Do environmental policies affect global value chains?
A new perspective on the pollution haven hypothesis
OECD 10 Mar 2016
Tomasz Koźluk 1, Christina Timiliotis
1: OECD, France
No. 1282 64 pages:
DOI: 10.1787/5jm2hh7nf3wd-en
Abstract
Increasing international fragmentation of production has reinforced fears that industrial activity may flee to countries with laxer environmental policies – in line with the so-called Pollution Haven Hypothesis (PHH). If PHH effects are strong, domestic responses to environmental challenges may prove ineffective or meet strong resistance. Using a gravity model of bilateral trade in manufacturing industries for selected OECD and BRIICS countries over 1990s-2000s, this paper studies how exports are related to national environmental policies. Environmental policies are not found to be a major driver of international trade patterns, but have some significant effects on specialisation. More stringent domestic policies have no significant effect on overall trade in manufactured goods, but are linked to a comparative disadvantage in “dirty” industries, and a corresponding advantage in “cleaner” industries. The effects are stronger for the domestic component of exports than for gross exports, yet notably smaller than the effects of e.g. trade liberalisation.

Press Release
Tougher environmental laws do not hurt export competitiveness – OECD study
10/3/16 – Countries that implement stringent environmental policies do not lose export competitiveness when compared against countries with more moderate regulations, according to a new OECD study that examines trade in manufactured goods between advanced and emerging economies.

The findings suggest that emerging economies with strong manufacturing sectors like China could strengthen environmental laws without denting their overall share in export markets. High-pollution or energy-intensive industries like chemicals, plastics and steel making, whether in the BRIICS or in Europe or North America, would suffer a small disadvantage from a further tightening of regulations, but this would be compensated by growth in exports from less-polluting activities.

Do Environmental Policies Affect Global Value Chains? challenges the conventional wisdom that regulations to curb pollution and energy use hurt businesses by creating new costs. The so-called Pollution Haven Hypothesis suggests that tightening environmental laws often prompts manufacturers to simply relocate some production stages to countries with laxer regulations.

“Environmental policies are simply not the major driver of international trade patterns,” said OECD Chief Economist Catherine L. Mann, presenting the study at the London School of Economics. “We find no evidence that a large gap between the environmental policies of two given countries significantly affects their overall trade in manufactured goods. Governments should stop working on the assumption that tighter regulations will hurt their export share and focus on the edge they can get from innovation.”…