Input Intensity: A Missing Link between Production,Trade Patterns,and Environmental Standards

Trade and production implications of a change in environmental policy using the 2 × 2 Heckscher–Ohlin framework are identified. For otherwise identical economies a difference of environmental policy standards generates two effects: the “effective‐endowment effect” where the abatement activity uses up some resources of the economy leaving less for the production of the final goods and the “factor‐price effect” where changes in the abatement requirement affects factor prices that in turn affect production. The direction and relative strengths of these two effects determine whether production and trade patterns are consistent with or opposite to the pollution haven expectation.