Trade and the Environment: An Application of the WIOD Database

At times, the term structural change has been used largely in debates regarding increasing unemployment in industrial nations because of movements of industries into low-wage countries. Therefore, structural change is often associated with negative connotations, even more in the recent debate on its impact on the environment. Whether these concerns can be justified or not will be discussed later in this paper. But to forecast the major insights from our analysis, structural change is - counter to conventional wisdom - necessary for industrialized countries to maintain economic growth and high wages, and furthermore, it spurs international trade which was identified to have positive influence on the environment for reasons going to be discussed in this paper.

The WIOD database allows for improved empirical analysis on a wide range of important environmental research questions. In this paper we demonstrate the scientific power of the WIOD database and give answers for very urgent policy questions on the impacts of international trade and structural change on the environment. This debate about the impacts of international trade and structural change on the environment has been very heated up to now and it is of very high political importance. This holds in particular true for the European Union. The reasons are the stringent European climate and environmental policy measures and their potentially harmful effects on the competitiveness of the energy-intensive European manufacturing sectors. Structural change has been identified to have a significant impact on environmental issues just because of its potential impact on international trade patterns. Whether concerns can be justified or not will be discussed in this paper application of the WIOD database. It provides insights into the driving forces of structural change and its close relationship to international trade. In a further step, the paper connects these economic forces with environmental issues based on recent econometric approaches in the literature. In addition to this guidelines by the literature, an econometric panel data approach is offered to shed some light on the impact of structural change and international trade on environmental pressure.

By relying on this guideline, we are aware of the problem that some of these variables can not be considered as being strictly exogenous. This is the case for trade and income as was pointed out. To cope with the problem of endogenous regressors, we construct instruments for trade and income. We start our analysis with endogenous cross-section and panel regression. Subsequently we employ our instrumental variables. In the end, our models, indicate strong support for the evidence, that globalization has no harmful effects on the environment.

Löschel, Andreas, Sascha Rexhäuser and Michael Schymura (2013), Trade and the Environment: An Application of the WIOD Database, ZEW Discussion Paper No. 13-005, Mannheim.