Home demand and trade pattern: A support for the Linder conjecture in the environmental sector

Abstract

This paper theoretically and empirically explores the Linder conjecture (the home market effect [HME] in terms of trade pattern) in the environmental sector. Using a general equilibrium model for a two-country, two-sector economy, we demonstrate the existence of a strong/weak HME and highlight the crucial role of trade costs in the HME. Empirically, by utilising a data set of international air purifier trade and PM2.5 concentration, we investigate the causal relationship between environmental demand and trade patterns. The results show that for every 1% rise in PM2.5, the exports and net exports of air purifiers increase by 4.337% and 3.835%, respectively. We also illustrate that the strong secondary magnification effect exists in the environmental sector, especially among developing countries. In conclusion, a country with a larger environmental home demand tends to be a net exporter of environmental products. It provides a new path for high-polluting countries to upgrade their traditional manufacturing towards an environmentally friendly economy.