Impact of US environmental regulation on exports of environmentally sensitive goods

This paper examines the relationship between trade and the environment. Theoretically, stricter environmental regulation should have a negative impact on exports of environmentally sensitive goods (ESGs). However, empirical evidence is mixed. Walter (1973), Leonard (1988) and Tobey (1990, 1993) find no impact of stricter environmental policy on trade while Robison (1988) and Kalt (1988) find that environmental regulation affects trade composition and volume.  

The U.S. has made progress in improving environmental standards since 1970, which marks the beginning of the modern environmental movement. U.S. environmental policy can be broadly broken into two regimes. The first regime that spans the 1970s and 1980s mostly saw the use of regulation to curtail emissions known as the command-and-control regime. The most significant criticism of this approach is that it failed to provide economic incentives to individual firms and industries to adopt environmentally-friendly means of production. As a result, firms may not have been able to meet government-set environmental standards in the most efficient way, thus lowering their profitability. The 1990 Clean Air Act marked a shift to a more market-oriented approach towards achieving environmental goals. For example, Title IV of the Clean Air Act established the sulfur dioxide permits trading market known today as the Acid Rain Program.

Our paper examines the impact of policies in the two regimes on exports of ESGs. ESGs are determined through pollution abatement costs (Tobey, 1990 and Low and Yeats, 1992) and emission intensity (Mani and Wheeler, 1997). The list includes chemicals, metals, and petroleum products among others. The standard model to estimate the factors that affect trade is through the gravity model (Xu, 2000; van Beers and van den Bergh, 2000). Using data from 1970 to 2010 we estimate a modified version of the gravity model to examine the role of environmental performance on U.S. exports of ESGs with her major trade partners (Brazil, Canada, China, India, Japan, Mexico, South Korea and UK). Preliminary results show that the data series are nonstationary. Thus, we use two estimation techniques, standard OLS in growth rates and autoregressive distributive lag method in levels.

We complement our empirical work with a case study. We focus on a strategic environmentally sensitive sector, oil / energy. Our case study analyzes various policies that have affected production, consumption and thus, trade of oil and energy. Given the importance of this sector among NAFTA countries, we focus on U.S. trade with Canada and Mexico.