Trade related environmental regulations: some lessons from India

There is a commonly held view that countries heavily dependent on trade incur some welfare loss when environmental regulations, standards, and protocols are introduced. There is an alternative argument that environmental regulations act as incentives to innovate and improve trade efficiency and competitiveness. The empirical findings on both these hypotheses are quite mixed, both at the international and Indian context. There is a serious methodological problem in aggregating a diverse set of environmental regulations in a time-related index of environmental stringency. Econometric investigation of the impact of environmental regulations on India’s tea exports reveals a negative effect, while the export of leather goods seems to have internalized this non-trade barrier to its comparative advantage. The real challenge is faced by primary exports, as they may not be able to internalize the environmental compliance costs in the short run.