Product quality and sustainability: The effect of international environmental agreements on bilateral trade

Abstract This paper addresses the impact of sustainability in production on international trade. In particular, it examines the effect of the International Tropical Timber Agreement ( ITTA ) on tropical timber trade. The empirical analysis is based on a gravity equation in a difference‐in‐difference setting, which is estimated by a panel Heckman's selection model. This accounts for the potentially systematic selection of trading partners into timber trade activity. We then conduct a comprehensive comparative static analysis solving the structural gravity model with and without the ITTA . This allows us to determine the trade impact of an ITTA ‐induced increase in sustainability for participating as well as for third countries. We find that countries participating in the ITTA exhibit a significant and substantial increase in trade values ranging from 4% to 6%. Furthermore, we observe that this effect is more pronounced for smaller member countries. Non‐ ITTA countries are confronted with reduced values of tropical timber trade flows.