross- section analysis

PHH only in low-income countries

In low-income countries, CO2 causes FDI (Granger causality test)

In middle-income FDI causes CO2

In high-income countries no Granger causality

McPherson and Nieswiadomy (2005)

Percentage of bird or mammal species classified by IUCN as threatened

GDP pc. Political rights and civil liberties

113 countries in 2000

Spatial lag model

Possible EKC curve: N-shaped relationship between threatened birds and GDP pc; no evidence for EKC relationship for threatened mammals

Paudel et al. (2005)

Three water pollutants: Nitrogen, Phosphorus, dissolved oxygen

GDP pc

53 Louisiana parishes 1985—1999

Fixed and random effects, and semi-parametric models

Standard EKC relationship only between per capita income and the level of nitrogen. No (significant) evidence of EKC for phosphorus and dissolved oxygen

Azomahou et al. (2006)

CO2 emissions pc

GDP pc

100 countries for the period 1960–1996

nonparametric model with country-specific effects

EKC for CO2 emissions does not exist

Cole et al. (2006)

Lead content in gasoline

Inward FDI flows and stock Corruption

33 countries 1982–1992

Fixed effects models

FDI leads to a lower (higher) lead content in gasoline when the degree of local government corruptibility is low (high)

Deacon and Norman (2006)

Median annual concentrations of SO2, smoke, and PM

GDP pc

25, 14, 13 countries for SO2, particulates, and smoke respectively. 1970–1992

Nonparametric model

EKC only for SO2

Farzin and Bond (2006)

CO2, NOx SO2 emissions, SO2 concentrations, Non-methane volatile organic compounds (VOC)

GDP pc. Democracy (Polity)

CO2: over 200 countries, 1980–1998

SO2: 45 countries, 1972–1994

NOx, VOC and SO2 emissions: 45 countries, 1980–1996

Reduced-form parametric approach

EKC relationship for NOx, VOC, and SO2 emissions; Democracy reduces both emissions and concentrations

He (2006)

SO2 emissions

FDI inflows

China, 1996–2001

GMM estimation for a simultaneous model

Results support PHH

Li and Reuveny (2006)

NOx, CO2 emissions, BOD, forest area and deforestation, land degradation

GDP pc. Trade openness Democracy (Polity)

CO2: 143 countries, 1961–1997

NOx:118 countries, 1990

BOD: 112 countries, 1980–1998

Deforestation: 134 countries, 1980 and 1990

Land degradation: 105 countries in the 1980s

Time-series cross-sectional and cross-sectional models

EKC relationship for CO2, NOx, deforestation rate, and land degradation.

Democracy reduces environmental degradation.

Trade has no effect on CO2, BOD, forest area; it increases NOx and the deforestation rate; and it decreases land degradation

Plassmann and Khanna (2006)

CO, ground-level ozone (O3), and coarse PM10

Median household income

704 locations in the USA in 1990

Poisson regression model

PM10 pollution decreases at high levels of income; no evidence of an inverted U-shaped relationship between household income and O3 and CO

Verbeke and Clercq (2006)

SO2 emissions pc

GDP pc. Trade openness; Democracy (Polity)

Large number of countries: 5- and 10-year periods: 1961–1990

Fixed effects logit model and random effects probit model

Democratic countries and countries more open to trade have a higher probability of experiencing a negative income-environment relationship

Culas (2007)

Deforestation

GDP pc. Trade: proportion of forest area (as a measure of Comparative Advantage of Forest Products), port price index and industrial round wood export price index; Institutions: contract enforceability of government and the efficiency of bureaucracy

14 tropical developing countries from Latin America, Africa and Asia 1972–1994

TSCS models

ECK for deforestation exists. Trade increases deforestation rate. Institutions reduce deforestation

Zeng and Eastin (2007)

SO2, soot, and solid waste

Trade openness Trade dependence: share of provinces’ imports of its GDP, share of provinces’ exports in its GDP FDI inflows

Chinese provinces 1996–2004

OLS with panel-corrected standard errors

NO PHH. Trade openness and FDI is positively associated with environmental protection in China.

Elliott and Shimamoto (2008)

Japanese outward FDI flows at the industry level divided by industrial sales

Stringency of environmental regulations: pollution abatement capital expenditure cost (PACE) for a particular industry

Japanese FDI to Malaysia, Indonesia and the Philippines 1986 and 1998

Generalized least squares with fixed effects

NO PHH: pollution abatement costs are not a significant determinant of an industry’s FDI

Lantz and Martinez-Espineira (2008)

Bird populations in 5 different habitats (woodland, scrubland, urban, wetland, and grassland)

GDP pc

9 Canadian provinces from 1968 to 2002

Generalized least-squares regression

EKC hypothesis is supported for only 3 of 5 bird population habitat types (woodland, scrubland, and wetland)

Ward (2008)

Sustainability: Footprint and genuine (adjusted net) saving

GDP pc. Trade openness Democracy (Polity)

Over 100 countries in 2000 (or as close as possible to 2000)

Cross-sectional

EKC for footprint; trade and liberal democracy typically promote weak sustainability

Bättig and Bernauer (2009)

Policy output and policy outcome indices, CO2 emissions, and trends

GDP pc. Trade openness Political rights: (Freedom House)

185 countries 1990–2004

OLS

Democracy increases policy output but it has an ambiguous effect on CO2 emissions

Trade openness reduces policy commitments

Bernauer and Koubi (2009)

SO2 concentrations

GDP pc. Trade openness Institutions: Political rights (Polity), Civil liberties (Freedom House); Labor union strength; green party strength

107 cities in 42 countries from 1971 to 1996

Fixed and random effects models

EKC for SO2

While democracy, green party strength and trade decrease SO2 concentrations, labor union strength increases them

Deacon (2009)

Access to sanitation and safe drinking water; lead content of gasoline

GDP pc. Trade openness Democracy (Polity)

Access to sanitation and safe drinking water: 90 countries for the mid-1990s. Lead content of gasoline: 48 countries, 1972 and 1992

Fixed effects models

Higher income and more democratic countries provide better access to sanitation and safe drinking water and have less lead in gasoline

Managi et al. (2009)

SO2, CO2, and BOD emissions

GDP pc. Trade openness

SO2, CO2: 88 countries, 1973 to 2000.

BOD: 83 countries, 1980 to 2000

Dynamic generalized method of moments (GMM)

Trade benefits the environment in OECD countries; trade has detrimental effects on SO2 and CO2 emissions in non-OECD countries but it does lower BOD emissions in these countries

Shandra et al. (2009)

Average annual percentage change in natural forest area

Forestry exports from poor to rich (OECD) nations as a percentage of a nation’s total forestry exports

60 poor nations 1990–2005

OLS

Forestry export from poor to rich nations are associated with increases in deforestation rates in poor nations

Bernauer and Kuhn (2010)

Water pollution: BOD and NO levels

Trade intensity: trade ratio of upstream country to downstream country and vice versa Trade openness Trade asymmetry: trade dependence of upstream on downstream country

BOD: 21 rivers and 24 country dyads; NO: 24 international rivers and 30 country dyads, 1970–2003

Prais-Winsten regressions with weighted panel corrected standard errors

Trade openness reduces transboundary BOD pollution, but bilateral trade intensity and asymmetry have no significant effect

Cao and Prakash (2010)

SO2 and BOD divided by GDP

Structural equivalence: correlation between two countries’ exports at both bilateral and sector levels trade openness

140 countries for the time period 1980–2003

Spatial maximum likelihood approach

Support for a race to the bottom for SO2

Kearsley and Riddel (2010)

CO2, GHGs, CO, NOx, SOx, SPM, and VOCs

GDP pc. Trade openness Ratio of dirty exports to total exports from an OECD country to a developing country)

Ratio of dirty imports to total imports from a developing country to an OECD country

27 OECD and 100 developing countries.

1980 to 2004 for CO2, GHGs

1990 to 2004 for other pollutants

OLS with bootstrap standard errors

Trade openness is not generally correlated with increased emissions; very weak statistical evidence that dirty imports are correlated with higher emissions. So, little evidence of the PHH

Tevie et al. (2011)

Biodiversity risk

GDP pc

48 U.S. contiguous states in 2007

OLS, spatial error, and spatial lag models

No EKC for biodiversity risk in the US

Ben Kheder and Zugravu (2012)

Firm location decision

Environmental regulation index (MEAs, NGOs, energy efficiency)

1374 French firms in 2002

Conditional logistic models

Some evidence for PHH: manufacturing French firms locate preferably in countries with less stringent environmental policy, provided that regulation is not more lenient than an accepted level ensuring wealthy business environment

Kim and Adilov (2012)

CO2 emissions

Productive FDI

64 countries 1961 to 2004

OLS

Effects of FDI on pollution support both the pollution haven and the pollution halo hypotheses

Lan et al. (2012)

Industrial waste water, industrial soot, and SO2 emissions by industrial value added

FDI inflow, FDI stock, price index of FDI

Human capital: average year of schooling) Interaction FDI and human capital

29 provinces in mainland China 1996 to 2006.

OLS with fixed effects

PHH holds only in those provinces with low human capital

Manderson and Kneller (2012)

Firm location decision

Pollution abatement costs Environmental Policy in host country (Executive Opinion Survey)

UK manufacturing firms in 2005

Probit regressions

No evidence for PHH, rather other factors such as the availability of scientists and engineers as well as infrastructure differently influences the investment decisions of high vs. low environmental cost firms

Kleemann and Abdulai (2013)

Adjusted net saving, energy consumption, BOD, and CFCs

GDP pc. Trade openness tariff rate

90 developed and developing countries 1990–2003

Fixed effects and seemingly unrelated regression estimations

EKC for most pollutants.

Modest support for the PHH: trade is beneficial to sustainable development for rich countries but harmful to poor ones

Lin and Liscow (2013)

Different water pollutants (Global Environmental Monitory System GEMS/Water dataset)

GDP pc. Political rights and civil liberties (Freedom House)

Developing and developed countries 1979 to 1999

OLS and IV generalized method of moments (GMM) regressions

EKC exists for seven out of eleven water pollutants. Political institutions have a significant effect on environmental degradation for five out of eleven water pollutants

Spilker (2013)

SO2, CO2, BOD

GDP pc. Trade openness FDI inflow IO membership

114 developing countries in 1970–2000

Fixed effects models

Du et al. (2014)

Air visibility

GDP pc. Trade intensity (exports pus imports to GDP)

18,000 sites in 184 countries for the period 1950–2004

Fixed effects model

Air visibility- income path supports EKC hypothesis; trade improves air visibility

Aklin (2016)

CO2 per capita

GDP pc. Bilateral trade; Democracy

151 countries 1950–2000

Spatial OLS

Support for PHH

Li et al. (2015)

Air visibility

Trade openness (exports pus imports to GDP)

134 countries for the period 1961–2004

OLS and IV

Trade has a significantly detrimental effect on air quality in developed and less-developed countries

You et al. (2015)

CO2 emissions

GDP pc. Trade openness. Openness in capital account transactions) Political Institutions: Polity and Freedom House

99 countries for the period 1985 to 2005

Panel Quantile models with fixed effects

An EKC exists but the estimated turning point is far above all countries’ income levels (relationship is essentially monotonic).

Democracy is positively associated with emissions for the least emissions individuals (or countries), while the relationship is negative for the most emissions countries.

Financial and trade openness

have no significant effect on pollution

Prakash and Potoski (2017)

CO2, SO2 emissions, and PM-10 concentrations

GDP pc Exports to EU divided by GDP FDI flows MEA membership Environmental NGOs Polity

136 countries 1981–2007

Time-series cross-section analysis

Developing countries’ export dependence on the EU is associated with less SO2 and CO2 emissions but not with less PM-10 concentrations post-Kyoto in relation to the pre-Kyoto time period

Environmental Regulation

Dasgupta et al. (1998a)

Aklin (2016) adoption (firm survey data) and use of plant personnel for environmental inspection

Size of firm Foreign ownership

236 Mexican firms in 1995

Two-stage regression models

Ownership does not matter but rather size of firms

Stafford (2000)

Location decision of hazardous waste management firms

Number and stringency of environmental policies (green index) and spending on enforcement

U.S. states. One year at the beginning of the 1990s

Conditional logit models

While other factors, such as energy costs, are more important, environmental policy can explain parts of location decisions. States that spend more resources to enforce environmental regulations see fewer waste management firms

Christmann and Taylor (2001)

ISO 14000 adoption (firm survey data)

Exports to developed countries (percentage of exports to developed countries in a 5 point scale)

101 firm representatives from Shenzhen and Shanghai, China

OLS

Support for race to the top: Exports to developed countries increase self-regulation of environmental performance

Prakash and Potoski (2006b)

Number of ISO 14001 certified facilities

Export dependence (total exports divided by GDP); Bilateral trade weighted by ISO Adoption

108 countries 1996–2002

Negative binomial models

Support for “California effect”: trade linkages encourage ISO 14001 adoption if countries’ major export markets have adopted this voluntary regulation

Andonova et al. (2007)

GEF environmental funds

Trade openness

Post-Communist states 1994–1999

OLS

Trade openness has weakened environmental policy in the post-communist world

Prakash and Potoski (2007)

Number of ISO 14001-certified facilities

Inward FDI stocks (a) inward FDI stock to GDP and (b) bilateral FDI weighted by ISO adoption

98 countries and 74 developing countries 1996–2002

Negative binomial model

Inward FDI stocks are associated with higher levels of ISO 14001 adoption in host countries only when FDI originates from home countries that themselves have high levels of ISO 14001 adoption

Cao and Prakash (2012)

De jure domestic regulatory stringency: number of treaties to which a country is a member of de facto environmental regulations: SO2 and BOD; Conditional effects for veto players

GDP pc. Share of industrial production in GDP; Trade competition: Structural network equivalence

Stock of inward FDI Veto players

140 countries 1980–2003

Spatial lag models with fixed effects

Trade competition has no significant effect on a country’s de jure regulatory stringency; Constraining effect of veto players is more pronounced for air pollution than water pollution FDI stock has a consistent and significant effect on both de jure and de facto stringency

Environment and IOs

Ward (2006)

4 environmental sustainability measures: 2 indices of sustainability, ecological footprint, genuine saving

Membership in environmental regimes; IO network centrality

141 countries 392 environmental treaties in 2000

OLS

Network centrality positively impacts on nations’ environmental performance

Bernauer et al. (2010)

Ratification of multilateral environmental treaties (MEA)

IO membership

180 countries and 255 global environmental treaties 1950–2000

Binary-time-series-cross-sectional estimation

IO membership increases the probability that a country ratifies a MEA

Spilker (2012)

SO2, CO2, BOD emissions

IO membership

114 developing countries in 1970–2000

time-series cross-section (TSCS) estimation

IGO membership is associated with a reduction in both air pollution and greenhouse gases

Spilker and Koubi (2016)

Ratification of multilateral environmental treaties (MEA)

IO membership

162 countries with respect to 220 MEAs 1950–2000

Binary-time-series- cross-sectional estimation

IO membership does not affect the likelihood that a country ratifies a MEA

The micro level

Bechtel et al. (2012)

Attitudes on trade liberalization

Attitudes on environmental protection

Swiss environmental survey in 2007

Probit models

Stronger environmental concerns are related to more protectionist attitudes

Jorgenson and Givens (2014)

Environmental concern

Economic globalization

37 countries that are part of the World Value Survey in 2005

Multilevel analysis

Economic globalization as measured by exports as percent of total GDP lessens the likelihood of environmental concern, whereas percent exports to high-income countries increases the likelihood of individuals expressing concern for the environment

Bernauer and Nguyen (2015)

Attitudes on trade Liberalization

Attitudes on environmental protection

Surveys and survey experiments in Costa Rica, Nicaragua and Vietnam

Various hypotheses tests

Despite low-income levels individuals in all three countries care about environmental implications of trade

Hao (2016)

Environmental concern

Economic globalization

82 countries that are part of the World Value Survey and the International Social Survey Program

Time-series cross-section analysis

Economic globalization as measured by exports as percent of GDP has a negative effect on environmental concern but other measures of globalization have a more mixed impact

Spilker et al. (2016a, b)

Individual-level preferences with regard to partner countries in and with regard to content of preferential trade agreements

Environmental standards in partner countries or environmental standards in trade agreements respectively

Survey experiments in Costa Rica, Nicaragua and Vietnam

Various hypotheses tests

Individuals in all three countries prefer trade partners with higher environmental standards as well as trade agreements that include strong environmental standards

Legends:

BOD: Biological Oxygen Demand

CO: Carbon Monoxide

CO2: Carbon Dioxide

MEA: Multilateral Environmental Agreement

OLS: Ordinary Least Squares

PC: per capita

PHH: Pollution Haven Hypothesis

PM: Particulate Matter

SO2: Sulfur Dioxide

SPM: Suspended Particulate Matter

If not otherwise specified trade openness is measured as the sum of imports and exports divided by GDP

Further research could focus on several issues. First, the existing literature is somewhat stronger with respect to the economic mechanisms connecting economic openness and environmental protection than with respect to political mechanisms. In particular, it would be worthwhile to explore in greater detail the implications of international organizations, formal and informal international political networks, as well as international policy diffusion for domestic-level environmental protection and environmental quality.

Second, much more research at the firm and plant level is needed, notably in view of the fact that the proportion of international trade that is intrafirm trade has increased very strongly. Such research should be systematically linked to a consumption-based approach to measuring and explaining environmentally damaging human activity.

Finally, on the presumption that public opinion is an important driver of policy, there is a need for more research on how citizens relate various facets of globalization with environmental quality, and what conclusions they draw from this with respect to their preferences for particular economic and environmental policies.

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Notes:

(1.) The Environmental Kuznets Curve (EKC) owes its name to Simon Kuznets (1955), who first proposed an inverted U-shaped relationship between the level of income and income inequality.

(2.) The income elasticity of environmental quality demand means that after a particular level of income has been reached, the willingness to pay for a clean environment rises by a greater proportion than income. Consequently, when a country achieves a sufficiently high standard of living, the expectation is that people attach increasing value to environmental amenities; that is, the environment is no longer a luxury public good.

(3.) Copeland and Taylor (2004) provide a critical review of the theoretical and empirical work on the relationship between trade, economic growth, and the environment.

(4.) A comparative advantage could also derive from endowments of natural resources. In this case, a country with abundant natural resources, say oil or forests, will most likely export them, and thus trade is likely to damage the environment.

(5.) In addition to FDI, (Chudnovsky & Lopez, 2003) list three other mechanisms through which technology can be diffused to developing countries via Multinational Corporations (MNCs): joint ventures, purchase of technology by firms in developing countries in contractual form (e.g. patents or licensing), and reverse engineering, imitation, or copying.

(6.) Levinson (2009, 2010) reports that for the United States over the past 30 years, there has been no significant offshoring of pollution via more importing of polluting goods.

(7.) For example, Damania and colleagues (2003) and Welsch (2004) report that corruption can cause environmental degradation by reducing the effectiveness of environmental regulations.

(8.) The finding that economic affluence and environmental concern are positively correlated is also questioned by various other studies (e.g., Brechin, 1999; Dunlap & York, 2008; Hao, 2016; Jorgenson & Givens, 2014).

(9.) The very few studies evaluating how economic globalization affects individual environmental concerns, in contrast, show that individuals living in more economically globalized countries (measured by exports as percent of GDP) show less environmental concern than individuals living in less globalized countries (Hao, 2016; Jorgenson & Givens, 2014). However, these results should be interpreted with some caution for at least two reasons. First, these studies rely on purely correlational, that is, nonexperimental, research designs, which can be problematic in the study of attitude formation since one can hardly identify causal mechanisms. And second, these studies only look at countrywide globalization and its effect on individual attitudes, thereby treating the effect of globalization within one country as constant for all individuals. However, individual-level assessment of globalization and thus its influence on environmental concern might strongly depend on individual level characteristics.