Trade and the Environment in Central America

Abstract: During the last decades, the policies of trade liberalization and export promotion have been crucial to Central America's economic growth. Because of the linkages between trade and the environment, this dramatic shift in Central America’s trade patterns could have important implications for the environment and use of natural resources. This paper looks at the dynamics between trade and the environment in the Central American region during the decade of the 1990s, focusing on export flows with its main partner, the United States. By making use of relevant econometric techniques, such as instrumental variables and fixed effect estimation, in order to address problems caused by the endogeneity of environmental policy and unobserved country characteristics, we found evidence supporting the existence of a pollution haven effect. These results show that after controlling for other factors that influence trade flows more stringent environmental regulation acts as a deterrent to dirty good production.