Outflow of Manufacturing Facilities, Environmental Policy, and International Migration

We consider a simple North-South model of trade where the manufacturing plants are completely outsourced in a developing country and cause trans-boundary pollution which is detrimental to the productivity of an environmental sensitive (agricultural) industry in a developed country. The developed country has a comparative advantage in pollution abatement equipments which are supplied via international trade to the manufacturing sector of the developing country. We investigated the effects of economic policies to improve economic welfare of the representative workers in the developed country. Our findings are that developed country should not increase subsidy to the pollution abatement equipment sector but introduce foreign worker if pollution abatement equipment is sufficiently effective. Developed countries usually regard the environmental industry as the promising growth industry which surely supplies enough job opportunities to domestic workers. Therefore in order to hold relative advantage, several environmental policies to support environmental industry tend to be adopted. But our analysis suggests that even though environmental policy (subsidy to pollution abatement equipment sector) could enhance the environmental capital stock, which might reduce economic welfare. On the other hand, developed countries are often reluctant to introduce foreign workers and usually immigration is not considered a useful policy to improve environment. But our result suggests that under certain condition, introduce foreign worker might be better than subsidy policy to environmental industry.