Kyoto Protocol and global value chains: Trade effects of an international environmental policy

Deepening globalization and international fragmentation of production (IFP) have provided an appropriate foundation for offshore production processes to exploit comparative advantage wherever possible. Unilateral environmental regulations can increase the outsourcing probability of polluting production processes in regions with looser environmental regulations and can consequently alter trade patterns by changing comparative advantage. The Kyoto Protocol (KP) is considered as one of the international but unilateral environmental regulations for coping with climate changes. This protocol was implemented to mitigate emissions in industrial economies, and its potential side effects such as production relocation have always been controversial. Therefore, this study aimed to estimate the impacts of the KP on trade patterns of the ratifying countries within the context of global value chains (GVCs). For this purpose, the difference-in-differences (DiD) regression and the generalized synthetic control method (GSCM) were used to model the panel data during 1990-2017. The estimation results indicated that the KP ratification decreased the forward participation of the committed countries, while increased their backward participation. As a result, it deepened their relative downstream positions in the GVCs. Accordingly, the KP reduced the share of intermediate goods and services exports in committed countries that ratified KP but increased the share of foreign intermediate goods and services in their exports. In addition, some environmental implications and outcomes of these results, especially for the Paris Agreement, were discussed.