Academic journal article International Journal of Business and Society

The Environmental Effects of Intra-Industry Trade in the Saarc Region

Academic journal article International Journal of Business and Society

The Environmental Effects of Intra-Industry Trade in the Saarc Region

Article excerpt

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I. INTRODUCTION

The environment is becoming an important issue in international trade, while trade liberalization is creating issues that are concerned with both trade and the environment. The pertinent questions are whether the resulting trade expansion pollutes the environment more or less than before? Does an emphasis on economies-of-scale in trade liberalization policies have triggered countries to evaluate their pollution emission? Trade expansion may have direct as well as indirect trade-induced environmental effects. The relationship between trade and environmental quality is ambiguous due to the structure of developing economies; sometime it is beneficial in the short ran but harmful in the long run or vice versa (Cosbey, 2008). The debates on the international trade and environmental sustainability have generated more heat than light; trade liberalization has affected both trade and environment.

Economies with large polluting industries are blamed to be the major culprit of the environmental degradation, such as climate change. In the industrial sector, having features of increasing returns to scale with trade liberalization, total number of firms in the industry shrinks although each one of the remaining firms produces more than before. Trade expands the consumption basket and enables the consumers to use both local and imported varieties of goods. At the same time, when income level of a country increases due to the trade openness; the country implements stricter environmental approach, which causes amplified pollution abatement activity and lesser emission intensity (Fung and Maechler, 2007).

The South Asian Association for Regional Cooperation (SAARC) countries are actively participating in the world trade, both inter-trade and intra-industry trade. On this note, the volume of intra-industry trade is increasing in the SAARC region. Hence, the question is whether the increase in the intra-industry trade contributes to the environmental externalities in the region? Accordingly, this study investigates the trade and environment relationship by utilizing the new trade theory. The new trade theory refers to the imperfect competition, increasing returns to scale, choice of variety and specialization in a limited range of production of differentiated goods. Employing the new trade theory, this study examines the trade induced environmental effect which is classified further into the scale effect, selection effect and technique effect. Firstly, the scale effect refers to the variation in environmental quality due to change in scale of production while the selection effect refers to the change in environmental quality due to the change in number of firms; and finally, the technique effect is the impact of income on the quality of environment (Aralas, 2010). It is noteworthy that the selection effect is the main factor that differentiates the effect of inter-industry trade from the effect of intraindustry trade on the environment. The other effect of inter-industry trade is the composition effect which refers to a tradeoff between capital labor ratio and this effect provides the base of pollution haven hypothesis and race to bottom approach in the Hecksher-Ohlin framework (Taylor etak, 2001).

Existing studies generally ignored the selection effect due to the frequent use of overall trade induced environmental composition effect in the trade and environment literature. Trade induced environmental composition effect emphasizes on environmental effect of trade due to change in factor intensity. However, this study departs from the existing practice by focusing on the trade induced environmental selection effect instead of the composition effect. The environmental selection effect is the change in emission level due to the change in the selection of differentiated products, while trade induced environmental selection effect is the change in emission level due to change in the selection of differentiated products as a result of trade liberalization. …

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