Do Environmental Policies Hurt Trade Performance?

This paper contributes to the controversial literature on the relationship between environmental policies and international trade. It provides new evidence about the effect of a gap in environmental policies between trading partners on trade flow on a sample of developed and developing countries over the 1980-2010 period. The paper innovates on two aspects. First, while previous studies have used partial measures of environmental regulations (input-oriented or output-oriented indicators), an index of a country's environmental policy is computed. This index is calculated as the difference between observed pollution levels and "structural" pollution i.e. pollution predicted by determinants of environmental degradation as identified and modelled in the literature. This index is therefore a measure of "revealed" efforts made by countries aiming at downsizing environmental degradation. Second, the effect of these revealed environmental policies is assessed on bilateral trade flows in a gravity model. A particular attention is paid to similarities in environmental policies. Our results show that a gap in domestic efforts towards environmental protection between trading partners has no effect on exports. Moreover, the results do not appear to be conditional on the level of development of the countries trading nor on the characteristics of exported goods (manufactured goods and primary commodities).