Trade effects of sustainability standards – a review of literature

Sustainability standards may generate two opposing effects on trade flows between the importer adopting the standard and an affected exporter. First, to the extent a standard leads to an increase in the marginal costs of producing a given product in the exporting country, the standard may lead to a reduction in trade. Conversely, to the extent the standard leads to an increase in the demand for the product in the importing country, the standard may lead to an increase in trade. The net effect on trade, which depends on the relative magnitude of the two factors and the international scope of the standard (i.e. whether it is implemented multilaterally, regionally, bilaterally, or unilaterally). The general consensus in the literature appears to be that the trade-reducing effects of standards typically dominate the trade-enhancing effects of standards. However, in certain situations, the trade-enhancing effects can mitigate or even reverse these negative effects. A trade reduction does necessary imply a reduction in welfare as it may reduce consumption of goods with negative externalities. The trade effects of voluntary sustainability standards tend toward 'trade enhancing' outcomes as opposed to `trade reducing' outcomes. However, there seems to be self-selection effect: only those adopt for whom it is profitable.