Economic Research Forum (ERF)

Making trade agreements more environmentally friendly in the MENA region

860
Trade policy can play a significant role in efforts to decarbonise the global economy. But as this column explains, there need to be more environmental provisions in trade agreements in which developing countries participate – and stronger legal enforcement of those provisions at the international level. The MENA region would benefit substantially from such changes.

In a nutshell

Flows of dirty and footloose products between countries decrease when regional trade agreements have environmental provisions that are legally enforceable and subject to dispute settlement; this especially holds for flows from non-OECD to OECD.

Most treaties and trade agreements with environmental provisions are more concentrated in advanced economies, confirming the ‘pollution haven hypothesis’ – the idea that developing countries are the repository for environmentally damaging production.

Deepening trade agreements to go beyond a simple reduction in tariffs is crucial for MENA; including environmental provisions in deeper trade agreements could make the region’s trade policy more in line with the ambitions of the Sustainable Development Goals.

Despite the fact that flows of international trade have contributed to deterioration of the global climate, trade policy has the potential to reduce carbon emissions through the environmental provisions that are included in regional trade agreements (RTAs). Indeed, over the last two decades, there has been an increase in the number of environmental provisions included in such agreements.

To date, these provisions have been more concentrated in agreements involving developed countries than those involving developing countries. Between 1956 and 2016, 295 RTAs were created and 93% of them included at least one environmental provision. Of that share, 143 were negotiated between developed economies, 108 between developed and developing economies, and 23 between developing economies.

Compared with other countries, those in the Middle East and North Africa (MENA) region tend to have fewer environmental provisions in the trade agreements of which they are signatories, with most of the provisions not legally enforceable. This indicates the extent to which most trade agreements involved MENA countries are rather shallow.

Research on environmental provisions and trade flows

In recent research, we distinguish between three types of products:

  • Dirty-immobile products: those from pollution-intensive industries for which incurred pollution abatement and control costs are 1% or more of total costs. These include organic chemicals, inorganic chemicals, non-ferrous metals, petroleum products, fertilisers and construction materials.
  • Dirty-footloose products: those from industries defined as for the non-resource-based pollution-intensive industries that use few raw materials and which do not need to locate near the sources of raw materials.
  • Normal products: those that do not belong in the other two categories.

In general, evidence suggests that the existence of a treaty or the enforceability of the environmental provisions can lead to more trade in clean goods. Figure 1 shows that the more stringent the environmental provisions in a trade agreement, the lower the value of trade in dirty goods. Indeed, the shares of dirty goods and dirty-footloose goods decrease from 11.2% and 9.6% to 9.7 and 8.7%, respectively, when legally enforceable provisions subject to dispute settlement are introduced into a trade agreement. This is why it is important to consider the level of enforcement.

Figure 1: Legal enforcement and type of traded goods (%)

Source: Authors’ own elaboration using BACI and Deep Trade Agreement dataset.

Notes: EP stands for environmental provision, LE for legally enforceable and DS for dispute settlement.

Our results show that RTAs with environmental provisions increase trade in non-dirty and non-footloose goods slightly less than RTAs without these provisions by around 5% on average. In contrast, in the case of dirty and footloose categories, RTAs with environmental provisions reduce trade by 18% and 17%, respectively, with respect to RTAs with environmental provisions for non-dirty and non-footloose goods.

When distinguishing by groups of countries and the direction of the export flows, the results show that flows of dirty and footloose goods decrease when RTAs have environmental provisions that are legally enforceable and are subject to dispute settlement. This especially holds for flows from non-OECD to OECD.

Implications for policy

From a policy perspective, this research highlights a couple of policy-relevant findings. First, for developing countries, especially those in the MENA region, there is still a long distance between considering such provisions and actually implementing them. Most of the treaties and trade agreements with environmental provisions are more concentrated in advanced economies, confirming the ‘pollution haven hypothesis’ – the idea that developing countries are the repository for environmentally damaging production.

Thus, deepening trade agreements to go beyond a simple mutual reduction in tariffs is crucial for the MENA region. Indeed, most the agreements involving MENA countries are rather shallow. Including environmental provisions in deeper trade agreements could make the region’s trade policy more in line with the ambitions of the Sustainable Development Goals.

Second, the existence of a law does not necessarily lead to a concrete and tangible effect on trade. In other words, while the de jure dimension is necessary, it is not sufficient.

Thus, making trade laws legally enforceable at the international level and subject to dispute settlement – the de facto dimension – makes them more effective. These results confirm the role of trade policy in efforts to decarbonise the global economy and reach net-zero emissions.

Further reading

Baghdadi, L, I Martínez-Zarzoso and H Zitouna (2013) ‘Are RTA Agreements with Environmental Provisions Reducing Emissions?’, Journal of International Economics 90(2): 378-90.

Brandi, C, J Schwab, A Berger and J-F Morin (2020) ‘Do Environmental Provisions in Trade Agreements Make Exports from Developing Countries Greener?’, World Development 129: 104899.

Martínez-Zarzoso, I, T Núnez-Rocha and C Zaki (2024) ‘Environmental regulations and environmental provisions’ impact on trade’, Revue d’économie du développement (forthcoming).

Most read

Social insurance in Egypt: between costly formality and legal informality

The rates of participation of Egyptian workers in contributory social insurance has continued to decline, even during times when the country has had positive annual growth rates. This column discusses key institutional elements in the design of the current social insurance scheme that have contributed to the growing gap in coverage, particularly the scheme’s cost and eligibility requirements.

Making trade agreements more environmentally friendly in the MENA region

Trade policy can play a significant role in efforts to decarbonise the global economy. But as this column explains, there need to be more environmental provisions in trade agreements in which developing countries participate – and stronger legal enforcement of those provisions at the international level. The MENA region would benefit substantially from such changes.

Jordan: navigating through multiple crises

Jordan’s real GDP per capita is today no higher than it was 40 years ago. While external factors have undoubtedly had an adverse effect on the country’s economic outcomes, weak macroeconomic management and low public spending on investment and the social sectors have also played a substantial role. This column explores what can be done to reduce high public debt, accelerate private sector development and enhance social outcomes.

Iran’s globalisation and Saudi Arabia’s defence budget

How might Saudi Arabia react to Iran's renewed participation in global trade and investment? This column explores whether the expanding economic globalisation of Iran, following the lifting of nuclear sanctions, could yield a peace dividend for Saudi Arabia, consequently dampening the Middle East arms competition. These issues have attracted increased attention in recent times, notably after a pivotal agreement between the two countries in March 2023, marking the resumption of their political ties after a seven-year conflict.

Egypt and Iraq: amenities, environmental quality and taste for revolution

The Middle East and North Africa is a region marked by significant political turbulence. This column explores a novel dimension of these upheavals: the relationship between people’s satisfaction with, on one hand, the amenities to which they have access and the environmental quality they experience, and, on the other hand, their inclination towards revolutionary actions. The data come from the World Value Survey collected in 2018 in Egypt and Iraq.

Global value chains and domestic innovation: evidence from MENA firms

Global interlinkages play a significant role in enhancing innovation by firms in developing countries. In particular, as this column explains, participation in global value chains fosters a variety of innovation activities. Since some countries in the Middle East and North Africa display a downward trend on measures of global innovation, facilitating the GVC participation of firms in the region is a prospective channel for stimulating underperforming innovation.

Labour market effects of robots: evidence from Turkey

Evidence from developed countries on the impact of automation on labour markets suggests that there can be negative effects on manufacturing jobs, but also mechanisms for workers to move into the services sector. But this narrative may not apply in developing economies. This column reports new evidence from Turkey on the effects of robots on labour displacement and job reallocation.

Food insecurity in Tunisia during and after the Covid-19 pandemic

Labour market instability, rising unemployment rates and soaring food prices due to Covid-19 are among the reasons for severe food insecurity across the world. This grim picture is evident in Tunisia, where the government continues to provide financial and food aid to vulnerable households after the pandemic. But as this column explains, the inadequacy of some public policies is another important factors causing food insecurity.

Do capital inflows cause industrialisation or de-industrialisation?

There is a clear appeal for emerging and developing economies, including those in MENA, to finance investment in manufacturing industry at home with capital inflows from overseas. But as the evidence reported in this column indicates, this is a potentially risky strategy: rather than promoting industrialisation, capital flows can actually lead to lower manufacturing value added and/or a reallocation of resources towards industries with lower technology intensity.

Manufacturing firms in Egypt: trade participation and outcomes for workers

International trade can play a large and positive role in boosting economic growth, reducing poverty and making progress towards gender equality. These effects result in part from the extent to which trade is associated with favourable labour market outcomes. This column presents evidence of the effects of Egyptian manufacturing firms’ participation in exporting and importing on their workers’ productivity and average wages, and on women’s employment share.