Linkages between trade liberalization and environmental policy: Evidence from India

The relationship between trade liberalization and the environment is generally thought of as one that involves a trade-off between better environmental quality and freer trade. While this view appears to be widely held, it has so far been rejected by a large number of empirical studies. Using evidence from India, this dissertation empirically tests for the existence of the trade-off between promoting free trade and protecting the environment at three different levels of analysis---cross-country, national and state-level.; Chapter four analyzes the pattern of international trade flows across two countries that greatly differ in the stringency of their environmental enforcement regimes: India and the U.S. Since the U.S. has a stricter environmental enforcement regime than India, we hypothesize that over the time period of analysis, the U.S. will become relatively less competitive than India in the export of dirty goods. In Chapter five, we evaluate the environmental impact of India's trade liberalization program of 1991 by examining the composition of (dirty versus clean) production, exports and foreign investment. Using evidence from state-level inflow of FDI and new investment location in India, Chapter six of this dissertation examines whether foreign investments and new investments locations are attracted to regions with less stringent environmental regulations.; Our results provide some support for the broad hypothesis that the relationship between trade and environment is negative. In chapter four, we find that India is becoming more competitive in exports of dirty goods relative to its exports of clean goods compared to the US. In chapter five, we find that exports and FDI grew in the more polluting sectors relative to the less polluting ones between the pre and post-liberalization periods. Finally, our findings in chapter six supports the hypothesis that there appears to be small, though significant, increase in domestic and foreign investments in states with weaker environmental stringency.; Based on the findings in our empirical section, we make several policy recommendation to the Indian government to mitigate the potential environmental damage of trade liberalization measures while balancing the economic costs of stringent environmental laws. Policy lessons drawn from the Indian experience serve as an informative case study for other developing countries that are planning trade liberalization programs without simultaneously strengthening their environmental institutions.