# 1 Introduction

For the environmentally minded, globalization reflected in rising trade shares in world GDP is worrisome, directly because the activity of trading itself generates pollution, and indirectly because lower environmental standards generate a comparative advantage in “dirty” industries for developing countries. In this context, globalization, which reduces transport costs and/or trade barriers, would shift investment and production of “dirty”goods to the South. As a result, globalization would lead to an increase in the pollution content of imports by the North, in conformity with what has been called the “pollution haven (PH) hypothesis”, and to a worldwide increase in the production of dirty products. Likewise, the literature has emphasized that a tightening of environmental standards in the North would lead industries to relocate to the South according to what is referred to as the “pollution haven (PH) effect”. Overall, it is fair to say that empirical support for the PH hypothesis is weak, while the PH effect, which is often taken for granted, has proven elusive too, apart from recent empirical support for the US.

One often-mentioned culprit is lack of data: only the US has time series on abatement costs at the industry level, and the only comprehensive data set on emissions is also for that country and for one year (the 1987 IPPS data elaborated by the World Bank). Although the PH effect is obviously a worldwide issue involving rich and poor countries, faced with this lack of data, researchers have made progress on the PH debate by carrying out what we would call “partial” studies. First, the effects contributing to the location of economic activity (see the illustrative example in section 2) have been analyzed in the context of firm case studies (e.g. Eskeland and Harrison (2002)). Second, progress has also been made by case studies of a particular pollutant (e.g. Antweiler et al. (2001) for SO2 emissions). Third, many studies have been carried out on the US where recent evidence controlling for unobserved heterogeneity and the endogeneity of environmental policy has detected a significant PH effect (Ederington et al (2004, 2005) and Levinson and Taylor (2005) using a panel data set of US industries). And fourth, when covering more countries, the analysis is often limited to specific sectors (e.g. Cole and Elliott (2003)). In the absence of systematic data on emissions across countries, making progress has been largely limited to gathering fragmentary evidence (see e.g. Copeland and Taylor (2003) for a review).

In this paper we go beyond partial evidence and carry out a more systematic global estimation of the pollution content of trade across all industrial sectors in which we disentangle the role of factor endowments and environmental policies from the more fundamental (or “deep”) determinants of bilateral trade. To our knowledge, such a decomposition exercise, which allows one to get a better handle on the PH effect, has not been carried out previously. As an example of what transpires from a global decomposition exercise, consider the usual version of the PH effect, according to which a tightening of Northern environmental standards will increase the pollution content of imports by the North. But what about the South? In reality, developing countries are also importing dirty products, 2