The impact of environmental product standards on trade flows: The case of German reuse quotas

The main goal of this study is to investigate the impact of the introduction of an environmental product standard on trade flows and social welfare. Since product standards may affect the environmental friendliness of a product, we build a theoretical framework that allows us to: (1) theoretically investigate, the role of the consumer's concern for the environmental friendliness of a product in shaping the impact of environmental product standards on trade flows and social welfare; (2) empirically estimate the effect of the introduction of the 1991 German Packaging Ordinance on the German imports of beverage products and social welfare. Our theoretical analysis suggests that environmental product standards adopted in a country where the consumer cares about the environmental friendliness of a product are less likely to act as a barrier to trade and have a negative effect on social welfare. This policy would therefore be easier to implement in such a country. Furthermore, if the introduction of an environmental product standard worsens the competitive position of foreign products, the impact on trade flows will be negative, but the impact on social welfare can still be positive if the sum of the changes in the quality-price relationship of home and foreign products is positive. Our empirical analysis finds evidence that the 1991 German packaging ordinance had a negative impact on the quality of foreign products relative to that of home products as perceived by the consumer. The ordinance ultimately caused an overall loss in potential sales for foreign producers equal to 544,165,000 U.S. Dollars (1996 value) between 1993 and 1996, which represents the. 0.3% of the total consumer expenditure for beverage products in this period of time. The small size of the effect might be due to the fact that home and foreign products are perceived by the consumer as imperfect substitutes. In fact, the elasticity of substitution between home and foreign beverage products estimated in this study is equal to 1.39. Finally, if the introduction of the packaging ordinance did not have any effect on the quality of home products, its effect on social welfare is negative and equal to 496,057,000 U.S. Dollars (1996 value) total across sectors, between 1993 and 1996.