Impact of Trade and Sustainable Development (TSD) chapters in the free trade agreements of the EU on its imports of environmental goods: A gravity model analysis

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: Sustainable development agenda in general and environmental considerations in particular have become deeply embedded into the ways the public and decision makers are thinking about trade policy. European Union, while not being the very first adopter of ambitious policies on this front as part of its free trade agreements (FTAs), has emerged throughout the 2010s as the most consistent one. From the signing of the EU – Korea FTA in 2011, Trade and Sustainable Development (TSD) chapter has been part of most FTAs coming after. It is argued that its effects on imports of environmental goods from the countries that entered into these agreements with the EU can vary. The Porter hypothesis, which emphasizes the role of environmental regulations in increasing innovation and productivity, leads to assuming that imports to the EU will increase. The pollution heaven hypothesis focuses on the issue of outsourcing of ‘dirty’ production in countries with weak regulations, in which case TSD chapters will serve more as a tool to reign in these imports rather than facilitate the green ones. A gravity model analysis is performed across all EU trade partners, 54 environmental goods and 10 years (2010-2019) to examine how TSD chapters and environmental regulations in FTAs with TSD impact imports of green goods by the EU member countries. The results demonstrate that largely it is positive but not consistently statistically significant, with increases in imports upward correlated with the income status of exporting countries. This essay also lays out potential explanations for this outcome and how it can influence future research on the topic.

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