Are the differences in the stringency of domestic environmental regulations affecting the bilateral trade of OECD countries?

Sammanfattning: The question of whether the stringency of domestic environmental regulations indeed interferes with trade is of growing interest for better policymaking. This paper re-examines the relationship between the stringency of environmental regulations and bilateral trade using a panel dataset consisting of 34 OECD countries over 7 years. Two different types of environmental measures based on energy intensity are constructed, representing 2 sources of differences in environmental regulatory stringency: the absolute difference between 2 countries and a country's relative stringency among 34 countries. Fixed-effects models, mixed-effects models and lagged dependent variable models are employed, respectively accounting for static country heterogeneity, poor variability of policy variables and serial correlation. The findings overall suggest that the differences in the stringency of environmental regulations indeed affect the bilateral trade of OECD countries in some circumstances, although somewhat deviating from the PHH prediction. From a relative perspective, stricter environmental regulations might reduce both exports and imports for the country, and the effect size is growing with GDP per capita. Further, a larger absolute difference in the stringency of environmental regulations between 2 countries is found to be correlated with higher bilateral trade values.