THE ROLE OF ENVIRONMENTAL AGREEMENTS ON TRADE MARGINS AND INVESTMENT FLOWS
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This dissertation consists of three essays that examine the impact of environmental agreements on member countries' trade flows and bilateral trade margins. The precise relationship between environmental regulation, the location of production, aggregate trade flows and subsequent bilateral trade margins remains an open and widely debated issue. By using panel data estimation techniques on a large number of global environmental regulations and their accompanying standards, this dissertation finds that environmental agreements and trade are reinforcing each other. Furthermore, it also takes into account the differential impacts of agreements by category/size, and pays attention to the heterogenous design of individual environmental agreements when assessing their specific effects on trade. After introductory remarks of the first chapter, the second chapter analyses the consequences of multi-lateral environmental agreements (MEAs) on international bilateral trade. To mitigate potential bias caused by the endogeneity, I apply a five-year first-differencing method to examine the specific effects of environmental agreements when simultaneously taking the effects of trade agreements into account. To identify the categorical impacts of both trade and environmental agreements, I divide all complete trade agreements into two categories; (i) free trade agreements and (ii) custom and economic unions, and environmental agreements into those dealing with (i) pollution and (ii) natural resources. I also look at the differential impact of small and large size MEAs on trade flows, and estimate an effect specific to each agreement as a further robustness check. The third chapter focuses on the specific role of international environmental agreements (IEAs) and accompanying regulations and standards on bilateral extensive and intensive margins in international trade. Similar to the previous chapter, it uses panel data estimation techniques along with a 1962-2000 bilateral trade flows data set at the product-sector level and a full list of IEA membership along with agreement lineage of 198 countries. The estimation results show that the tightening of environmental standards between a pair of countries reduces trade margins to a small extent only. To identify the specific deterring effects of different environmental agreements, I divide all IEAs into three categories: (i) pollution, (ii) resource, and (iii) other. Small effects for specific type of IEAs are concerned as well. Such an empirical finding of the small magnitude of negative IEA impact remains consistent with various robustness checks. The fourth chapter investigates the effect of one particular environmental policy that introduces stricter regulations on sulfur dioxide emissions in China. The Two Control Zones (TCZ) policy was instituted by the Chinese government in 1998. By focusing on the amount of foreign direct investment inflows of 31 provinces between 1988 and 2012, I find that an average of ten percent of the provinces that have been designated as TCZ areas have attracted about 26.5% less capital investment than their non-attainment counterparts. Such a negative impact of the environmental stringency on investment inflows in these provinces is consistent with various robustness checks. However, ignoring the spatial correlation of provincial capital inflows leads to an over-estimated policy effect. The subsequent spatial-analysis results further confirm the presence of third-region eff effects in estimating the impact of environmental regulations. The final chapter provides concluding remarks and future outlook based on current research.