How to Estimate Whether Preferential Trade Agreements Contribute to International Environmental Impact Shifting?

Abstract

We present a new methodological approach for estimating the international relocation of environmental impacts of consumption through trade liberalisation. Our approach reconstructs changes in import flows after the entry into force of a preferential trade agreement (PTA) while taking into account different dynamics of trade diversion and trade growth. Our empirical application focuses on whether and how much the entry into force of 25 PTAs affected greenhouse gas (GHG) emissions embodied in Swiss imports between 2000 – 2018. The analysis is based on a unique dataset for more than 7’000 products that includes information on whether and how much of a given product was imported under a particular PTA or other trade rules. We find that the relocation of embodied GHG emissions attributed to the 25 PTAs is relatively small compared to the overall increase in imported GHG emissions. Most of the additional relocation of GHG emissions via trade diversion in 2000 – 2018 took place via imports under other trade rules. Given the widespread controversies over the environmental implications of PTAs, our approach provides a useful template for ex-post assessments of such implications, particularly for high-income countries that are prone to “outsourcing” environmental impacts of consumption through international trade.

Keywords: international trade, environmental impacts, preferential trade agreements, carbon leakage, World Trade Organization (WTO)