The impact of environmental efficiency on bilateral trade : a panel data estimation of gravity model

In this study the role of environmental efficiency in the determination of bilateral trade flows is empirically examined by using Gravity Model for a panel data for 1971 to 2003. Although there are a number of empirical studies that analyze the relationship between environment and trade, most of them show insignificant relationship between environmental regulations and trade. Their differences are mostly due to the use of stringency indicators that are computed with different methods. This study, unlike previous studies, computes the environmental efficiency as a hyperbolic measure of technical efficiency in a non-parametric piecewise linear technology, with a production plan that maximizes the desirable outputs while simultaneously minimizing the resource use and pollution emission. The relationship between bilateral exports and environmental conditions measured as environmental efficiency index is investigated. The empirical results indicate that although there is no significant relationship between exports of a country and its own environmental efficiency index, there is a strong and robust positive effect of the partner country's environmental efficiency index.