Department of Economics

Over the last two decades an unprecedented increase in private vehicle ownership has taken place in the developing world. This growth is due, in part, to increased international trade in used vehicles. In this paper we use theory and empirical evidence to evaluate the environmental implications of free trade in vehicles and other used durable goods. With non‐homothetic preferences, used vehicles are relatively inexpensive in high‐income countries and free trade causes these goods to be exported to low‐income countries. We apply this framework to the North American Free Trade Agreement. Since trade restrictions were eliminated in 2005, over 2.5 million used cars have been exported from the United States to Mexico. Using a unique, vehicle‐level dataset, we find that traded vehicles are dirtier than the stock of vehicles in the United States and cleaner than the stock in Mexico, so trade leads average vehicle emissions to decrease in both countries. Total greenhouse gas emissions increase, primarily because trade gives new life to vehicles that otherwise would have been scrapped. Key Words: Durable Goods, Non‐Homothetic Preferences, NAFTA, Climate Change JEL: F18, H23, Q54, Q56.