World Economy - 2012 - de Santis - Impact of Environmental Regulations On Trade in The Main EU Countries Conflict or

The World Economy
The World Economy (2012)

doi: 10.1111/j.1467-9701.2012.01450.x
Impact of Environmental
Regulations on Trade in the Main
EU Countries: Conflict or Synergy?
Roberta De Santis
Istat (Italian National Institute of Statistics) and University of Rome La Sapienza, Rome, Italy
1. INTRODUCTION
N an increasingly integrated world with declining trade barriers, environ-

I mental regulations can have a decisive role in shaping countries’ compara-
tive 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 chal-
lenged by some analysts. In particular, Porter (1991) and Porter and 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.
This paper attempts to estimate, in a gravity setting, the overall impact on
15 EU countries’ bilateral exports of environmental regulation. The study is
innovative with respect to the existing literature in two ways: it uses as a proxy
of environmental regulation, besides the GDP per capita differential,1 the mem-
bership of three major multilateral environmental agreements (MEAs) and it
focuses on European Union countries.2
The views expressed in this paper are those of the author and do not necessarily represent the insti-
tutions with which the author is affiliated. Any error or mistake remains the author’s sole responsi-
bility. Thanks are due to Claudio Vicarelli for many helpful suggestions.
1
The so-called environmental Kuznets curve hypothesis (Copeland and Taylor 2003) states that as
far as an healthier natural environment is a normal good, demand for it tends to be higher in richer
countries that impose more stringent environmental regulations, as compared to poorer ones. For
this reason in the related literature often the difference in GDP per capita is used as a measure of
the regulatory gap between countries. See for example Grether and de Melo (2004).
2
In the existing literature as far as we know only Jug and Mirza (2005) focuses on EU countries
trade.
Ó 2012 Blackwell Publishing Ltd., 9600 Garsington Road,

Oxford, OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. 799
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800 R. DE SANTIS
The choice to use also the MEAs as a proxy of environmental regulation is

due to the fact that, at present, there are over 250 multilateral environmental
agreements 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.
The choice to study the effect of environmental regulation on trade specifi-
cally for the EU countries is due to the fact that the European Commission has
been the central proponent for including environmental issues in trade discus-
sions at the multilateral level and has made increasing efforts to integrate its
trade strategy with the principles of sustainable development in the past
decades. Recently, this aspect has been particularly prompted in the Europe
2020 strategy.3
This paper is organized as follows: the first section conducts a critical survey
of the most recent empirical literature, the second, third and fourth sections
describe the empirical strategy, the equation and the data set and the estimation
results. Conclusions follow.
2. A SURVEY OF THE LITERATURE: CONFLICTS OR SYNERGIES?
According to economic theory, the environmental regulations affects

trade flows. In fact, the environmental rules modifying the production
cost curve would determine a change in the comparative advantages. It is
worthwhile mentioning, however, that the interaction between international
trade and environmental policies could determine opposite effects on trade
flows.
In the theoretical literature, most widely discussed is the ‘pollution-haven –
race to the bottom’ hypothesis, which says that countries that are open to inter-
national trade will adopt looser standards of environmental regulation, out of
fear of a loss in international competitiveness. This hypothesis was initially for-
mulated in the context of local competition for investments and jobs within
Federal States, where the decentralized environmental responsibilities gave
each state independence in setting their environmental standards in line with
their priorities. Most critics argue that increased competition for trade and for-
eign direct investment could lead to lowering of environmental standards and
regulations.
3
Launched by the European Commission in March 2010, the ‘Europe 2020’ Strategy is the over-
arching policy initiative which brings together all areas of EU competence and activity in order to
prepare the EU economy for the next decade.
Ó 2012 Blackwell Publishing Ltd.

IMPACT OF ENVIRONMENTAL REGULATIONS ON TRADE 801
Less widely recognized is the Porter hypothesis4 stating that stringent envi-
ronmental regulation does not necessarily deteriorate the industrial competitive-
ness of a country. Rather, stringent environmental policies – under the
condition that they are efficiently designed and employed – can further a
nation’s international competitiveness.
While there is a broad empirical literature on the impact of trade on environ-
ment, the empirical literature on the impact of environmental regulations on
trade flows is relatively scarce, is very heterogeneous and presents mixed
results. One of the main problems is that most studies are incomparable to
other ones with the consequence that results do not lead to a uniform conclu-
sion. Mainly, due to differences in model assumptions, methods employed and
data that are used as a comparison of results across studies are extremely
difficult.5
The differences in study outcomes are mainly related to three factors:6 (i)
different studies use different policy stringency indicators. These comprise
input- versus output-oriented indicators, costs versus physical measures, objec-
tive (observed) versus subjective (self-reported, expert judgemental) measures,
(ii) studies use different types of temporal data, (iii) different methods are
employed: simple statistical indicators or econometric studies; cross-section,
time series or panel data econometric studies; and studies at country, state, firm
or plant level.
Among the papers comparable, using a gravity setting with OECD data,7 the
most significant studies are those of Van Beers and van den Bergh (1997),
which test the impact of environmental stringency on bilateral exports. They
construct 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 in a way the
4
Porter and van der Linde (1995). For a survey on empirical paper assessing Porter hypothesis see
Ambec and Lanoie (2007).
5
In Table A1 in the Appendix there is a comparison among the main empirical papers on this
issue.
6
The following categorization of empirical studies illustrates the wide diversity of approaches: (i)
trade-in-goods (Tobey, 1990; Van Beers and van den Bergh, 1997) versus factor content of trade
(Xu and Song, 2000),(ii) simple statistical indicators (Low and Yeats, 1992) versus (multivariate)
regression models (Tobey, 1990; Van Beers and van den Bergh, 1997) or applied equilibrium mod-
elling (Steininger, 1999), (iii) multilateral trade flows (Tobey, 1990) versus bilateral trade flows
(van Beers and van den Bergh), (iv) single country (Low and Yeats, 1992; studies in Fredriksson,
1999) versus multi-country or multiregion (Tobey 1990, van Beers and van den Bergh 1997, Xu
and Song, 2000), (v) static (Tobey, 1990; Van Beers and van den Bergh, 1997) versus dynamic
(Bjørn et al., (1997); Xu and Song, 2000), (vi) analysis at the individual firm level (Bjørn et al.,
1997) versus sector level (all of the other studies mentioned in this list).
7
Particularly interesting, in a more theoretical context, is the paper of Cole and Elliott (2003) This
paper examines the issue in the context of the Heckscher–Ohlin–Vanek (HOV) model of trade and
also in a ‘new’ trade model characterized by monopolistic competition and differentiated products,
improving the well-cited study by Tobey (1990) in many ways.

802 R. DE SANTIS
pollution-haven hypothesis, because they come to the finding that the OECD
countries’ exports are negatively and significantly affected by more stringent reg-
ulations. 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 the first findings anymore. In a
gravity setting, Grether and de Melo (2004) represent stringency by a regula-
tory gap between countries, measured by difference in GDP per capita. How-
ever, 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.
The study by Jug and Mirza (2005) is the only other empirical study testing
the impact of environmental regulation on EU trade. It shows negative effects
of environmental stringency estimating a gravity equation. Their results show
that more stringent environmental regulations, when depicting a pure cost
effect, are reducing exports. The coefficient is even larger in the case where
exporting countries are Central and Eastern European countries, comparing to
the EU15. They also show that there is no significant difference in the impact
of regulations on trade in case of dirty and clean sectors.
3. EMPIRICAL STRATEGY
The aim of our empirical analysis is to estimate whether and how environ-
mental regulation exerts a negative impact on trade flows on EU-15 exports in
a gravity setting.
As one innovative feature of the paper is the introduction in the estimates of
MEAs as a proxy of environmental regulation, three major multilateral agree-
ments have been selected. In particular, the Montreal Protocol on Substances
that Deplete the Ozone Layer, the United Nations Framework Convention on
Climate Change and the Kyoto Protocol seem particularly suitable for our pur-
pose. They include, in fact, many trade-related measures8 covering a large
number of goods. Moreover, the aim of these MEAs is mainly related to emis-
sion reduction and could have had a strong impact on a broad range of produc-
tion techniques and industrial sectors’ competitive advantages also at an
aggregate level. The three agreements have been signed and implemented in
different years by the EU members and by many (but not all) OECD members.
In line with recent works, we augmented the gravity equation with a multi-
lateral trade resistance index. Starting from Anderson and Van Wincoop
8
For a detailed description see WTO, WT=CTE=W=160=Rev.1 14 June 2001.

(2003), the inclusion of ‘multilateral trade resistance index’ in empirical papers

has been widely used to obtain a specification of a gravity equation that can be
interpreted as a reduced form of a model of trade with micro foundations.9 As
for the empirical strategy, we used a panel data technique. A major motivation
for this choice is the possibility to control for the correlated time-invariant het-
erogeneity.10 We performed an Hausman specification test to check the pres-
ence of correlation between explanatory variables and individual effects.
Results are reported in Table 1: the null hypothesis of zero correlation is
rejected, showing that for our purposes FEM seems more reliable than REM.11
However, FEM suffers from the major shortcoming of not being able to
provide estimates of time-invariant regressors.
To overcome this problem, we decided to use an Hausman and Taylor
estimator (HT). HT method is a 2SLS random effect model that allows to
deal with correlation between regressors and unobserved individual effects.
Using an HT estimator, it is possible to estimate parameters of time-invariant
regressors.
The HT model in a bilateral form is as follows:
Yijt ¼ a0 þ b1 X1ijt þ b2 X2ijt þ d1 Z1ij þ d2 Z2ij þ eijt ; ð1Þ
eijt ¼ lij þ vijt ; ð2Þ
where i is country A, j is country B and t is the time, a0 is the constant term;

lij is the unobserved individual effect, vijt is the white noise error term, X1 are
9
Anderson and Van Wincoop (2003) developed a theoretical gravity equation by using a CES util-
ity function. Their basic gravity model is subject to:
X
yi yj tij 1r
xij ¼ W P1r
j ¼ Pir1 hi tij1r 8j:
y Pi Pj i
where yW is the world income, country i’s world income share hi = yi=yW, and trade cost tij is a
function of border effect bij and distance dij. bij = 1 if there is no border barriers between country i
and j, otherwise equals one plus the tariff equivalent of the border barrier between the two coun-
tries. The model says that the trade between country i and j is determined by the share of the multi-
plier of both countries’ income to the world income, as well as trade cost adjusted for the price
indexes in both countries. The price index in country j is a function of the price indexes, income
shares, and the trade costs of all countries.
10
Ordinary least squares (OLS) suffer from heterogeneity bias in a gravity setting. The two most
widely used panel data models are the random effect model (REM) and fixed effect model (FEM):
both can control for heterogeneity. Their assumptions are different. REM models require that unob-
served bilateral effects are n.i.i. and orthogonal to the remaining part of the error term. regressors
have to be uncorrelated to individual effects and error term for all cross sections and time periods.
If the orthogonality conditions hold, the REM provides more efficient estimates than fixed effect
estimators. If explanatory variables are correlated with unobserved individual effects FEM is con-
sistent.
11
The test statistic of 128.87 is greater than the chi-squared critical value with 11 degrees of
freedom therefore the null hypothesis that the REM is consistent is rejected.

804 R. DE SANTIS
the time-varying variables uncorrelated with lij, X2 are the time-varying vari-
ables correlated with lij, Z1 are time-invariant variables uncorrelated with lij
and Z2 are time-invariant variables correlated with lij.
lij is the part of eijt, including all the bilateral characteristics not specifically
modelled in X1, X2, Z1 and Z2. It also includes the unobserved trade resistance
variables, both bilateral- and country-specific:
lij ¼ gij þ ki þ kj þ xt ; ð3Þ
where gij are the bilateral-specific effects, ki and kj are importer and exporter
country characteristics, x are optional time effects.
The presence of X2 and Z2 causes correlation with unobserved individual
effect. HT model uses variables already included in the model to instrument X2
and Z2.12
In the empirical literature, there are different selection procedures to select the
variables correlated with lij. It is possible to select instruments on the basis of econ-
omic intuition (Hausman and Taylor (1981) or following different procedures.13
4. EQUATION AND DATA SET
The dependent variables in the estimates are the EU-15 bilateral export
flows. The equation is estimated for the EU-15 countries as exporting countries
and 24 countries (15 EU members14 + 10 OECD) as trading partners; the time
span is 1988–2008.15
We introduced three sets of variables into the gravity equation: (i) standard
gravity variables; (ii) variables proxing multilateral trade resistance index; and
(iii) dummy variables for trade and environmental agreements.
1. Standard gravity variables. Bilateral distance as a proxy of transport costs
and the product of the importer’s and exporter’s GDP as proxies of the
‘mass’.16
12
In detail, X2 can be instrumented by deviation from the group means of X2; Z2 can be instrumen-
ted by deviation from the group means of X2. The model is identified as long as the number of
variables in X1 is greater than the number of variables in Z2.
13
See for instance Walsh (2006).
14
Since data for Belgium and Luxembourg have been supplied together since 1999, they will be
included in the estimates together.
15
The dataset is taken by OECD (STAN DTB) for bilateral exports in value terms and environ-
mental stringency indicators, World Bank WDI for GDP in US$ and population, WTO and MEAs
membership are taken by WTO and OECD websites, distance is taken from http://www.cepii.fr/
anglaisgraph/bdd/distances.htm. Summary statistics of the data are provided in Table A2 in the
Appendix.
16
The mass, as conventionally calculated in the gravity equation, is the product of the gross
domestic product of the exporting and importing countries.

2. Multilateral trade resistance index. To built a multilateral resistance

index, price indexes are needed. However, price variables are not avail-
able for all the countries, especially for developing ones. Therefore, in
the empirical literature, several methods have been implemented to proxy
these trade resistance terms. The most widely used seems to be the inclu-
sion of country-specific dummies.17 This method has the advantage of
capturing unobserved price effect producing consistent estimates of
parameters. Feenstra (2004) shows that the inclusion of these dummies
generates about the same results of Anderson and Van Wincoop (2003).
Our empirical strategy follows these suggestions. In HT models, country-
specific dummies appear in the error term. At the same time, the remain-
ing components of lij (equation 3) proxies the unobserved trade resistance
variables, both bilateral- and country-specific. We adopted a broad interpre-
tation assuming that tij is a log-linear function of observable variables.18
3. Trade and environmental agreements.
The estimated equation form is the following:
LnEXPijt ¼ b1 LnMassijt þ b2 LnDistij þ b3 Similijt þ b4 Stringijt
þ b5 Z þ b6 Kyotoijt þ b7 UNFCCCijt þ b8 Montrealijt
þ b9 WTOijt þ b10 EUijt þ eijt ; ð4Þ
where
1. Ln is the natural logarithm, i is the exporting country, j is the importing
country and t is the year;
2. EXPijt is exports in value from country i to country j;
3. MASSijt is the product of the gross domestic product of the exporting and
importing countries, a proxy of the ‘mass’, that is the size of the coun-
tries involved in bilateral trade;
4. Distij is the great circle distance between i and j;19 this formula approxi-
mates the shape of the earth as a sphere and calculates the minimum
distance along the surface;
5. Similijt is the similarity index of the two trading partners’ GDP as a
measure of relative country size; it is built as:
17
Rose and van Wincoop (2001).
18
Dummies for common language, shared borders, currency, islands, countries, See Marques and
Spies (2006), Melitz (2005), Subramanian and Wei (2003), Rose (2002).
19
To calculate great circle distances you need the longitude and latitude of the capital or ‘econ-
omic centre’ of each economy in the study. The apply the following formula to obtain the distance
measure in miles: Dij = 3962.6 arccos([sin(Yi) Æ sin(Yj)] (6) + [cos(Yi) Æ cos(Yj) Æ cos(Xi Xj)]),
where X is longitude in degrees multiplied by 57.3 to convert it to radians and Y is latitude multi-
plied by 57.3 (assuming it is measured in degrees West).

806 R. DE SANTIS
" 2 2 #
GDPit GDPjt
Ln 1 ; ð5Þ
GDPit þ GDPjt GDPit þ GDPjt
6. Stringijt proxies the environmental regulatory gap between countries

according to the environmental Kuznets curve hypothesis; it is built as:

Ln GDPit Ln GDPjt ; ð6Þ
POPit POPjt
where POP is the population;

7. Z is a vector of dummy variables capturing bilateral characteristics (i.e.
dummies for common language, shared borders, currency and islands
countries);
8. WTOijt is a dummy that assumes value 1 if the importing country j liberal-
izes its imports under the WTO and at the same time the exporting coun-
try i is a WTO member;
9. Kyotoijt, UNFCCCijt and Montrealijt are dummies that assume value 1 if
the exporting and importing countries have signed (and ratified) the
Kyoto, UNFCCC and Montreal agreements and 0 otherwise;
10. EUijt is a dummy that proxies the EU internal market integration process.
Therefore, EU membership has been a dynamic process, with European
countries joining the EU in different years; this dummy assumes value 1
when both countries were members.
We expect that bilateral export flows are positively influenced by (i) the
product of importing and exporting countries’ GDP. In gravity models, trade
flows are positively influenced by the ‘mass’ proxied by the product of GDP
and (ii) the WTO and the ‘EU membership’ – countries joining EU and WTO
should have benefited from declining trade barriers.
We expect that bilateral export flows are negatively influenced by distance.
According to the standard gravity model, bilateral distance is a proxy for trans-
port costs and cultural proximity between two countries.
We have no a priori on (i) the signs of the String and MEAs proxies: a
negative sign of the indexes would suggest a pollution-haven view. On the
contrary, a positive sign would support a Porter type interpretation and (ii)
the signs of the relative country size index (Simil). A negative sign of the
index favours the classical Heckscher–Ohlin–Samuelson trade theory view
that trade rises with relative factor endowment differences. On the contrary,
a positive sign supports Linder’s hypothesis, which states that trade volumes
are smaller the more dissimilar two countries are in terms of relative
factors.

5. ESTIMATION RESULTS: IS ENVIRONMENTAL REGULATION A SECONDARY

TRADE BARRIER?
We estimated our equation (4) through an HT estimator. As we have

stressed in empirical strategy, in this kind of model the choice of variables that
correlated with residuals is crucial. We tested in the estimates several variables
potentially correlated with unobserved individual effects. The choice of the fea-
sible set of instruments depended on the deviation of the estimates from FEM
estimates.20 The basic idea was that the lower the gap with FE estimates, the
lower the correlation of the independent variables with residuals.
To test the appropriateness of the choice of variables that correlated with
unobserved individual effect, we performed a Hausman–Taylor over-identifica-
tion test based on comparison between the HT and Within estimators.
We identified HT121 as our preferred version: the mass, bilateral distance,
the similarity index and the borders were the most important sources of correla-
tion between explanatory variables and unobserved specific effects. The HT
over-identification test did not reject the hypothesis of legitimacy of our choice
of instruments.
The estimates results are summarized in Table 1, and some robust-
ness checks are presented in Table A3 in the Appendix. As regards ‘gravity
standard’ variables, a positive export relationship with the mass and a nega-
tive one with distance are confirmed, in line with the relevant empirical
literature. The control variables are statistically significant and with the
expected signs, with the exception of the common language that is not
significant.
As in Baltagi et al. (2003), the signs and statistical significance of Similijt
seem to support Linder’s hypothesis: bilateral trade is higher the more similar
two countries are in terms of factor endowments and country size.22
The environmental stringency variable (String) is negative and significant,
showing that bilateral trade is negatively affected by relative higher degree of
environmental stringency in the exporting countries. This result is in line,
20
FEM results were taken as benchmarks: the within estimator is a consistent estimator of parame-
ters, controlling for any source of correlation between regressors and unobserved individual effects.
21
Several HT specifications were implemented in order to select the appropriate instrumental vari-
ables we selected HT1 with the following: instruments (Simil, lndist, lnmassa, border).
22
This hypothesis was resumed by Helpman and Krugman (1986). They asserted – using a model
derived from a standard monopolistic competition framework- that the theory behind comparative
advantages (i.e. the Heckscher–Ohlin model) does not predict the relationships in the gravity model.
Deardoff (1998) suggested that the basic gravity model can be derived from H-O, and so too can
the Linder, Helpman–Krugman hypothesis. Reconciliation is provided by Evenett and Keller
(2002) who find that ‘factor endowments and increasing returns explain different components of the
international variation of production patterns and trade volumes’.

808 R. DE SANTIS
among the comparable studies, with those of Grether and de Melo (2004) and
Jug and Mirza (2005) and seems to support a pollution-haven view.23
Interestingly, the dummies of three MEAs have positive and significant
coefficients.24 This evidence seems to be in contrast with the previous result.
However, the average positive variations of exports (of EU-15 towards 24
OECD countries) induced by signing UNFCCC, Kyoto and Montreal agree-
ments could be explained by a possible trade creation effect among members
of the environmental agreements (owing for example to homogeneous environ-
mental standards) and a consequent trade diversion effect with respect to coun-
tries that did not sign the agreements (and whose products have different
environmental standard).
TABLE 1
The Impact of Trade Agreements and MEAs on EU-15 Export Flows
Number of Observations 5,698 Time Sample 1988–2008

Number of Bilateral
Relations 286
Within GLS HT1
Ln Massijt 0.40*** 0.29*** 0.41***

LnDISTij 0.75*** 0.11
Similijt 1.11*** 0.20 1.11***
Stringijt 0.13*** 0.05* 0.13***
EUijt 0.15*** 0.20*** 0.15***
WTOijt 0.23*** 0.25*** 0.27***
UNFCCCijt 0.20*** 0.17*** 0.20***
Montrealijt 0.30*** 0.31*** 0.30***
Kyotoijt 0.27*** 0.36*** 0.28***
Zij
Common language 0.4 2.6
Common currency 0.2*** 0.2*** 0.2***
Border 1.0*** 8.1***
Island 0.1 1.1*
Constant 10.4*** 19.13*** 8.6***
Hausman test v2 (11) 1128.87***
F test F(11, 5339) = 551.02***
Over-identification test: v2 (3) 2.94**
Notes:
(i) ***Significant at 1%; **Significant at 5%; *Significant at 10%.
23
The result is robust to the inclusion of exporters and importers’ fixed effects as well as time
effects. For a selection of robustness checks see Table A3 in the Appendix.
24
As the coefficient of the dummy UNFCCC is 0.20, the variation of exports induced by signing
this agreement (UNFCCC = 1) with respect to the case of not signing (UNFCCC = 0) is given,
other things being equal, by [(exp0.20 1=exp0.20 0) 1] 100 = 22 per cent.

TABLE 2
Interaction Effects
Coefficient
UNFCC String 0.08***

Montreal String 0.05***
Kyoto String 0.01
Notes:
(i) ***Test: v2 (3): 497.27.
We also find a positive and significant relationship between EU and WTO

memberships and bilateral exports. Similarly to the related empirical litera-
ture,25 our results show that the WTO membership dummy is positive and sta-
tistically significant. EU countries exported about 31 per cent more to WTO
members than other countries. As for EU membership, the impact is more lim-
ited (16 per cent) than that for WTO membership. Nevertheless, this result is
consistent with the tight trade links characterizing EU members also before the
creation of the European Union.26
To have a common currency (that in our panel is mainly explained by a
‘euro effect’) and to share borders seem to have a positive and significant
impact on trade flows in line with the related literature.27
To investigate further the impact on trade of the three MEAs, we included
in our regression interaction terms between the environmental regulations dum-
mies (Table 2). With the inclusion of these terms, the estimated coefficients
indicate the difference in effects of the variable (String) on the dependent vari-
able (EU-15 bilateral exports) between countries that had signed MEAs and
those that had not.
We found a positive and significant coefficient for UNFCCC and Montreal.
This evidence seems to show that for exporting countries, having signed the
UNFCCC and the Montreal agreements partly mitigates (by the amount of the
estimated coefficient) the negative impact on bilateral trade of having a rela-
tively more stringent environmental regulation.
6. CONCLUSIONS
Estimates show that the environmental stringency variable is negative and

significant, showing that bilateral trade is negatively affected by the relative
25
Rose (2002), Subramanian and Wei (2003), De Santis and Vicarelli (2007).
26
Trade relationships within Europe have always been intense because of cultural and neighbour-
hood factors and they have been reinforced over the past decades by several partially overlapping
policy decisions.
27
See De Santis et al. (2008a, 2008b).

810 R. DE SANTIS
degree of environmental stringency in the exporting countries. These results

that seem to support a pollution-haven view are in line, among the comparable
studies, with Grether and de Melo (2004) and Jug and Mirza (2005).
However, we also found that EU-15 bilateral export flows were positively
influenced by the presence of environmental agreements in the period 1988–
2008.
According to our estimates, to be member of MEAs in the sample period
had an overall positive impact on EU-15 exports. The average positive varia-
tions of exports (of EU-15 towards 24 OECD countries) induced by signing
UNFCCC, Kyoto and Montreal agreements could be partly explained by a pos-
sible trade diversion effect with respect to countries that did not sign MEAs
and a corresponding trade creation effect among members of the environmental
agreements owing for example to homogeneity of environmental-related pro-
duction standards. This explanation seems consistent with the fact that the rele-
vance 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.
We included in our regression interaction terms between the environmental
regulations proxies. With the inclusion of these terms, the estimated coeffi-
cients indicated the difference in effects of the regressor (String) on the depen-
dent variable (EU-15 bilateral exports) between countries that had signed
MEAs and those that had not.
We found a positive and significant coefficient for UNFCCC and Montreal.
This result could have important policy implications for the future international
trade–environmental negotiations. In fact, the evidence seems to show that for
exporting countries, having signed the UNFCCC and the Montreal agreements
partly mitigates (by the amount of the estimated coefficient) the negative
impact of having a relatively more stringent environmental regulation on bilat-
eral trade was higher.
We also found a positive and significant relationship, in line with the exist-
ing literature, between EU and WTO membership and bilateral exports: EU
countries exported about 31 per cent more to WTO countries and 16 per cent
more to 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.

APPENDIX
TABLE A1
Selection of Previous Studies Investigating the Impact of Environmental Regulations on Trade

Authors Model Period-Countries Sectors Environmental Main Findings
Regulation Proxies
Van Beers and van Gravity 21 OECD Total Qualitative, STR (exporter)
den Bergh Cross- countries Dirty output-oriented negative,
(1997) section 1975; 1992 Footloose 7 broad measures, significant
OLS 2 narrow measures STR (importer)
(energy intensity) negative, even
more significant
Harris et al. Gravity 24 OECD Total Similar to Van Beers STR signs not
(2002) countries Dirty and Van den Bergh; always what
1990–96 Footloose own indices constructed expected – When
(based on energy, accounting for FE,
consumption and STR not significant
energy supply)
Grether and Gravity 52 countries Dirty: pulp and paper, Regulatory gap between Dirty: STR not
de Melo Panel (North, industrial chemicals, countries (difference significant
(2004) revealed South) 1981–98 Nonmetallic in GDPpc) Footloose: STR
comparative minerals, Iron & Steel, significant
advantage Nonferrous metals sectoral analysis: not
(RCA) - Clean all significant
IMPACT OF ENVIRONMENTAL REGULATIONS ON TRADE
811
812
TABLE A1 Continued
Authors Model Period-Countries Sectors Environmental Main Findings

Regulation Proxies
Ederington et al. Panel IMP and EXP Total US: ratio of PACE to Total trade – STR not
(2003) Industry and from the Dirty total costs of materials significant
time FE United States Footloose other: indices US -developing: STR
1978–92 (World Bank) significant,
Footloose: STR
significant
Large costs: STR not
significant
Ederington and Panel US industries US 4-digit SIC-level PACE (US); ratio of STR significant
Minier Industry and 1978–92 manufacturing industries PACE to total costs
(2003) time FE of materials
Levinson and Panel US net imports from US 133 4-digit PACE (US) as a STR significant
Taylor Theoretical Mexico, Canada; SIC-level fraction of (0.05–0.27)
R. DE SANTIS
(2003) model other OECD countries; manufacturing value added STR significant
non-OECD industries; (1.1–4.4)
countries 1974–86 differentiated
by most =
least polluting
Jug and Panel Importers: 12 9 sectors: by ISIC; Eurostat – current STR significant
Mirza Structural EU countries, differentiated environmental (0.3); larger
(2005) gravity exporters: 19 into dirty and clean; expenditures by for Candidate
EU+CC 1996–99 homogeneous industry (total countries
and differentiated manufacturing) STR even
higher (3)

TABLE A2
Summary Statistics of the Data
Variable Observation Mean SD Min Max
Exptot 5,698 6.52e+09 1.25e+10 112355 1.40e+ll

Unfccc 6,006 0.7029637 0.4569907 0 1
Kyoto 6,006 0.1753247 0.3802762 0 1
Montreal 6,006 0.9738595 0.1595664 0 1
Dist 6,006 4706.168 5749.761 248 22138
Cambioreale 5,875 132.4553 529.825 39.68604 10558.07
Wto 6,006 0.6666667 0.4714438 0 1
Massa 5,967 1217142 2103526 929.8544 1.40e+07
Border 6,006 0.1085581 0.3111099 0 1
Commonlang 6,006 0.041958 0.20051 0 1
Simil 6,006 0.1798857 0.1780945 0 .4999998
Fact 5,967 2.833219 2.275019 .0003681 8.318549
Island 6,006 0.2027972 0.4021162 0 1
Landlogx 6,006 243668.5 178472.7 33096 547030
Landlogm 6,006 1515741 3060932 33096 9976140
Dueu 6,006 0.5161505 0.4997807 0 1
TABLE A3
Robustness Checks. The Impact of Trade Agreements and MEAs on EU-15 Export Flows
HT1
1988–2008 1988–98 Montreal UNFCCC Kyoto Without USA
Ln Massijt 0.41*** 0.20*** 0.60*** 0.60*** 0.37*** 0.32***

LnDISTij 0.11 0.12* 0.04 0.04 0.02 0.03
Similijt 1.11*** 1.2*** 1.05*** 1.5*** 0.80*** 0.82***
Stringijt 0.13*** 0.10* 0.10*** 0.12*** 0.10*** 0.11***
EUijt 0.15*** 0.11*** 0.18*** 0.16*** 0.17*** 0.15***
WTOijt 0.27*** 0.22*** 0.41*** 0.23*** 0.42*** 0.24***
UNFCCCijt 0.20*** 0.14*** 0.23*** 0.20***
Montrealijt 0.30*** 0.32*** 0.28*** 0.28***
Kyotoijt 0.28*** Dropped 0.30*** 0.33***
Common language 2.6 3.1 0.02 0.2 2.4 3.5
Common currency 0.2*** 0.04 0.23*** 0.22*** 0.18*** 0.18***
Border 8.1*** 11.1*** 2.5* 2.9 7.9*** 9.4***
Island 1.1* 2.6 8.3*** 8.2*** 1.1 0.3
Constant 8.6*** 15.4*** 8.4*** 8.5*** 12.2 12.6
Note:
(i) ***Significant at 1%, *Significant at 10%.

814 R. DE SANTIS
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The World Economy

The World Economy (2012)

N an increasingly integrated world with declining trade barriers, environ-

Ó 2012 Blackwell Publishing Ltd., 9600 Garsington Road,

The choice to use also the MEAs as a proxy of environmental regulation is

2. A SURVEY OF THE LITERATURE: CONFLICTS OR SYNERGIES?

According to economic theory, the environmental regulations affects

Ó 2012 Blackwell Publishing Ltd.

Ó 2012 Blackwell Publishing Ltd.

Ó 2012 Blackwell Publishing Ltd.

(2003), the inclusion of ‘multilateral trade resistance index’ in empirical papers

Yijt ¼ a0 þ b1 X1ijt þ b2 X2ijt þ d1 Z1ij þ d2 Z2ij þ eijt ; ð1Þ

eijt ¼ lij þ vijt ; ð2Þ

where i is country A, j is country B and t is the time, a0 is the constant term;

Ó 2012 Blackwell Publishing Ltd.

4. EQUATION AND DATA SET

Ó 2012 Blackwell Publishing Ltd.

2. Multilateral trade resistance index. To built a multilateral resistance

Ó 2012 Blackwell Publishing Ltd.

6. Stringijt proxies the environmental regulatory gap between countries

where POP is the population;

Ó 2012 Blackwell Publishing Ltd.

5. ESTIMATION RESULTS: IS ENVIRONMENTAL REGULATION A SECONDARY

We estimated our equation (4) through an HT estimator. As we have

Ó 2012 Blackwell Publishing Ltd.

Number of Observations 5,698 Time Sample 1988–2008

Ln Massijt 0.40*** 0.29*** 0.41***

Ó 2012 Blackwell Publishing Ltd.

UNFCC String 0.08***

We also find a positive and significant relationship between EU and WTO

Estimates show that the environmental stringency variable is negative and

Ó 2012 Blackwell Publishing Ltd.

degree of environmental stringency in the exporting countries. These results

Ó 2012 Blackwell Publishing Ltd.

Ó 2012 Blackwell Publishing Ltd.

Authors Model Period-Countries Sectors Environmental Main Findings

Ó 2012 Blackwell Publishing Ltd.

Variable Observation Mean SD Min Max

Exptot 5,698 6.52e+09 1.25e+10 112355 1.40e+ll

1988–2008 1988–98 Montreal UNFCCC Kyoto Without USA

Ln Massijt 0.41*** 0.20*** 0.60*** 0.60*** 0.37*** 0.32***

Ó 2012 Blackwell Publishing Ltd.

Ó 2012 Blackwell Publishing Ltd.

Ó 2012 Blackwell Publishing Ltd.

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Ln Massijt 0.40* 0.29* 0.41***

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