World Economy (2003), 26, 8, pp. 1163-86

Do Environmental Regulations Influence Trade Patterns? Testing Old and New Trade Theories

Matthew A. Cole and Robert J. R. Elliott

Department of Economics, University of Birmingham

Abstract:

The relationship between trade liberalisation and the environment has been the subject of a growing body of literature in recent years. One particular focus of attention has been the issue of whether environmental regulations are influencing patterns of international trade. This paper aims to examine this issue in the context of the Heckscher-Ohlin-Vanek (HOV) model of trade, but also in a 'new' trade model characterised by monopolistic competition and differentiated products. Our use of the HOV model improves upon a well cited study by Tobey (1990) in many ways, not least by allowing for the possible endogeneity of environmental regulations. We find no statistically significant relationship between such regulations and 'dirty' net exports. The 'new' trade model explains the presence of both intra and inter-industry trade and we again allow for the possible endogeneity of environmental regulations. We believe this to be the first study to assess the role of environmental regulations within a 'new' trade model, but also the first to allow for the endogeneity of regulations in a cross-country model of trade. In the context of this model, we find environmental regulations to be a statistically significant determinant of the share of inter-industry trade (net trade) and we find this significance to increase when endogeneity is controlled for.