IT Industry, Environmental Regulations and International Trade-A Two-Sided General Equilibrium Approach

Abstract

The relationship between trade and environment is a complex and highly debated issue, and the inclusion of IT industry makes this relationship even more complex in nature. Capital-exporting countries are typically well endowed with IT-type capital as well as with non-IT-type capital. Since capital-intensive goods (other than IT Sector) are often also pollution-intensive, factor endowment theories of international trade predict that capital-exporting countries specialize in polluting goods. Thus, the materialization of the pollution haven hypothesis (PHH) is in direct conflict with the factor endowment hypothesis (FEH). The present chapter has tried to solve this debate and by doing so also supports the arguments of PHH over FEH with the help of general equilibrium trade model. In this chapter, we have shown that trade liberalization in the form of non-IT-type capital inflow from Capital-exporting nation (the North) to Capital-importing nation (the South), augmented with environmental restrictions claims the rise of dirty industry in South at the cost of environment-friendly IT industry. However, the same trade regime claims the fall of dirty industry in the North, along with the benefit of expanded IT industry. Interestingly, this chapter also shows that international flow of IT-type capital can lead to an expansion of IT-based industries simultaneously in both capital-exporting and capital-importing nations and also raises the arguments in favour of outsourcing.