Do National Borders Matter? Intranational Trade, International Trade, and the Environment

We develop a theoretical model identifying channels through which trade impacts the environment. First, trade decouples some of regulation's costs from its benefits, prompting demand for stringent environmental regulations. Second, trade provides consumers with access to new varieties of goods; the associated income (substitution) effect raises (lowers) demand for strict regulation. The model predicts (1) international trade to be more environmentally beneficial than intranational trade due to a stronger decoupling effect, and (2) both intra and international trade to be pro-environment unless substitution effects are sufficiently strong. Using data on intra and international trade for the US and Canada, along with several environmental outcomes, we find robust evidence that international trade has a statistically and economically beneficial causal effect on environmental quality, while intranational trade has a harmful impact. This pattern is consistent with a moderate-sized substitution effect along with a stronger decoupling effect of international trade.