International Trade and Preferential Trade Agreements: The impact of environmental provisions in Preferential Trade Agreements on the trade-flows of environmentally sensitive and non-sensitive sectors

Abstract

As the intersection of environmental regulation and international trade has been a gaining a n elevated attention in recent decades due to climate change concerns, the integration of carbon-related clauses into trade agreements has become a strategic tool for aligning economic policy and climate mitigation. This thesis analyses whether carbon-related provisions in Preferential Trade Agreements (PTAs) affect bilateral goods trade in carbon-pollutive industries. It focuses on how both the presence and the legal strength of such provisions shapes exports in industries between OECD partner countries over 1998-2018. With the analysis, the study aims to quantify the effect of these carbon provisions on trade flows by sector, determine if more stringent carbon clauses are associated with stronger trade effects, and provide evidence-based recommendations for policymakers on the importance of sectoral analysis of the trade-environment landscape.

The research combines 3 authoritative datasets: it uses the OECD Bilateral Trade in Goods by End-Use (BTiGE) database (1998-2018), disaggregated by product sector for trade flows, the TRade and ENvironmental (TREND) database for dyadic data for provision-level coding of PTAs, and the CEPII database for gravity model controls. The carbon-related PTA measures are summaries using both binary measure (presence/absence) and a carbon stringency index that considers the bindingness, enforceability and monitoring attributes of the provisions. Structured gravity models were estimated using Poisson Pseudo-Maximum Likelihood (PPML) and Negative Binomial regressions, involving fixed effects and clustered standard errors. Models examined the average effect, applied sector-specific interaction terms and robustness checks such as time-varying fixed effects, lagged effects and country-pair fixed effects.

The research finds that the presence and stringency of carbon-related provisions can reshape sectoral trade patterns and have heterogeneous effects on trade flows, depending on sectors. Sectors considered more pollutive or dirty, like coal and lignite consistently display negative and statistically significant effects across models, suggesting that carbon-related PTAs decrease the exports in high-emission goods. Conversely, moderately pollutive sectors such as chemicals, rubber & plastics, non-metallic minerals, motor vehicles and electricity/gas/steam show robust positive marginal effects across estimations, indicating that PTAs with strong and well-designed carbon provisions can stimulate trade in more adaptive sectors. The results indicate that when accounting for the presence and stringency effects, the binary presence of these provisions in agreements have a larger effect on trade flows, and the legal depth of the provisions act as an amplifier of the effects rather than a transformational factor. Stronger legal design reinforces the sectoral patterns generated by PTA-adoption but does not overturn the primary effect. Cleaner and more technologically adaptive industries experience additional gains from stringency, while highly pollutive sectors remain constrained and show no statistically significant incremental response. Overall, the findings show that sectoral heterogeneity is fundamental and that one-size-fits-all regulations can drive very different trade responses across industries.

The findings conclude important implications for policymakers. Decision-makers should avoid one-size-fits-all rules and design for sector heterogeneity, using sector-specific PTA provisions and compliance supports for less adaptive, fossil fuel heavy primary extraction industries, while adaptive and innovation-prone sectors can scale up and leverage the effects of the provisions. Policymakers should pair stringency with a just transition, combining the legal depth of the provisions with technology-modernization, R&D incentives support and leverage regional adjustment programs to manage costs, jobs, value-chain stability. Additionally, recommendations include to complement PTA provisions with border measures and international cooperation where appropriate, such as CBAM-style mechanism, to mitigate carbon leakage effects. Finally, as the lagged effects indicate that clauses can reshape comparative advantage over time, therefore the establishment of continuous monitoring and review cycles are needed, to be able to adapt regulations as trade-environment dynamics evolve.

The research leverages available coded data and focuses on OECD-covered sector data and cannot measure firm-level adjustments directly. Future work should extend coverage to non-OECD economies, integrate firm-level customs and emission data and linkages to actual climate performances measuring carbon mitigation efforts.

When incorporating carbon-related provisions in PTAs, we have to take into account that their effects are not merely symbolic. They can act as effective tools for stimulating comparative advantage and the adoption of new, greener production measures in certain industries, while simultaneously can discourage trade in pollution-intensive primary extraction goods. This thesis highlights the importance disaggregated measures of trade effects and that tailor-made regulations are needed across different industries to achieve efficient carbon mitigation objectives.