The Impact of Exporting Countries' Environmental Regulation Depth on Bilateral Trade Scale and Its Transmission Mechanisms

1. Introduction

1.1. Research Background

The global climate governance process is continuously accelerating, and the green and low-carbon transition of the economy has become an irreversible trend that is profoundly reshaping the system of international economic and trade rules. In the past, barriers to international trade were primarily concentrated on border measures such as tariffs and quotas. However, an increasing number of countries are now extending environmental regulation beyond the border, setting standards at the production stage of goods. As the multilateral trading system has made relatively slow progress in environmental negotiations, regional trade agreements (RTAs) have gradually become the core platform for countries to formulate green trade rules and coordinate environmental standards. By the end of 2024, over 85% of effective RTAs worldwide had established dedicated environmental chapters, and their provisions have evolved from principled requirements to binding legal stipulations equipped with enforcement measures and dispute settlement mechanisms.

As the free trade agreement covering the world’s largest population and the largest economic and trade scale, the Regional Comprehensive Economic Partnership (RCEP) has served as the core engine driving economic integration in the Asia-Pacific region since its entry into force in 2022. In 2024, the intra-regional merchandise trade volume under the agreement reached USD 5.83 trillion, representing an increase of 18.7% over 2021. For China, trade with member states already accounts for approximately 32% of its total foreign trade. Under the guidance of the “dual carbon” targets, China is actively aligning with high-standard international economic and trade rules and promoting the transition of foreign trade toward green and high-quality development. Environmental provisions are no longer merely target-market barriers faced by exporting enterprises; they have become intrinsic institutional constraints on the supply side of exporting countries.

The existing literature largely treats environmental provisions as a moderating factor of bilateral trade costs, focusing on the impact of environmental regulations established by importing countries as external barriers on trade flows. However, research on how exporting countries internalize deepened environmental regulations into relative factor prices and production compliance costs, and through which specific channels these affect macro-level bilateral export scale, remains insufficient. Systematically examining this supply-side transmission mechanism not only provides a more comprehensive analytical perspective for understanding the link between environmental regulation and foreign trade core competitiveness, but also offers an experiential basis for China to coordinate green transition with stable foreign trade development.

1.2. Research Significance

This paper extends the previous research paradigm that treats environmental provisions merely as a factor of bilateral trade costs, shifting the analytical focus to the supply side of exporting countries. By constructing an environmental regulation vertical depth index, it explores the short-term compliance cost effect of environmental regulations on a country’s comparative advantage, providing empirical evidence for understanding the applicability boundary of classical theories such as the “Pollution Haven Hypothesis” within the framework of modern regional trade agreements. At the methodological level, this paper introduces a two-step mechanism analysis framework, focusing the mechanism test on “the first-step impact of environmental regulation depth on the mechanism variable,” with the second step supported by theoretical expectations and existing literature, thereby avoiding the endogeneity interference that arises from simultaneously introducing the mechanism variable into the main regression.

This study holds reference value for balancing the green and low-carbon transition with stable foreign trade development. The three channels revealed by the mechanism tests—emission reduction, green innovation, and energy transition—help policymakers identify the specific transmission paths through which environmental regulations impact exports. The moderation effect of financial development level on environmental regulation shocks suggests that, while well-developed financial markets can accelerate capacity rationalization and green transition, they may also amplify short-term export volatility. The heterogeneity analysis based on institutional quality and urbanization levels helps developing countries optimize their trade spatial layout and enhance the resilience of regional supply chains.

1.3. Research Content

Following the logical thread from theoretical derivation to empirical testing, this paper is organized into six chapters. Chapter 1 presents the research background and significance; Chapter 2 reviews the relevant literature and defines the research positioning; Chapter 3 establishes the theoretical basis and proposes research hypotheses; Chapter 4 constructs the baseline model and describes the variables and data; Chapter 5 conducts the baseline regression, robustness checks, mechanism tests, moderation effect analysis, and heterogeneity analysis; and Chapter 6 summarizes the conclusions and proposes policy recommendations.

2. Literature Review

2.1. Research on Environmental Regulation Depth

Environmental provisions in regional trade agreements have become a research hotspot in the field of international economic and trade institutional innovation. Regarding the measurement and evolutionary characteristics of environmental regulation depth, the existing literature primarily proceeds along two directions: text mining and provision quantification. Some scholars have utilized global free trade agreement databases to conduct a panoramic mapping of specific environmental provisions, pointing out that regional trade agreements are accelerating toward deep harmonization of behind-the-border environmental standards [0]. Building on this, Chinese scholars have systematically constructed a three-dimensional dataset of agreement provision characteristics, depicting the deepening path of international free trade agreements along the axes of horizontal breadth and vertical depth, and arguing that deep integration provisions are gradually becoming the core benchmark of institutional-type openness [2].

However, different economies exhibit pronounced structural disparities when it comes to participating in and aligning with such regulatory deepening. Relevant text benchmarking studies indicate that developing countries still have room for improvement in the vertical depth of environmental provisions in free trade agreements, particularly in areas such as the legal definition of ecological protection, public participation, and the introduction of environmental dispute settlement mechanisms, where a notable vertical gap remains compared with high-standard international economic and trade rules [3]. The existing literature on the quantification of environmental regulation depth provides a solid indicator foundation for further evaluating its macroeconomic effects.

2.2. Research on Bilateral Trade Scale

A country’s total export flows and bilateral trade volumes are first constrained by static traditional gravity factors such as economic scale, population factors, geographic distance, and historical and cultural ties. As the international division of labor evolves into a matrix-type network, the impact of ex-post institutional environments and the depth of regional economic and trade agreements on member countries’ global value chain embedding patterns and export performance has sparked extensive discussion. Deep provisions encompassing behind-the-border policy coordination in areas such as environment and competition policy have a significant impact on value chain advancement toward the high end and the reshaping of trade directions [4].

The vertical deepening of such institutional-type openness rules can generate marginal synergy with factor flows, thereby stimulating the value chain embedding dividend of exporting countries and driving the expansion of bilateral trade scale [5]. However, specific provisions such as behind-the-border constraints can also objectively impose implicit institutional costs on developing countries with insufficient technological endowment, generating complex structural shocks to the stability and positional security of their participation in global value chain division, which in turn leads to marginal fluctuations in trade flows [6]. The factor flow redirection and restructuring effects brought about by regulatory changes constitute important antecedent factors for understanding bilateral trade scale fluctuations.

2.3. Research on the Impact of Environmental Regulations on Bilateral Trade Scale

Regarding the impact of environmental regulation deepening on bilateral trade scale, existing empirical assessments primarily revolve around two main lines—the compliance cost hypothesis and the Porter Hypothesis—exhibiting pronounced asymmetry.

On the one hand, the traditional compliance cost hypothesis holds that the tightening of environmental regulations inevitably internalizes pollution costs, leading to a retreat of the production frontier and a loss of comparative advantage [7]. Rising environmental compliance costs exert a negative reshaping effect on the international competitiveness of pollution-intensive industries [8]. Environmental compliance frictions and cumbersome certification procedures attached to deep free trade agreements can produce significant reshaping and squeezing effects on bilateral trade flows in the short term [9]. As the vertical depth of environmental regulations increases, the surge in compliance costs triggered by behind-the-border green rules can impose significant cost pressure on the supply side of exporting countries in the short term, leading to a notable decline in product exports between contracting parties [10]. At the micro level, stringent environmental regulations also compel enterprises to make drastic adjustments to their export product scope, causing some marginal products to be forced out of the international market, thereby triggering a passive contraction of trade scale [11].

On the other hand, the Porter Hypothesis emphasizes that well-designed external environmental regulations can stimulate the innovation offset effect of micro-level entities, thereby achieving leaps in total factor productivity and technological quality [12]. Market-based environmental regulatory instruments can induce the emergence of low-carbon technological innovation by enhancing government environmental governance capacity and promoting regional industrial upgrading [13]. The intensification of environmental regulation not only stimulates the quantity of enterprise invention patent grants but also improves the application share of invention patents at the quality level [14]. However, owing to the lengthy input-output cycle of substantive green innovation quality, some universal-type policies often face difficulties in elevating substantive innovation quality [15], which results in a general lack of sufficient innovation offset for foreign trade enterprises to hedge against cost pressure in the short term, thereby causing the price competitiveness of export products to deteriorate in the short term.

2.4. Literature Summary

In summary, domestic and international scholars have conducted extensive pioneering research on the quantitative measurement of environmental provisions in regional trade agreements, the determinants of bilateral trade scale, and the channels through which environmental regulations affect enterprise export behavior. However, existing research tends to treat environmental regulations as bilateral trade frictions or external tariff-substitute barriers established by importing countries, paying less attention to the internal institutional shocks experienced on the supply side of exporting countries when they advance regulatory deepening. How a country’s own vertical advancement in environmental regulation depth is internalized into domestic compliance costs and mapped onto its bilateral trade scale remains a dimension that warrants further investigation.

3. Theoretical Basis and Research Hypothesis

3.1. Theoretical Basis

3.1.1. Compliance Cost Theory

The compliance cost theory is a core analytical tool for examining the short-term negative economic effects of environmental regulation. The theory posits that when governments introduce stricter environmental regulatory policies, the environmental pollution costs previously borne by society as a whole must be absorbed by enterprises themselves. Given that technological conditions remain unchanged in the short term, export enterprises must redirect a portion of working capital originally planned for capacity expansion and market development toward purchasing pollution treatment equipment, acquiring clean energy credits, and obtaining international green compliance certifications. This resource reallocation raises the unit production cost of products and undermines the relative advantage of export products in international competition.

3.1.2. Porter Hypothesis

The Porter Hypothesis provides a dynamic evolutionary perspective for understanding the relationship between environmental regulation and economic performance. The hypothesis posits that well-designed environmental constraints can stimulate innovation and generate offsetting effects. Stringent environmental standards send clear signals of factor price changes to the market, driving enterprises to intensify technological research and process improvement. When the gains from green technological innovation exceed the initial compliance costs, enterprises instead forge new green competitive advantages in the international market. However, the practical implementation of the Porter Hypothesis is largely constrained by the research, development, and conversion process of technology, and the innovation offset effect exhibits a significant lag, typically requiring one to two years to manifest.

3.1.3. Financial Development and Transition Adjustment Theory

Financial development theory concerns the supporting role of financial systems in resource allocation and industrial transition. Well-developed financial markets can reduce information asymmetry and financing constraints, facilitating enterprises’ access to funds needed for transition. Under environmental regulation shocks, enterprises in countries with higher financial development levels more easily obtain green credit and transition financing, thereby accelerating capacity rationalization and equipment renewal. However, accelerated capacity adjustment in the short term implies faster contraction of production scale, and the magnitude of export decline may be greater.

3.2. Theoretical Mechanisms and Research Hypotheses

3.2.1. Trade Suppression Effect of Environmental Regulation Depth

When an exporting country signs a regional trade agreement containing stringent green standards, it essentially creates a supply-side cost shock for foreign trade enterprises. During the adjustment phase when short-term innovation dividends are insufficient to offset compliance costs, enterprises often adopt a passive defensive strategy of contracting or cutting back their export product range to meet mandatory environmental requirements. Moreover, changes in institutional rules are typically accompanied by strong expectation effects; rational foreign trade enterprises adjust their long-term production decisions in advance, exacerbating the marginal decline in export scale.

Hypothesis H1: In the short term, the deepening of an exporting country’s own environmental regulation depth significantly raises internal compliance costs, exerting a significant suppressive effect on its bilateral export scale.

3.2.2. Transmission Channels of Environmental Regulation Depth

The deepening of environmental regulations transmits to the export side through three supply-side channels. First, the emission reduction effectiveness channel: environmental regulation deepening forces high-carbon industries to reduce emissions, per capita CO₂ emissions decline, reflecting the contraction of high-carbon production capacity, which in turn leads to a decline in export scale. Second, the green innovation channel: compliance expenditures crowd out R&D resources in the short term, green patent output declines, the innovation offset effect is subject to a lag, and export price competitiveness deteriorates in the short term. Third, the energy transition channel: the elimination of backward production capacity and substitution by clean energy raise the short-term costs of energy transition, the decline in per capita energy consumption reflects the contraction of production scale, which in turn leads to a decline in export scale.

Hypothesis H2: The deepening of environmental regulation depth transmits to the export side through three channels—emission reduction effectiveness, green innovation, and energy transition—significantly reducing the exporting country’s per capita CO₂ emissions, green patent output, and per capita energy consumption, respectively.

3.2.3. Moderating Effect of Financial Development Level

The more developed the financial system, the lower the financing constraints for enterprise transition, the faster the pace of capacity rationalization, and the greater the short-term export decline. This “accelerated rationalization” effect indicates that, while financial development contributes to industrial structure optimization and green competitiveness enhancement in the long term, it may reinforce the negative impact of environmental regulations on exports in the short term.

Hypothesis H3: In countries with higher financial development levels, the negative effect of environmental regulation depth on export scale is reinforced.

4. Research Design

4.1. Building Baseline Model

To examine the net impact of an exporting country’s own environmental regulation depth on bilateral trade scale, this paper extends the traditional structural gravity model. The baseline regression equation is specified as follows:

$${\mathrm{l}\mathrm{n}\_\mathrm{e}\mathrm{x}\mathrm{p}\mathrm{o}\mathrm{r}\mathrm{t}}_{\mathrm{i}\mathrm{j}\mathrm{t}}={\mathsf{\alpha }}_0+{\mathsf{\alpha }}_1{\mathrm{e}\mathrm{n}\mathrm{v}\_\mathrm{d}\mathrm{e}\mathrm{p}\mathrm{t}\mathrm{h}}_{\mathrm{i}\mathrm{t}}+{\mathsf{\gamma }\mathrm{c}\mathrm{o}\mathrm{n}\mathrm{t}\mathrm{r}\mathrm{o}\mathrm{l}\mathrm{s}}_{\mathrm{i}\mathrm{t}}+{\mathsf{\mu }}_{\mathrm{i}\mathrm{j}}+{\mathsf{\nu }}_{\mathrm{j}\mathrm{t}}+{\mathsf{\epsilon }}_{\mathrm{i}\mathrm{j}\mathrm{t}}$$

(1)

where i, j, and t denote the exporting country, importing country, and year, respectively; ${\mathrm{l}\mathrm{n}\_\mathrm{e}\mathrm{x}\mathrm{p}\mathrm{o}\mathrm{r}\mathrm{t}}_{\mathrm{i}\mathrm{j}\mathrm{t}}$ is the dependent variable, representing the natural logarithm of the total merchandise export value from exporting country i to importing country j in year t; ${\mathrm{e}\mathrm{n}\mathrm{v}\_\mathrm{d}\mathrm{e}\mathrm{p}\mathrm{t}\mathrm{h}}_{\mathrm{i}\mathrm{t}}$ is the core explanatory variable, representing the environmental provision institutional depth index of exporting country i in year t; ${\mathsf{\alpha }}_1$ is the causal identification coefficient of primary interest in this study—if ${\mathsf{\alpha }}_1$ is significantly negative, then Hypothesis H1 is supported, meaning that environmental provision depth constitutes a de facto green trade barrier in the short term and suppresses bilateral exports; ${\mathrm{c}\mathrm{o}\mathrm{n}\mathrm{t}\mathrm{r}\mathrm{o}\mathrm{l}\mathrm{s}}_{\mathrm{i}\mathrm{t}}$ represents a matrix of covariates controlling for macroeconomic and spatial friction factors;${\mathsf{\mu }}_{\mathrm{i}\mathrm{j}}$ denotes country-pair fixed effects, which fully absorb time-invariant bilateral static friction such as geographic distance, contiguity, and historical and cultural ties between the two countries; ${\mathsf{\nu }}_{\mathrm{j}\mathrm{t}}$ represents importing-country–year joint fixed effects, absorbing all demand-side shocks of the target market in a given year; and ${\mathsf{\epsilon }}_{\mathrm{i}\mathrm{j}\mathrm{t}}$ is the random error term.

4.2. Variable Description

First, the dependent variable. Bilateral trade scale is measured by the total export value from the exporting country to the importing country, transformed into natural logarithm form.

Second, the core explanatory variable. Data on the environmental provision depth of exporting countries are sourced from the World Bank’s RTAs Vertical Depth Database [16]. Through textual analysis and statistical compilation of environmental provisions in 400 effective RTAs through 2023, this database identified a total of 55 categories of environmental regulation provisions. Following the “provision counting method” proposed by Hofmann et al. (2017) [17], this paper calculated the environmental provision depth of RTAs signed by RCEP countries from 2002 to 2023 and still in effect, using the following formula:

$${\mathrm{e}\mathrm{n}\mathrm{v}\_\mathrm{d}\mathrm{e}\mathrm{p}\mathrm{t}\mathrm{h}}_{\mathrm{i}\mathrm{t}}={\displaystyle \sum _{\mathrm{k}=1}^{55}}{\mathrm{p}\mathrm{r}\mathrm{o}\mathrm{v}\mathrm{i}\mathrm{s}\mathrm{i}\mathrm{o}\mathrm{n}}_{\mathrm{k}}/38$$

(2)

where k denotes the 55 categories of environmental regulation provisions in RTAs, and ${\mathrm{p}\mathrm{r}\mathrm{o}\mathrm{v}\mathrm{i}\mathrm{s}\mathrm{i}\mathrm{o}\mathrm{n}}_{\mathrm{k}}$ is a dummy variable that takes the value of 1 if a particular RTA contains a specific environmental regulation provision, and 0 otherwise. Because the most stringent agreement—the USMCA—encompasses a total of 38 environmental regulation provisions, the values of the 38 environmental regulation provisions are summed sequentially, with equal weight assigned to each provision, yielding the environmental provision depth index.

${\mathrm{e}\mathrm{n}\mathrm{v}\_\mathrm{d}\mathrm{e}\mathrm{p}\mathrm{t}\mathrm{h}}_{\mathrm{i}\mathrm{t}}$.A higher environmental provision depth index indicates that the RTA covers a greater number of environmental provisions, reflecting stronger environmental regulatory constraints [18].

Third, mechanism variables. Per capita CO₂ emissions (in natural logarithm) of the exporting country are used to measure emission reduction effectiveness. Environmental regulation deepening requires high-carbon industries to implement emission reduction measures; the decline in per capita CO₂ emissions reflects the contraction of high-carbon product production capacity. The natural logarithm of one plus the total number of green patent applications (ln(gp+1)) of the exporting country is used to measure green innovation output to avoid undefined values for zero-patent observations. Environmental regulation deepening may crowd out R&D resources in the short term, leading to a decline in green patent output, reflecting the lag of the Porter Hypothesis’s innovation offset effect. Per capita energy consumption (in natural logarithm) of the exporting country is used to measure the energy transition process. Environmental regulation deepening promotes the elimination of backward production capacity and the substitution of clean energy for fossil energy; the decline in per capita energy consumption reflects the physical contraction of production scale.

Fourth, control variables. To control for other macroeconomic factors affecting supply-side trade flows, the model selects the following control variables: the exporting country’s per capita GDP, measured by the natural logarithm of GDP per capita, representing the exporting country’s level of economic development and supply capacity; the exporting country’s net FDI inflows, measured by the natural logarithm of actual net foreign direct investment inflows, reflecting the exporting country’s ability to attract international capital; the exporting country’s inflation rate, measured by the annual inflation rate based on the consumer price index; and the exporting country’s official exchange rate, measured by the natural logarithm of the official exchange rate (domestic currency per USD), controlling for the impact of exchange rate fluctuations on export competitiveness.

Fifth, the moderating variable. Financial development level is measured by the ratio of the exporting country’s domestic credit to GDP. This indicator reflects the intensity of credit support provided by a country’s financial system to the real economy. A higher financial development level implies greater ease for enterprises in accessing green transition financing, faster capacity rationalization, and potentially stronger short-term negative impact of environmental regulations on exports.

4.3. Data Sources and Descriptive Statistics

The empirical sample of this paper covers the fifteen member countries of the Regional Comprehensive Economic Partnership Agreement, with a time window from 2002 to 2024. Bilateral export trade data are extracted from the United Nations Comtrade Database; environmental regulation depth data are sourced from the World Bank database; macroeconomic indicators for each country are sourced from the World Bank’s World Development Indicators database; green patent data are sourced from the World Intellectual Property Organization (WIPO); institutional governance indicators are sourced from the World Bank’s Worldwide Governance Indicators database; and inter-country geographic friction data are sourced from the CEPII database. After multi-source data matching, a panel dataset comprising 4489 observations was constructed. The descriptive statistics of the key variables are presented in Table 1.

As shown by the descriptive statistics, the observation values of all key variables are smoothly distributed with normal standard deviations, and no obvious logical anomalies or extreme outliers are present, meeting the technical requirements for large-scale high-dimensional panel regression.

5. Empirical Testing and Result Analysis

5.1. Benchmark Regression Results

Table 2 reports the baseline regression results of the impact of environmental regulation depth on bilateral export scale. The model adopts a stepwise approach to incorporating fixed effects, in order to observe the changes in the coefficients of core explanatory variables under different identification strategies.

Column (1) presents the results of the mixed regression, where the coefficient of the depth of environmental regulations is significantly positive. This result is influenced by unobserved confounding factors. As the depth of environmental regulations increases over time, bilateral trade volumes also continue to grow with the trend of globalization. The superposition of these two time trends leads to a reverse bias. Column (2) further incorporates year fixed effects, and the coefficient is significantly negative, highlighting the role of time trends as an important confounding factor. Column (3) represents the benchmark model of this paper, using country-pair fixed effects and importing country-year joint fixed effects. The benchmark regression results are significantly negative at the 1% level. This means that after controlling for bilateral fixed frictions and demand shocks at the importing country-year level, a one-unit increase in the depth of environmental regulations in the exporting country leads to a decrease of approximately 37.2% in bilateral export volumes. Hypothesis H1 is verified.

5.2. Robustness Test

To verify the reliability of the baseline regression results, this paper conducts robustness tests from seven dimensions, as shown in Table 3.

First, the PPML estimator is adopted to address potential heteroskedasticity and zero-trade bias in gravity model estimation; the core coefficient remains significantly negative at the 1% level. Second, the core explanatory variable is lagged by one period to capture the delayed impact of regulation and alleviate reverse causality, and the result remains consistent with the baseline. Third, COVID-19 period samples are excluded to rule out the interference of the pandemic’s exogenous trade shock, and the conclusion still holds. Fourth, all continuous variables are winsorized at the 1% level to eliminate outlier disturbance, with the magnitude and significance of the core coefficient largely unchanged. Fifth, the fixed effect structure is adjusted to verify that the findings are not dependent on a specific identification strategy. Sixth, energy and capital endowment controls are added to further mitigate omitted variable bias. Seventh, zero-trade observations are excluded to avoid sample selection bias.

Across all seven checks, the environmental regulation depth coefficient consistently remains significantly negative, confirming that the baseline finding of a significant export-suppressing effect is highly robust.

5.3. Mechanism Tests

Following the two-step framework, this paper separately tests the three transmission channels of emission reduction effectiveness, green innovation, and energy transition. The results are presented in Table 4.

Column (1) shows that environmental regulation depth has a significantly negative effect on per capita CO₂ emissions, indicating that environmental regulation deepening significantly reduces the per capita CO₂ emission level of exporting countries. Stricter environmental regulations force high-carbon industries to implement emission reduction measures, including equipment upgrading, process transformation, and capacity reduction. Carbon emission levels are a direct reflection of the production scale of high-carbon industries; the decline in CO₂ emissions reflects the contraction of high-carbon product production capacity, thereby leading to a decline in export scale. The emission reduction channel is thus established.

Column (2) shows that environmental regulation depth has a significantly negative effect on green patent output. This result reveals the limitation of the Porter Hypothesis in the short-term dimension: the incentive effect of environmental policies on green technological innovation exhibits a significant time lag, typically requiring one to two years to manifest. In the current period of environmental regulatory changes, enterprises need to allocate substantial funds to non-productive activities such as purchasing end-of-pipe pollution treatment equipment, obtaining green certifications, and conducting environmental audits to meet compliance requirements, crowding out budgets originally intended for technological research and development. In the short term, the crowding-out effect of compliance costs exceeds the innovation incentive effect, resulting in a decline in green patent output. The green innovation channel is thus established.

Column (3) shows that environmental regulation depth has a significantly negative effect on per capita energy consumption, indicating that environmental regulation deepening promotes a decline in per capita energy consumption. Stricter environmental regulations force enterprises to eliminate energy-intensive and outdated production capacity while promoting the substitution of fossil fuels with clean energy; the combination of both leads to a decline in per capita energy consumption. Energy consumption levels are directly linked to manufacturing production scale; the decline in per capita energy consumption reflects the physical contraction of production scale, which then transmits to the export side. The energy transition channel is thus established. In summary, the first-step regressions of all three mechanism channels are significant, supporting Hypothesis H2.

5.4. Moderation Effect Test

To test the moderating role of financial development level, this paper introduces an interaction term between environmental regulation depth and financial development level. All variables participating in the interaction are mean-centered.

Table 5. Moderation effect test—financial development level.

	(1)
	Financial Development
env_depth_c	0.1945
	(0.1902)
fin_dev_exp_c	0.0092 ***
	(0.0019)
env_X_fin	−0.0116 **
	(0.0045)
ln_gdppc	1.0518 ***
	(0.2436)
ln_fdi_exp	−0.0063
	(0.0268)
inf_exp	−0.0243 ***
	(0.0073)
ln_exrate	0.1057 **
	(0.0515)
N	3854
${\mathrm{R}}^2$	0.9559

Note: Clustered robust standard errors in parentheses. ***, **, * denote significance at the 1%, 5%, and 10% levels, respectively.

Table 5. Moderation effect test—financial development level.

	(1)
	Financial Development
env_depth_c	0.1945
	(0.1902)
fin_dev_exp_c	0.0092 ***
	(0.0019)
env_X_fin	−0.0116 **
	(0.0045)
ln_gdppc	1.0518 ***
	(0.2436)
ln_fdi_exp	−0.0063
	(0.0268)
inf_exp	−0.0243 ***
	(0.0073)
ln_exrate	0.1057 **
	(0.0515)
N	3854
${\mathrm{R}}^2$	0.9559

Note: Clustered robust standard errors in parentheses. ***, **, * denote significance at the 1%, 5%, and 10% levels, respectively.

The results show that the interaction term coefficient is significantly negative, implying that the higher the financial development level, the stronger the negative impact of environmental regulation depth on export scale, thus supporting Hypothesis H3. Enterprises in countries with higher financial development levels more easily obtain green credit and transition financing support; the alleviation of financing constraints enables enterprises to respond more quickly to environmental regulatory requirements, accelerating capacity rationalization and equipment renewal. However, accelerated capacity adjustment in the short term implies faster contraction of production scale, and the magnitude of export decline is greater. This “accelerated rationalization” effect suggests that financial development contributes to industrial structure optimization in the long term but reinforces the negative impact of environmental regulations on exports in the short term.

5.5. Heterogeneity Analysis

To further examine the differences in the trade effects of environmental regulation depth under different conditions, this paper conducts subgroup analyses from three dimensions: institutional quality, urbanization level, and trade geography. Countries are divided into high- and low-level subgroups according to the sample median of institutional quality and urbanization level, respectively. The results are presented in Table 6.

In terms of institutional quality, the environmental regulation depth coefficient for the high institutional quality group is 0.0629 but not significant, while the coefficient for the low institutional quality group is −0.6906, significantly negative at the 5% level. Countries with higher institutional quality possess more developed legal environments and more efficient policy enforcement systems; enterprises have more stable expectations of environmental regulations and can make transition preparations in advance, resulting in relatively lower compliance adjustment costs. In contrast, countries with lower institutional quality face greater policy enforcement uncertainty; enterprises face higher passive adjustment costs when confronting environmental regulation shocks, leading to more severe export declines.

In terms of urbanization level, the coefficient for the high urbanization group is −0.0543 and not significant, while the coefficient for the low urbanization group is −0.7609, significantly negative at the 1% level. The industrial structure of highly urbanized countries leans more toward services and high-value-added manufacturing, with higher factor allocation efficiency; enterprises have stronger adjustment capabilities in responding to environmental regulation shocks. In contrast, the industrial structure of less urbanized countries is more resource-intensive and energy-consuming, making them more sensitive to environmental regulatory changes. The enhancement of factor agglomeration levels helps strengthen the resilience of the economic system to environmental regulation shocks.

In terms of trade geography, the coefficient for the contiguous group is −0.3980 and not significant, while the coefficient for the non-contiguous group is −0.4229, significantly negative at the 5% level. Land contiguity implies closer transport distances and tighter supply chain ties; this trade viscosity buffers compliance cost shocks to some extent. However, the statistical insignificance of the contiguous group may be primarily limited by sample size—contiguous country pairs have only 481 observations, accounting for merely 12.5% of the full sample. In economic terms, the supply chain viscosity of land-contiguous countries renders trade between them slightly less sensitive to environmental regulatory changes.

6. Discussion and Conclusions

6.1. Discussion

This study confirms that deeper environmental regulation in exporting countries significantly suppresses bilateral export scale, which aligns with the core prediction of compliance cost theory and prior empirical evidence on RTA environmental provisions. Unlike most studies framing environmental regulation as an external barrier set by importing countries, this paper provides supply-side evidence that domestic regulatory deepening itself generates cost shocks and dampens export performance, complementing the conventional understanding of environmental trade barriers and extending the analytical boundary of the pollution haven hypothesis in the context of modern regional trade integration. Mechanism tests show that the emission reduction and energy transition channels match theoretical expectations, while the negative green innovation result verifies the time lag of the Porter Hypothesis: in the short adjustment phase, the crowding-out effect of compliance spending on R&D outweighs the innovation incentive, and cannot offset compliance costs. The moderating effect of financial development reveals a double-edged “accelerated rationalization” effect: developed financial markets facilitate long-run green transition but amplify short-run export contraction, supplementing existing studies that mostly emphasize the long-term benefits of financial development. The heterogeneity findings are also consistent with institutional economics and agglomeration theory, as better institutional quality and higher urbanization effectively buffer compliance shocks.

This study has several limitations. First, the sample is limited to RCEP members, so the generalizability to other types of trade agreements requires further verification; future research can expand to a global sample of RTAs for cross-regime comparison. Second, the regulation depth index is built by provision counting, which cannot distinguish command-and-control from market-based policy instruments, nor reflect actual enforcement intensity; more granular measurement of regulatory heterogeneity can be explored later. Third, this paper focuses on short-term impacts. Constrained by the data window, the long-run release of the Porter Hypothesis innovation offset is not observed; longer panel data would help trace the dynamic evolution from short-run cost shocks to long-run competitiveness gains. Fourth, the analysis remains at the national macro level. Future work can be disaggregated to industry and firm levels to identify heterogeneous responses, yielding more targeted policy implications.

6.2. Main Conclusions

Using bilateral trade panel data from 15 RCEP member states over 2002–2024, this paper constructs a vertical depth index of environmental regulation and systematically examines its impact on bilateral export scale, transmission mechanisms, and heterogeneity characteristics. The main conclusions are as follows:

First, the deepening of domestic environmental regulation in exporting countries exerts a significant short-term suppressive effect on bilateral export scale. After controlling for country-pair fixed effects and importer-year joint fixed effects, a one-unit increase in environmental regulation depth reduces bilateral exports by approximately 37.2%. This result holds across multiple robustness checks.

Second, the export-suppressing effect is transmitted through three supply-side channels: emission reduction, green innovation, and energy transition. Regulatory deepening reduces per capita CO₂ emissions, crowds out short-run green patent output, and lowers per capita energy consumption. Among them, the negative green innovation effect highlights the lagging nature of the Porter Hypothesis innovation offset.

Third, the trade effects of environmental regulation exhibit pronounced heterogeneity. Exporters with lower institutional quality and lower urbanization levels suffer more severe suppression, while transparent institutional environments and factor agglomeration effectively buffer compliance shocks. Trade between land-contiguous countries is slightly less sensitive to regulatory changes.

6.3. Policy Recommendations

First, the pace and intensity of environmental regulation deepening should be carefully calibrated to balance green transition and export stability. Policymakers should fully anticipate the short-term pain of compliance cost shocks, and adopt reasonable transition periods and gradual implementation mechanisms to give enterprises adjustment time and reduce export volatility during the transition.

Second, targeted measures should be adopted to unblock the green innovation channel and shorten the lag of the Porter Hypothesis effect. Governments should scale up financial support for green technological innovation, including R&D subsidies, tax incentives, and dedicated green technology funds, to directly offset the crowding-out effect of compliance expenditures on R&D investment and accelerate the release of innovation offset gains.

Third, differentiated support strategies should be targeted at countries with weak institutions and low urbanization. Within the RCEP framework, capacity-building cooperation mechanisms for environmental regulation should be established to help institutionally weak countries improve environmental governance through technical assistance, training, and experience sharing. Meanwhile, coordinated new-type urbanization and industrial upgrading should be promoted to enhance economic resilience through higher factor agglomeration.

Fourth, regional industrial and supply chain cooperation should be deepened to strengthen the buffering effect of trade viscosity. Member states should further promote industrial chain integration, reduce trade costs, and improve trade facilitation, so as to jointly address the adjustment pressures brought by environmental regulation deepening through closer regional economic integration.