1 Environmental Regulations and Trade in Europe: The Role of Differentiation

This paper proposes an alternative and new explanation of the low effect of environment stringency on trade, found so far in the literature, which is not related to environmental features per se. Indeed, we argue that the impact of stringency depends on the degree of differentiation of the traded products. Stringency would matter more in the case of trade in homogenous products (due to a higher sensitivity of consumers to prices). We test this argument by taking advantage of a new dataset on Western and Eastern European countries that report information on environmental abatement costs and link it to their trade flows data. In line with our argument, we find that Central and Eastern European Countries ’ (CEECs) exports to the European Union (EU15) are more sensitive to abatements costs, not because they might have highly polluting industries but partly because they produce relatively more of homogenous products