Modelling the Impact of Environmental Regulations on Bilateral Trade Flows : OECD, 1990-1996

Since the early seventies an increasing attention has been paid to the impact environmental policy might have on foreign trade. One of the most important issues is whether countries with relatively strict environmental regulations tend to experience a deterioration of international competitiveness and thus a fall in exports and a rise in imports, of the pollution-intensive commodities or, on the other hand, benefit from the improvement in environmentally more sensitive industries. So far, most empirical studies have concluded that the proportion of environmental costs to the total production costs is still so marginal that environmental policies have hardly any effect on comparative advantage patterns and thus on foreign trade. One of the few exceptions is Van Beers and Van den Bergh (1997), who found that stricter regulations have some negative impact on bilateral trade flows between OECD countries. The aim of this paper is to show that this outcome is partly due to model mis-specification. The analysis id based on a triple indexed model and on its variants. It is found that, as soon as both the importing and exporting country specific effects are taken into consideration, the relationship between stricter regulations and foreign trade becomes statistically insignificant. This suggests that environmental costs do not have a real impact, neither negative nor positive, on foreign trade