International trade and environmental regulation: Time series evidence and cross section test

This paper examines empirically whether more stringent domestic environmental policies reduce the international competitiveness of environmentally sensitive goods (ESGs). Our time series evidence indicates that there are no systematic changes in trade patterns of ESGs in the last three decades, despite the introduction of more stringent environmental regulations in most of the developed countries in the 1970s and 1980s. This observed phenomenon is then subjected to a multi-country econometric test using an extended gravity-equation framework. The test suggests that, overall, more stringent environmental regulations do not reduce total exports, exports of ESGs and exports of non-resource-based ESGs. Neither was there any evidence to support the hypothesis that new trade barriers emerge to offset the effects of more stringent environmental regulations.