For the last ten years environmentalists and the trade policy community have engaged in a heated debate over the environmental consequences of liberalized trade. The debate was originally fueled by negotiations over the North American Free Trade Agreement and the Uruguay round of GATT negotiations, both of which occurred at a time when concerns over global warming, species extinction and industrial pollution were rising. Recently it has been intensified by the creation of the World Trade Organization (WTO) and proposals for future rounds of trade negotiations. The debate has often been unproductive. It has been hampered by the lack of a common language and also suffered from little recourse to economic theory and empirical evidence. The purpose of this essay is set out what we currently know about the environmental consequences of economic growth and international trade. We critically review both theory and empirical work to answer three basic questions. What do we know about the relationship between international trade, economic growth and the environment? How can this evidence help us evaluate ongoing policy debates? Where do we go from here?

We develop a theory of resource management where the degree to which countries escape the tragedy of the commons is endogenously determined and explicitly linked to changes in world prices and other possible effects of market integration. We show how changes in world prices can move some countries from de facto open access situations to ones where management replicates that of an unconstrained social planner. Not all countries can follow this path of institutional reform and we identify key country characteristics (mortality rates, resource growth rates, technology) to divide the world's set of resource rich countries into Hardin, Ostrom and Clark economies. Hardin economies are not able to manage their renewable resources at any world price, have zero rents and suffer from the tragedy of the commons. Ostrom economies exhibit de facto open access and zero rents for low resource prices, but can maintain a limited form of resource management at higher prices. Clark economies can implement fully efficient management and do so when resource prices are sufficiently high. The model shows heterogeneity in the success of resource management is to be expected, and neutral technological progress works to undermine the efficacy of property rights institutions.

This paper investigates how openness to international goods markets affects pollution concentrations. We develop a theoretical model to divide trade's impact on pollution into scale, technique, and composition effects and then examine this theory using data on sulfur dioxide concentrations. We find international trade creates relatively small changes in pollution concentrations when it alters the composition of national output. Estimates of the trade-induced technique and scale effects imply a net reduction in pollution from these sources. Combining our estimates of all three effects yields a somewhat surprising conclusion: freer trade appears to be good for the environment.