Tuesday, April 07, 2009

International Trade in Used Durable Goods: The Environmental Consequences of NAFTA

A catch up on some must read papers in the "globalisation and environment" arena.

The results of this paper appeal as they are exactly what I would expect although the final line of emission increases due to a second life for cars that would otherwise be scrapped is less convincing. Clearly it depends on what happens in Mexico and whether the alternative is merely to prolong the life of even more polluting cars.

International Trade in Used Durable Goods: The Environmental Consequences of NAFTA

Lucas W. Davis
University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)
Matthew E. Kahn
University of California, Los Angeles (UCLA)

December 2008

NBER Working Paper No. w14565

Previous studies of trade and the environment overwhelmingly focus on how trade affects where goods are produced. However, trade also affects where goods are consumed. In this paper we describe a model of trade with durable goods and non-homothetic preferences. In autarky, low-quality (used) goods are relatively inexpensive in high-income countries and free trade causes these goods to be exported to low-income countries. We then evaluate the environmental consequences of this pattern of trade using evidence from the North American Free Trade Agreement. Since trade restrictions were eliminated for used cars in 2005, over 2.5 million used cars have been exported from the United States to Mexico. Using a unique, vehicle-level dataset, we find that traded vehicles are dirtier than the stock of vehicles in the United States and cleaner than the stock in Mexico, so trade leads average vehicle emissions to decrease in both countries. Total greenhouse gas emissions increase, primarily because trade gives new life to vehicles that otherwise would have been scrapped.

JEL Classifications: F18
Working Paper Series