Trade Flow Consequences of the European Union’s Regionalization of Environmental Regulations

Abstract

We show that multilateral environmental regulations may affect trade flows differently than unilaterally generated regulations. Using the gravity equation, we test the effect on bilateral trade flows of increases in environmental regulation stringency ratings, taken from survey data, with a panel of 97 countries, controlling for European Union (EU) membership. We find significant differences in the effects on intra-EU exports compared to trade involving at least one non-EU country. We also find differing effects for high income countries compared to low income countries. An increase in environmental regulation stringency leads to a dramatic decrease in intra-EU exports originating in low income countries. Conversely, a similar change in environmental regulation stringency does not statistically affect intra-EU exports originating in high income countries. The results are consistent with the uneven competitiveness effect and the uneven burden of compliance shown in our model.