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Trade in Environmental Goods: Evidences from an Analysis Using Elasticities of Trade Costs

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Abstract

Negotiations on the liberalization of environmental goods (EGs) and services within the WTO Doha Round (mandated in November 2001) are facing specific challenges. Conflicting interests and differing perceptions of the benefits of increased trade in EGs were reflected in different approaches proposed for determining EGs. Using import data of 34 Organisation for Economic Co-operation and Development (OECD) member countries and from a sample of 167 countries, from 1995 to 2012, we discuss the trade effect of reducing barriers on EGs. We analyze the lists of EGs proposed by the Asia-Pacific Economic Cooperation and OECD using a Translog gravity model. We found that removing tariff barriers for EGs will have a modest impact because for the biggest importers and exporters, elasticities of trade costs are very low while for most trading relationships they are very high, making it difficult for exporters to maintain their markets. Overall, our results suggest that, because of their substantial effect on international trade, future negotiations on EGs should also address the issues of standards and nontariff barriers.

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Notes

  1. See OECD (2006) for a definition.

  2. Lovely and Popp (2011) find that economic integration increases access to environmentally friendly technologies and leads to earlier adoption.

  3. See Article 31.3 of the Doha Declaration for WTO Strategy at http://www.international.gc.ca/media/comm/news-communiques/2014/01/24a.aspx [Accessed January 25, 2015].

  4. The impacts of environmental taxation on the competitiveness and the location of polluting industries have received much attention in trade literature. A stricter environmental regulation is potentially harmful to competitiveness of firms because of higher productive costs and may lead to relocation of dirty industries towards countries with a lower environmental taxation (e.g. Copeland and Taylor 2004; Muradian et al. 2002). In contrast, according to the Porter hypothesis, more stringent but properly designed environmental regulations may induce innovation and, in turn, could enhance competitiveness. Tsurumi et al. (2015) and Costantini and Mazzanti (2012) recently investigated on this Porter hypothesis, and confirm that environmental policies may foster international competiveness by inducing technological innovation.

  5. See at http://www.apec.org/Press/Features/2014/0115_egs.aspx [Accessed January 25, 2015].

  6. These countries are Australia, Canada, China, Costa Rica, the European Union, Hong Kong, Japan, Korea, New Zealand, Norway, Singapore, Switzerland, Taiwan, and the United States. They account for 86% of global trade in environmental goods and by the end of 2015 they were 11 rounds of negotiations. See the US government website at http://www.ustr.gov/about-us/press-office/press-releases/2014/January/Froman-ministers-launch-new-talks-toward-increased-trade-environmental-goods [Accessed January 25, 2015]. At the end of 2015, Iceland, Israel and Turkey joined the group (http://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/env/plurilateral.aspx?lang=eng, Accessed March, 2016).

  7. De Melo (2015) asserts that climate change negotiations faced difficulties because of the inability to obtain full participation. However, an EGs agreement requires the participation of only a small number of countries to reach the level of 90% of world trade in EGs, which is the condition for extending the reductions negotiated to all WTO members.

  8. Zugravu (2010) shows that, to increase EGs trade, attention must be paid not only to liberalization issues but also to cross-country harmonization of institutional quality, and especially, to environmental regulations.

  9. Also see a discussion on the implications of relaxing CES preferences in Mrazova and Neary (2014).

  10. Feenstra and Weinstein (2010) also provide theory and some evidences for the US.

  11. In the present study we adjust the OECD List by dropping services, and keeping only goods.

  12. During the same period, the growth in value of trade of industrial goods including environmental goods was 133.59%.

  13. In the literature, the term extensive margin refers to the growth in exports stemming from the emergence of new destinations (e.g. Felbermayr and Kohler 2006) or new exported varieties (e.g. Hummels and Klenow 2005), or the participation of new firms on export markets (Chaney 2008; Helpman et al. 2008). Growth in trade at the intensive margin refers to an increase in the trade volume between existing partners, in the trade volume of existing varieties or in the export volume of firms currently engaged in export activities.

  14. See the US government website at http://www.ustr.gov/about-us/press-office/press-releases/2014/January/Froman-ministers-launch-new-talks-toward-increased-trade-environmental-goods [Accessed January 25, 2015].

  15. Homogeneity condition requires that \(\sum \nolimits _{m=1}^N {\alpha _m } =1\) and \(\sum \nolimits _{k=1}^N {\gamma _{km}} =0\).

  16. See the appendix of Novy (2013) for the details of the gravity equation derivation. The procedure adopted is similar to the one adopted by Anderson and van Wincoop (2003).

  17. The corresponding “traditional” or CES gravity equation is: \(ln \left( {{x_{ij} }/{y_j }} \right) =ln \left( {\tau _{ij}^{1-\sigma } } \right) +S_i +S_j +\xi _{ij} \) where \(S_i =\left( {\Pi _i } \right) ^{\sigma -1}+{y_i }/{y^{W}}\) and \(S_j =\left( {P_j } \right) ^{\sigma -1}\). This specification implies a constant elasticity of substitution \(\eta ^{CES}=\left( {1-\sigma } \right) \).

  18. This specification is preferred because “any possible measurement error surrounding \(n_i \)is passed on to the left-hand side and estimation can be carried out with both exporter and importer fixed effects, as is frequently done in the gravity literature” (Novy 2013, p. 275).

  19. Data on trade were collected using World Integrated Trade Solution (WITS) software (See http://wits.worldbank.org/wits/).

  20. Before normalization, the number of EGs from the exporting country (\(n_i )\) is widely dispersed: with a maximum value of 112 (and a minimum value = 0) for OECD List, and a maximum value of 54 (and a minimum value = 0) for the APEC List. This requires standardization to control the effects of higher/lower values. Also see Hummels and Klenow (2005).

  21. See https://stat.unido.org/home [Accessed March 2, 2015] and the concordances at http://unstats.un.org/unsd/cr/registry/regot.asp?Lg=1 [Accessed January 25, 2015], and http://wits.worldbank.org/wits/product_concordance.html [Accessed January 25, 2015].

  22. Santos Silva and Tenreyro (2006) suggest the use of the Poisson pseudo-maximum likelihood (PPML) procedure to estimate the multiplicative form of the gravity equation. They showed that the PPML procedure yields consistent estimates in the presence of heteroskedasticity. However, as indicated by Olivero and Yotov (2012), in estimating a size-adjusted gravity model we deal with expenditure endogeneity as well as the important issue of heteroscedasticity.

  23. The first stage Probit results are reported on Table 9 in the “Appendix”.

  24. Based on survey data, Anderson and van Wincoop (2004) suggest that the elasticity of substitution is approximately the middle of the range [5; 8].

  25. The parameters \(\beta ^{translog}\) and \(\beta ^{traditional}\) are respectively the estimated distance coefficient from the Translog and CES gravity models.

  26. From 1996 to 2011, the average share of duty-free imports of EGs rose by 73.17 percentage points (He et al. 2015).

  27. See at http://data.worldbank.org/about/country-and-lending-groups . Accessed March 15, 2016.

  28. See e.g. Cosbey et al. (2010).

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Correspondence to Lota D. Tamini.

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The authors wish to thank Vramah S. M. Gbagbeu for providing valuable ideas at the early stage of this research. Financial support of the Fonds Québecois de Recherche – Société et Culture (FQRSC) is gratefully acknowledged.

Appendix

Appendix

See Tables 8, 9 and Fig. 5.

Table 8 List of countries
Table 9 First stage Probit model estimations results
Fig. 5
figure 5figure 5

Evolution of elasticities of trade costs for some selected countries

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Tamini, L.D., Sorgho, Z. Trade in Environmental Goods: Evidences from an Analysis Using Elasticities of Trade Costs. Environ Resource Econ 70, 53–75 (2018). https://doi.org/10.1007/s10640-017-0110-2

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