Research and projects

This paper examines the impact of input trade liberalization on firms’ incentives to transform the green composition of their trade. Using the Colombia-US Free Trade Agreement (FTA) as a quasi-natural experiment, we investigate the impact of input tariff reductions on firms’ sourcing decisions and trade-related emissions. The research draws on a unique firm product-level dataset for Colombia, alongside data on the emissions embedded in firms’ intermediate inputs derived from a multi-regional input-output framework. The analysis reveals a pre-existing environmental bias in trade policy, where lower input tariffs were applied to emission-intensive products before the implementation of the FTA. Due to the FTA’s tariff harmonization, firms importing from the US benefit from greater tariff reductions on less emission-intensive products, prompting a reconsideration of their product portfolios. Tariff differentials prompt firms to increase the use of liberalized greener inputs and subsequently alter the emission intensities of their trade. Specifically, higher tariff differentials on less emission-intensive inputs incentivize firms to increase their use, leading to a notable shift in output composition. Over time, we observe a decline in emissions, coupled with a reduction in the trade share of emission-intensive products.

Keywords: Heterogeneous firms, trade liberalization, environment, GHG emissions.

In recent years, the European Union has significantly expanded the scope and stringency of its environmental regulations. While these measures aim to protect the environment, they increase compliance costs for both domestic producers and foreign firms wishing to export into the EU. By disproportionately raising relative compliance costs between domestic and foreign firms, such regulations may unintentionally act as a protectionist measure, raising questions of green protectionism. This paper investigates the trade effects of Environmental Non-Tariff Measures (E-NTMs) introduced by the EU, focusing on their impact on domestic firms’ import patterns.  Using firm-level import data for Belgium and a developed dataset of restrictive E-NTMs, we study whether E-NTMs hinder trade by examining their effect on importers that rely on foreign inputs. Specifically, we assess whether these measures reduce import flows and alter sourcing decisions of Belgian firms, changing the competitive landscape for foreign suppliers. Our findings show that affected Belgian firms adjust their sourcing decisions in response to E-NTMs on their imported inputs. Specifically, extra-EU imports decline by 12.5%, while intra-EU imports increase by 7.9%, indicating a shift toward EU suppliers. This shift is associated with changes in the bilateral revealed comparative advantage of EU countries, suggesting that the policy strengthens the competitive position of intra-EU firms. The decline in extra-EU imports is largely driven by countries lacking similar environmental policies in place, highlighting the role of relative compliance costs.

Keywords: Non-tariff measures, heterogeneous firms, environment.