We have drawn two propositions, critical from a developing country viewpoint, from the trade and environment literature and assessed them for cloth and leather production in Pakistan. The first is that trade liberalization will result in export by developing countries of their environmental capital. The second is that the costs of mitigating these damaging environmental effects in the South are very high. We find that, given the state of implementation of environmental laws in Pakistan, exports induced by trade liberalization can indeed have major negative environmental impacts. However, we do not find support for the proposition that the costs of mitigation are very high. We also find that the social benefits far exceed the costs of mitigation.