# Summary

It is a common perception that higher environmental standards in industrial countries tend to lower their international competitiveness. This argument has frequently been put forward by opponents of NAFTA or other international agreements aiming at liberalizing trade such as the Uruguay Round. A look at data on trade flows and environmental expenditures to date show that there has been little systematic relationship between higher environmental standards and competitiveness in environmentally sensitive goods. In Germany, Japan and the United States correlations coefficients between changes in world export shares in environmentally sensitive goods and changes in environmental expenditures were not significant. For Austria the coefficient was positive.Environmentally sensitive products are defined as those having incurred highest pollution abatement and control costs in the US in 1988. Environmental expenditures are financial outlays both private and public that OECD governments have reported as related to pollution abatement in water, waste, air, noise, and other pollution. The study analyses trade flows in environmental sensitive products and environmental expenditures in seven industrial countries all claiming to adhere to high environmental standards - Austria, Finland, Norway, Sweden, Germany, Japan, and the United States.

Industrial countries have maintained competitiveness in environmentally sensitive goods in general - their index of revealed comparative advantage (RCA) in these goods has remained around one. The index measures comparative advantage within an industry in the context of a country's overall share in world markets. Among the industrial countries, overall performance in exports of the sensitive goods varied greatly among countries despite re!atively uniform standards in most industrial countries. Furthermore, among the industriai countries, there are both gains and losses in world market shares of the different sensitive industries. Imports of these goods from lower-standard developing countries have not invaded home or third country markets of industrial countries that have raised environmental standards. Their performance in these goods was in line with their increasing share in total world trade, but was inferior to their performance in manufactures. Product level data shows increases in developing country RCAs in most categories of these sensitive industries. Other factors are likely to have been more important than differences in environmental expenditures in explaining trade pattems in environmentally sensitive industries. Competitiveness is influenced by a complex interaction of a number of macro- and micro-economic factors.

Performance among the industrial countries is diverse. Japan on the one hand, and Austria and Finland on the other are the two extremes. Austria and Finland, with high shares of environmentally sensitive goods in their exports and some of the highest environmental expenditures among industrial countries, have increased their world market shares in these goods. For example, Austria's and to some extent Finland's, environmental policies seem to have encouraged investment and innovation, which is showing especially in higher investment shares in total environmental expenditures. But other factors, including macro-economic management during the 1970's and 1980's, are likelv to have been more important for their good performance. Germany, Sweden and the US were successful in maintaining competitiveness of their environmentally sensitive industries, despite increases ir, environmental expenditures in the 1980s, especially in Germany, and overall losses in total world exports and especially those of