Introduction

Countries protect the environment mostly for their own benefit. Similarly, they also engage in international trade (of goods, services, and assets) for their own advantage. But there are also ancillary benefits to a country that protects the environment; it may well find international trade easier. Countries that are involved in international environmental arrangements (IEAs) find it easier to engage in the international exchange of goods and assets (a multilateral effect). Further, a pair of countries with a joint interest in the environment also finds it easier to engage in international commerce, since each can punish the other in one domain for transgressions in a different sphere (a bilateral effect). In this paper, we formalize such theoretical notions, and then test and confirm them, using a recent cross-section of international asset holdings and environmental commitments. In practice, participation in non-economic partnerships turns out to enhance international economic relations.

In a recent and related paper of ours (Rose and Spiegel 2009), we demonstrate that IEA activity can facilitate international portfolio borrowing. Our analysis begins with an extension of the “reputation spillover” concept introduced by Cole and Kehoe (1997). With differing discount rates, more patient governments choose to join a greater number of environmental treaties; this sends a credible signal concerning a country's debt capacity. Creditors respond by granting the country more trade credit. The predictions of this model are multilateral, since membership in IEAs is easily accessible common knowledge.