The Role of Environmental Trade in Fostering Green Specialisation

Against a backdrop of growing environmental concerns, nations are joining efforts to fight climate change through sustainable practices. In this context, international trade and innovation play a crucial role. This study, focusing on OCED countries and 4-digit Trade in Environmental Goods (IMF) bilateral trade flows with more than 205 importing and exporting countries, explores the structural characteristics and dynamics of green innovation and green trade in the manufacturing sector over the period 1994-2022. In particular, it examines how international trade in environmental goods shapes green innovation specialisation, using panel estimation techniques (PPML and 2SLS) to investigate its impact on the innovation capabilities of exporting and importing countries. The relevance of the topic is suggested by the increase in both environmental technology patents and trade since 1990. Notable qualitative changes in recent decades include the increased importance of certain environmental patents (e.g. power generation) and green goods (e.g. electric vehicles, wind turbines). Although there has been a decline in patenting after 2013, this contrasts with the resilience of trade in green products despite economic downturns. However, green trade can be a tool for specialising in green innovation, and that's why our analysis focuses on knowledge spillovers, showing that robust trade relations with innovative partners enhance a country's innovation capabilities. In particular, import dynamics significantly influence technological specialisation in environmental patents, underlining the crucial link between international environmental trade, knowledge exchange and green innovation, and highlighting the importance of policies that promote green trade.