RESEARCH AND ANALYSIS
Impact of environmental regulations on trade in the main EU countries: conflict or synergy?
Roberta De Santis
Growing global interdependence, both economic and environmental, increases the need for coherence and coordination in trade and environmental policies. The European Union has been the central proponent of including environmental issues in trade discussions at the multilateral level and has made increasing efforts to integrate its trade strategy with the principles of sustainable development (and vice versa). This aspect is particularly evident in the recent Europe 2020 strategy.
At present, there are over 250 multilateral environmental agreements (MEAs) dealing with various environmental issues which are currently in force. About 20 of these include provisions that can affect trade. For instance, they may contain measures that prohibit trade in certain species or products, or that allow countries to restrict trade in certain circumstances.
A question that may arise is whether measures under a MEA are compatible with WTO rules. For example, a multilateral agreement could authorize trade in a specific product between its parties, but ban trade in the same product with countries that have not signed the agreement. This could be found to be incompatible with WTO’s non-discrimination principle known as “most favoured nation treatment”, which requires countries to grant equivalent treatment to the same (or “like”) products imported from any WTO member country. On the other hand, WTO rules do allow members to derogate from their obligations in some cases, for instance where a measure is aimed at the conservation of natural resources, provided certain conditions are met.
The conventional wisdom about environmental regulations is that they come at an additional cost on firms imposed by the government, which may erode their global competitiveness. However, this paradigm has been challenged by some analysts. In particular, Porter, M.E. and C. van der Linde (1995) argue that pollution is often associated with a waste of resources and that more stringent environmental policies can stimulate innovations that may compensate for the costs of complying with these policies. This is known as the Porter hypothesis. It is worth to underline that empirical studies present mixed results.
While there is a broad empirical literature on the impact of trade on environment the empirical literature on the impact of environmental regulations on trade flows is relatively scarce, very heterogeneous and presents mixed results. One of the main problem is that most studies are incomparable to other ones with the consequence that results do not lead to a uniform conclusion. Mainly due to differences in model assumptions, methods employed and data used a comparison of results across studies is extremely difficult.
Among the papers comparable, using a gravity setting with OECD data1, the most significant studies are Van Beers and Van den Bergh (1997) that test the impact of environmental stringency on bilateral exports. They built indicators of environmental stringency based mainly on energy intensities and recycling rates and rank OECD countries according to their stringency into a 0-1 index. Their main result confirms the pollution haven hypothesis: they found out that the OECD countries’ exports are negatively and significantly affected by more stringent regulations. They also show that imports are negatively correlated with the importing country’s stringency, which does not support the pollution haven hypothesis.
Harris et al. (2002) slightly modify Van Beers and Van den Bergh’s tests by adding-up exporters and importers’ fixed effects as well as time effects to show that the stringency variable does not confirm anymore the first findings. Grether and De Melo (2003) represent in a gravity setting stringency by a regulatory gap between countries, measured by difference in GDP per capita. However, when they control for different factors in their trade equation they conclude that the relationship between the regulatory gap and trade flows is not robust.
We tried to estimate whether and how the interaction between WTO, EU and three main MEAs memberships exerted a significant impact on EU15 exports in a gravity setting. Estimates show that EU15 bilateral export flows were positively influenced by the presence of both trade and environmental agreements in the period 1988-2008. This evidence seems to show that, at least for EU members, on average, the environmental regulations did not constitute a secondary trade barrier in the past twenty years.
The three MEAs dummies have positive and significant coefficients, rejecting the hypothesis of pollution haven. In fact, according to our estimates the average positive variations of exports (of EU 15 towards OECD countries) induced by signing UNFCCC, Kyoto and Montreal agreements are respectively 22, 32 and 35%, over the period 1988-2008. It can be partly explained by a possible trade diversion effect with respect to countries that did not sign MEAs, and a corresponding trade creation effect among (WTO) members of the environmental agreements.
We included in our regression interaction terms between our trade and environmental agreements dummies. With the inclusion of these terms, the estimated coefficients indicated the difference in effects of the regressors (EU or WTO membership) on the dependent variable (EU15 bilateral exports) between countries that had signed MEAs and those that had not.
Interestingly, with respect to the interaction with the EU membership, we found a positive and significant coefficient only between the EU membership and the Kyoto agreement. This shows that, for EU members, the effect of having signed the Kyoto agreement on bilateral trade was higher (by the amount of the estimated coefficient). As for the WTO membership we found positive and significant coefficient for the UNFCCC and Kyoto agreements.
These results reject the pollution haven hypothesis in favour of a view à la Porter, at least for EU members. This is in line with the fact that the relevance of the relationships between MEAs, EU and WTO rules for enhancing mutual supportiveness of environment and trade has been clearly reflected in the international negotiations in the past twenty years.
We also find a positive and significant relationship, in line with the existing literature, between EU and WTO membership and bilateral exports: EU countries exported about 31% more towards WTO countries and 16% more towards EU members. The lower impact of EU membership is consistent with the historically tight trade links characterizing the economies in Europe also before the creation of the European Union
This article is based on the working paper Impact of environmental regulations on trade in the main EU countries: conflict or synergy?
Harris, M. N., L. Kónya and L. Mátyás (2002), ‘Modelling the Impact of Environmental Regulations on Bilateral Trade Flows: OECD, 1990–1996’, The World Economy, 25, 3, 387–405.
Grether, J.-M. and J. de Melo, (2004), “Globalisation and dirty industries: Do pollution havens matter?”in R.E. Baldwin and A. Winters eds., Challenges to Globalisation: Analyzing the Economics, University of Chicago Press, 167-208.
Jug J. and Mirza D., (2005), Environmental Regulations in Gravity Equations: Evidence from Europe. The World Economy, Vol. 28, No. 11, pp. 1591-1615, November.
Porter, M.E. and C. van der Linde, 1995. Green and competitive: ending the stalemate, Harvard Business Review, September-October: 120-134.
Van Beers, C. and J.C.J.M. van den Bergh, 1997. An empirical multi-country analysis of the impact of environmental regulations on foreign trade flows. Kyklos 50: 29-46.
1. For an extensive survey see Jug and Mirza (2005). back to text
Roberta De Santis obtained her Ph.D. in Economics from the University La Sapienza of Rome (Italy), writing part of her Phd Thesis on trade linkages and currency crises at the Federal Reserve Bank of San Francisco (USA). Her research focuses mainly on international trade and European economic integration. She is currently a professor of European Economics at LUISS University in Rome (Italy) and senior economist at the Italian National Institutes of Statistics in the department of Economic Analysis and forecasts