The Impact of Environmental Policy on Foreign Trade

Whereas theoretical analyses of trade and environment indicate that relatively strict environmental policies can have a strong impact on foreign trade, empirical studies present mixed results. This study presents new empirical results that tie together two previous empirical studies employing a multicountry econometric framework, notably Tobey (1990, 1993) and van Beers and van den Bergh (1997). Such a link is useful since most empirical studies on trade and environment use unique assumptions and models, thus making a comparison of findings very difficult if not impossible. Since Tobey's study has been particularly influential on writings in this area a statistical analysis has been performed using a data set that shares many characteristics with his study. The main improvement of the approach adopted here is the use of more disaggregate data. In addition, as the effect of environmental policy on international trade is likely to differ between sectors analyses are performed for a variety of sectors. The results provide partly support for Tobey, namely no significant effects for dirty trade. Results for total trade flows, however, show a positive effect of relatively strict environmental policy on exports. This suggests that either Tobey's policy indicator is inaccurate, or essential variables are missing in the regression model, or countries employed complementary measures such as export subsidies in combination with relatively strict environmental regulations. Sector specific regressions results allow for further comparison with Tobey and provide additional support for the previous conclusions.