Do Greener Trade Agreements Call for Side-Payments?

Abstract

Preferential trade agreements (PTAs) increasingly include environmental provisions. While the existing literature documents these provisions’ environmental impacts, this paper sheds light on their relation with aid flows. Using an event-specification and data on bilateral Official Development Assistance (ODA) commitments for a sample of 147 developing country recipients in the period from 2002 to 2017, we find evidence that the number of environmental provisions in PTAs is positively associated with aid during negotiation phases. With high-income countries typically pre-determining the extent of environmental provisions in their upcoming PTAs, this suggests that aid serves as a side-payment for recipients to sweeten the pot and agree upon already formulated PTA content. While both aggregate ODA and its subcomponent environmental aid a priori qualify as candidates for pre-signature side-payments, we find that only the former fulfills this expectation, presumably reflecting more leeway to exploit aid fungibility.

Trade and the Environment

“…The findings of our recent quantitative analysis show a positive association between the number of environmental provisions in North-South PTAs and bilateral aid commitments during PTA negotiations (Brandi et al, 2022). This positive link is particularly prominent just before the PTA is signed.…”

“…The positive relationship between PTAs with environmental provisions and aid is more pronounced in recipient countries with relatively weak environmental performance (Brandi et al, 2022). At the same time, for these developing countries, the number of environmental provisions in PTAs is positively associated with development aid.…”

“…Conversely, well-designed preferential trade agreements (PTAs) can have beneficial environmental effects. For example, PTAs with environmental provisions can increase the export of environmental goods by 17 per cent (Brandi et al, 2020) and reduce forest losses by an average of approximately 23 per cent (Abman et al, 2021).…”

“…Given these ambiguous findings regarding international trade and environmental protection, it is unclear how their interplay affects the environment. Recent research on the trade-environment interface underlines the importance of the design of trade policies in this regard (Brandi et al, 2020;Shapiro, 2021). It is also unclear how international trade affects sustainable development more broadly.…”

“…Overall, existing research suggests that the role of the private sector as a driver of environmental provisions in PTA varies across countries and sectors (Lechner, 2018). For example, while companies involved in the production of environmental goods are likely to favour and lobby for their diffusion, firms in polluting sectors are unlikely to do so (see also Brandi et al, 2020).…”