E2022012                                                                                            2025-08-04

Haiwei Jiang, Wei Tian, Miaojie Yu

Abstract: The impact of environmental regulation on trade depends on the competitive forces between compliance costs (à la pollution haven hypothesis) and technology improvement (à la Porter hypothesis). This paper develops a Ricardian model that accounts for two-sector production. Trade shares and prices rely on the aggregate effects of technological progress and compliance costs. Country-level environmental regulation stringency affects trade shares and prices across industries that differ in environmental intensity. Using bilateral trade data and instrumenting a country’s environmental regulation stringency with temperature anomalies, we empirically confirm the theoretical implications on the basis in which the Porter hypothesis plays a more dominant role.
Keywords: Environmental Regulation, Environmental Intensity, Trade, Porter Hypothesis, Technological Progress
JEL Classifications: F14, F18, Q58

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