Industrial Migration in the Chemical Sector: Do Countries with Lax Environmental Regulations Specialize in Polluting Industries?

This study sets out to capture the effect that environmental policy has on trade and specifically then examining the notion that lax environmental regulations will constitute a basis of comparative advantage, causing the least regulated jurisdictions to specialize in polluting industries. This is done partly by a survey of the empirical literature on this subject and partly by performing an econometrical test of this, the so-called pollution haven hypothesis. The literature survey presents evidence of a relocation of production capacity in polluting industries towards less developed countries, with generally less stringent environmental regulations, during the last decades. Although, there is little evidence that this shift has primarily been driven by differences in environmental regulations, it is more likely to be explained by other factors such as increasing domestic demand and more abundant natural resource endowments in the industrialising countries. The econometrical test adopts a Heckscher-Ohlin-Vanek (HOV) model of trade, regressing net exports from 54 countries in 23 sectors of the chemical industry on endowments in seven factors of production and two measures of stringency of environmental regulations based on emissions of sulphur dioxide emissions (SO2) on a national level and emissions organic matter in wastewater (BOD) in the chemical sector. Though results indicate that environmental regulations have an effect on trade in a few sectors, most notably in the inorganic chemical sector, the effect is quantitatively weak and the results are sensitive to changes in the model. Thus, the weight of evidence suggests that environmental regulations have had a limited impact on global trade flows and production patterns to date, even in the most polluting industry sectors.