Globalization, International Trade, and CO2 Convergence: Evidence From G7 Countries

Introduction

The economic borders between countries can be said to have weakened in the past few decades due to globalization. In the 1970s, in particular, the dominant policy in the international field was neo-liberalism, and this ideology also even became dominant in the field of economics. Foreign direct investments and the volume of international trade prominently increased as an obvious result of globalization. Multinational corporations became the important actors of the new economic order, and they engendered the homogenous expansion of production processes throughout the whole world. As such, some multinational corporations left only their strategic operations such as management and design in the central country, moving all their production operations in particular to less developed countries with abundant cheap labor. This implicit agreement between less developed and developed countries has provided the less developed countries with more employment and more production. However, multinational corporations (i.e., those in developed countries) achieved distinct advantages such as lower production costs and new markets thanks to this agreement. However, in addition to the economic advantages that were created, this process has also increased energy consumption through the production increases in host countries. This increased energy consumption has also increased environmental degradation and the release of CO2 and other greenhouse gases into the atmosphere.

According to one part of the literature, developed countries have caused environmental pollution to be exported to the rest of the world through increased foreign trade volume and foreign direct investment as a result of globalization. Antweiler et al. (2001) investigated the effect a country’s openness to international trade has on the environment using a theoretical model. In the study’s theoretical section, they identified three different impacts free trade has had on the environment: the scale, technique, and composition effects. In their conclusion, they suggested that free trade has had a positive impact on environment. Cole and Elliott (2003) investigated whether compositional changes have occurred in inter-regional pollution due to trade liberalization. According to those authors, the suspected causes of these possible changes are dissimilarities in factor endowments (capital-labor composition) and/or inter-regional environmental regulations. They suggested trade liberalization as being able to reduce emissions based on biochemical oxygen demand while increasing NOx and CO2 emissions. The results from (Chakraborty & Mukherjee, 2013) indicate countries’ environmental sustainability to be negatively related to their merchandise export and inward foreign direct investments while being positively related to service exports and outward foreign direct investments. Their results also indicate increased production in developing or less developed countries to lead to more energy consumption and more CO2 emissions. As a result, CO2 emissions per capita in the world are expected to converge over time.

These new circumstances have transformed environmental pollution into a transnational problem and increased concerns both politically and academically. In order to reduce the damage to the environment, climate summits such as Rio de Janeiro, Copenhagen, Paris, and Kyoto Protocols have been held. The Climate Change Framework Agreement and the Kyoto Protocol were signed, bringing measures on carbon trading and carbon tax to the agenda.

The main purpose of this study is to investigate whether the amount of CO2 emissions between G7 countries converge with each of their developing trade partner countries with the highest trade volume. For this purpose, ADF, PP and Enders-Lee Fourier unit root tests have been used to test for the convergence of CO2 emissions between the related countries. To the best of my knowledge, this study is relatively unique in literature in terms how it uses the unit root test and its sample. This feature makes up part of the study’s contribution to the literature. The results reveal CO2 emissions to converge between Germany-China, Japan-Cuba, and the USA-Mexico. In contrast, no convergence was found between the United Kingdom-Turkey, Canada-Cambodia, France-Russia, or Italy-South Korea.

The remainder of the study is organized as follows. The next section is reserved to a review of the related literature. Following the literature review, the econometric model and method are introduced and the empirical results explained. Lastly, the study concludes with the discussion section.