A new motivation for sustainable trade between countries with different regulatory qualities

Abstract

In the context of rising anti-globalization sentiments, countries tend to trade with superior government institutions for a longer period and with a higher volume of exports. This phenomenon hinders sustainable trade between countries with different regulatory qualities, resulting in negative effects for developing countries that have poor institutional quality. Using a large panel dataset covering 192 countries during the period 1996-2017, this paper investigates the effect of relatively better government quality on exports. This quality is measured by said government's regulatory quality relative to its trade partner. The empirical results indicate that a country with relatively better institutional quality receives at least 4% higher exports (dubbed as a premium gain), keeping other factors constant. The empirical result remains the same when solving the endogeneity issue and when applying alternative estimation methods. This paper thus proposes a new channel for sustainable trade for countries characterized by different institutional qualities.