Trade competition and domestic pollution: A panel study, 1980-2003

This research note examines whether trade competition abets regulatory races in the environmental area. To analyze trade competition, we develop a new measure, structural equivalence, which assesses competitive threats that a country faces from other countries whose firms export the same products to the same destination countries. Employing this new measure, we analyze air pollution intensity (sulfur dioxide or SO2) and water pollution intensity (biochemical oxygen demand or BOD) for a panel of 140 countries for the time period 1980-2003. We find that trade competition is a significant predictor of water pollution intensity among structurally equivalent countries. We then test separately whether trade competition abets upward and downward regulatory races. We find that in the case of water pollution, countries respond symmetrically to downward and upward races, that is, they follow their structurally equivalent competitor countries both when they ratchet down their regulations and when they ratchet up regulations. In the case of air pollution, however, countries are responsive to downward policy changes only in competitor countries.