The Impact of Trade Liberalization on Air Pollution: In Case of Ethiopia

Abstract

The policy of trade liberalization and increased openness is seen as a means of stimulating economic growth for developing countries. However, there is argument from environmentalists side that trade has adverse environmental effects. Given the potential benefits of trade liberalization policies, it is important to examine whether such policies are in fact in conflict with the environment as they accelerate economic growth.This paper with aim of studying the impact of trade liberalization on environment has made use of a time series data from 1970 to 2010. The impact of trade on environment was analysed by decomposing into scale, composition, and technique effect. The Johansen co-integration and error-correction model technique has been used in order to examine the long run and the short run dynamics of the system respectively. The result indicate that scale effect, Economic growth and Population density are positively related to air pollution while it is negatively related with trade intensity and composition effect. In short run, scale effect and population density have negative environmental effects while trade intensity and composition effect are environmental friendly similar to long run results. Thus, there is a need to diversify on areas where the country has comparative advantage in international trade to maximize the gains from trade and Ethiopia has to critically examine and identify her trading opportunities so as to ensure that decisions which endanger areas where Ethiopia exhibits comparative advantage should not compromised

Keywords: Trade liberalization, Trade intensity, Scale effect, Composition effect, Technique effect, Ethiopia.