What Type of Trade is Promoted by Environmental Provisions in Trade Agreements?

The objective of this paper is to investigate the extent to which international trade is affected by environmental provisions in trade agreements. We use a sectoral gravity model of bilateral exports, estimated for a global sample of countries over the period from 1995 to 2019 with trade data at the 2-digit level of the Standard International Trade Classification. We distinguish between dirty-footloose and dirty-non-footloose industries. The main novelty is the estimation of heterogeneous effects for groups of goods and countries, considering the direction of trade and the distinction between legally enforceable and non-enforceable provisions. This enables us to investigate whether more stringent environmental provisions lead countries to decrease their exports. Data on legally enforceable environmental provisions is obtained from the Deep Trade Agreement dataset compiled by the World Bank. Our results show that dirty goods are generally less traded between pairs of countries within agreements that have environmental provisions, especially for exports of dirty-footloose industries from non-OECD countries to OECD countries. Nevertheless, When descending to sector-by-sector analysis within the dirty goods category, there is mixed evidence concerning the effect of environmental provisions.