Impact of environmental regulations on trade in the main EU countries: conflict or synergy?

In an increasingly integrated world with declining trade barriers, environmental regulations can have a decisive role in shaping countries’ comparative advantages. The conventional wisdom about environmental protection is that it comes 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 (1991) argues that pollution is often associated with a waste of resources and that more stringent environmental policies can stimulate innovations that may over-compensate for the costs of complying with these policies. This is known as the Porter hypothesis. 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. The innovative feature of this paper is its attempts to estimate, in a gravity setting, the overall impact on 15 EU countries bilateral exports of three major Multilateral Environmental Agreements (MEAs). According to our estimates, to be member of MEAs in 1988-2008 had a positive impact on EU15 exports ranging between 22 and 35%. Furthermore, it seems that the jointed membership of WTO/EU and MEAs had a further positive “interaction effect” on EU15 exports. These results show the presence of a synergy, at least for EU members, between environmental regulations and trade flows. 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 members of the environmental agreements. This explanation seems consistent with the fact that the relevance of the relationship 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. LUISS Guido Carli and ISTAT , [email protected], [email protected], The views expressed in this paper are those of the author and do not necessarily represent the institutions with which the author is affiliated. Any error or mistake remains authors’ sole responsibility. Thanks are due to Claudio Vicarelli for many useful comments.