The short and long-run effects of international environmental agreements on trade

Does the ratification of an international environmental agreement (IEA) reduce a country's competitiveness on world markets? In this paper, we take a gravity regression approach to answering this question by using industry-level bilateral trade data and employing time-varying country fixed effects to control for the endogeneity of treaty participation. Based on sample of >200 countries and over 40 years, we find that ratifying an IEA results in a significant compositional shift towards exporting cleaner and importing dirtier manufacturing goods. In addition, we find significant lagged effects to ratifying the Kyoto Protocol as the compositional shift towards exporting cleaner goods becomes even stronger in the long run. However, we find little evidence that the ratification of IEAs contributed to an overall decline in manufacturing exports as we uncover only small and insignificant effects of IEAs ratification on the median-polluting manufacturing industry.