Environmental Regulation as Export Promotion: Product Standards for Dirty Intermediate Goods

We employ a stylized model of trade in dirty intermediate goods to examine the impacts of product standards on trade volumes and pollution levels. Our focus is on the case with economies of scale in intermediate good production. In this setting, changes in one country's demand for dirty inputs can feed back to affect the quality of intermediate goods offered for sale in international markets. We provide conditions under which tightening product standards in one country can raise both the profits of and exports from that country's final good producers. Greening product standards can have perverse environmental impacts: tightening rules governing emissions arising from the use of dirty inputs may raise rather than reduce local pollution.