The Relationship Between Environmental Policy Stringency and Trade Flows

Sammanfattning: Ceteris paribus, it is unclear whether a more stringent environmental policy increases or decreases a country's competitiveness. Two hypotheses have been formulated in this decade-long debate: the competitiveness hypothesis - stating that a more stringent environmental policy decreases competitiveness, and the Porter Hypothesis, claiming the opposite. Previous research has studied this relationship between environmental regulation and trade flows at the firm and industry levels. However, few studies to date have been done from a macroeconomic perspective. Employing an instrumental variable strategy in which we exploit the exogenous variation in the ventilation coefficient as an instrument for policy stringency and a panel data set of 33 countries between 1990 and 2020, we attempt to fill this gap. In neither our OLS estimates nor our IV estimates do we find any statistically significant results supporting the competitiveness hypothesis or the Porter Hypothesis. Instead, our results suggest that other determinants of net imports are much more important, such as labour share, tariff rates, FDI and factor abundance.