How does trade affect the environment? This question lies at the heart of a growing policy debate, as governments seek to align ambitious environmental goals with an economy deeply intertwined through global value chains. Over the past three decades, the trade and environment literature has delivered key insights. Yet one of the most dynamic sectors in international trade – and the role trade in that sector could play for environmental sustainability – has received relatively less attention: services.

Driven by digitalisation, rising demand for intangible inputs, and the fragmentation of production, services trade has expanded rapidly in both volume and complexity (WTO 2019, Baldwin 2022). There is growing recognition that the specific characteristics of services sectors and services trade have important environmental implications.

Many services act as key enablers of innovation (e.g. research and development, engineering, and finance); as intermediate inputs that improve coordination of other factors of production (from management and other professional services, to computer and telecommunication); and as facilitators of supply chain efficiencies (e.g. logistics, transport, and distribution). These functions place services, and services trade, at the core of a variety of processes and solutions to achieve environmental objectives (Steenblik and Geloso Grosso 2011, Sauvage and Timiliotis 2017). This growing awareness has led to policy initiatives using services trade as a lever to support environmental sustainability (Morard 2024).

Against this background, in a recent paper (Beverelli et al. 2025) we revisit important contributions in the trade and environment literature, placing services trade at the centre of the analysis.

The scale, composition, and technique impact channels for services trade

A good starting point for analysing the trade-environment nexus in services is the seminal framework proposed by Grossman and Krueger (1991), which distinguishes three main channels through which trade affects the environment: scale, composition, and technique. While originally developed in the context of overall or merchandise trade, this framework is equally useful for understanding the environmental impacts of services trade, as it can accommodate the distinctive characteristics of services sectors and transactions.

Increased services trade expands economic activity. On the one hand, greater opportunities to export services may prompt firms to adopt innovative strategies to compete in foreign markets, including by bundling goods and services in new export offerings (Ariu et al. 2020, Cadestin and Miroudot 2020). On the other, improved access to service inputs through imports can enhance efficiency, productivity, and overall performance across the economy (e.g. Arnold et al. 2011). These mechanisms can raise production levels, which, all else being equal, may increase pressure on resources and raise pollution levels (scale channel).

Services trade may also alter the composition of economic activities, with potentially positive or negative effects on the environment, depending on the specialisation path it induces (composition channel). Here, the specific features of services sectors and transactions matter. For instance, with the exception of electricity and transport, services sectors are generally less polluting than manufacturing (see Figure 1). Therefore, all else being equal, countries that specialise more in services as a result of services trade openness will tend to have lower emissions than those that shift resources toward manufacturing. Moreover, many traded services rely on digital delivery. Specialisation driven by services trade can therefore shift the source of environmental pressure from physical to digital infrastructure – with environmental implications still to be fully explored.

Figure 1 The services sector embodies less CO2 than the manufacturing sector

Notes: OECD TECO2 data for the year 2018, averaged across 66 countries, 17 manufacturing sectors, and 22 services sectors. ISIC Rev. 4 Section D (Electricity, gas, steam and air conditioning supply) is excluded from the set of services sectors. Production- and demand-based emissions are expressed in million tonnes. Emission intensity is expressed in million tonnes per million USD.

Finally, services trade can foster technological solutions that reduce the environmental footprint of economic activities (technique channel). Engineering, computer, and telecommunications services are critical to innovation that enhances environmental sustainability across sectors. Circular economy models rely on the reuse and recycling of materials, supported by distribution, transport, and logistics services. Architecture and construction services contribute to energy-efficient buildings and infrastructure for the green transition. Financial services – including advisory, project finance, insurance, and risk management – play a key role in supporting investments in clean technologies.

Trade makes these enabling services more widely accessible, fostering innovation that improves resource efficiency and supports solutions to mitigate or remediate environmental impacts. The technique channel therefore provides a compelling rationale for viewing services trade as a key driver of global progress towards environmental sustainability.

Services trade liberalisation reduces manufacturing emissions intensity: The technique channel along supply chains

A growing body of empirical evidence suggests that the technique channel is a key mechanism through which trade in goods can generate a positive net environmental impact (Antweiler et al. 2001, Xu and Monteiro 2022). Several studies further show that this channel can operate along supply chains, with trade supporting cleaner production techniques downstream by providing producers with better access to foreign intermediate goods (Song and Wang 2016, Imbruno and Ketterer 2018, Akerman et al. 2024). How does this play out for services? Building on the discussion of the technique channel of services trade, we investigate empirically whether higher access to services intermediates through lower trade policy restrictions can help manufacturing sectors further down the supply chain reduce their pollution intensity.¹

 

Using a dataset covering 49 countries and 17 manufacturing sectors over the period 2014-2018,²

our analysis shows that lower trade restrictiveness affecting services used as intermediate inputs in production processes significantly decreases carbon dioxide (CO2) emissions intensity in downstream manufacturing sectors.

Ambitious yet realistic policy reforms that remove regulatory barriers to services trade are estimated to reduce CO2 emission intensity by an average of 1.5% across manufacturing sectors. This decrease is economically significant, as it accounts for about one fifth of the total decline in average CO2 emission intensity across sectors over the period and on average across the countries considered in the analysis. Beyond average effects, estimated reductions are particularly pronounced in contexts (defined as country-manufacturing sector pairs) with initially higher emission intensity, as shown in Figure 2. These findings underscore the potential for services trade policy to support convergence towards higher environmental performance across countries and sectors, and to facilitate a shift towards more sustainable production models in emerging and developing economies.

Figure 2 CO2 emissions intensity reductions are larger where initial intensity is higher

Notes: Each point represents a country–manufacturing sector pair. The slope of the fitted line corresponds to an estimated β coefficient of 0.02 (standard error: 0.01) from a regression including country and sector fixed effects, based on a panel of 833 observations (17 sectors, 49 countries).

Overall, this empirical exercise provides strong and robust evidence that, through the technique channel of the environmental effect of services trade, increasing access to foreign services inputs can be an effective policy strategy to reduce the environmental footprint of manufacturing supply chains.

More stringent environmental policy increases services trade

Another important contribution by the trade and environment literature is a better understanding of how environmental policies themselves can shape trade patterns, with empirical evidence relatively focused on trade in goods (Copeland et al. 2022). We put the spotlight on services trade and ask how it responds to environmental policy. The analysis relies on the OECD Climate Actions and Policies Measurement Framework (CAPMF) database (Nachtigall et al. 2022) as a rich source of measures of environmental policy stringency, and on a structural gravity framework augmented with internal trade (Heid et al. 2021, Benz and Jaax 2022, Benz et al. 2022, Beverelli et al. 2024). This method allows us to identify the differential effect of environmental policy on international services trade with respect to domestic services trade.

Adopting the perspective of importing countries, the results show that environmental policy stringency creates incentives to seek services necessary to meet higher environmental standards in international markets rather than sourcing them domestically.

Exploiting the granular nature of the CAPMF data and new machine-learning based approach to gravity estimation (Breinlich et al. 2021), the analysis further investigates which environmental policy instruments show the most robust differential effect on services trade across sectors. The results, summarised in Figure 3, indicate that higher performance standards and more stringent international co-ordination policies lead to greater reliance on imported services relative to domestic suppliers. This pattern is especially pronounced in sectors such as financial, maintenance and repair, telecommunications, and other business services.

Figure 3 The differential effect of environmental policy on services trade varies across sectors and policy types

Notes: The matrix plotted in the figure characteries each combination of a sectoral category of services imports (row dimension of the matrix) and a dimension of environmental policy (column dimension) with a robust assessment of the estimated differential effect of the latter on the former. Positive and negative labels are assigned when coefficients are either all positive or all negative. A cell is labelled as inconclusive if the significance requirement is met, and at least two significant coefficients have a different sign. A cell is labeled as inconclusive when coefficients are significant, but their sign could take both negative or positive values. Non-relevant cells are those that were not selected by the two-step variable selection algorithm adapted from Breinlich, et al. (2021).
Source: Figure 8 from Beverelli et al. (2025).

The way forward

As the world faces the pressing challenge of balancing economic growth with environmental sustainability, understanding how services trade, which plays an increasing role in international supply chains, can support sustainability efforts is more important than ever. Services sectors such as engineering, architecture, management consulting, and maintenance and repair can offer innovative solutions that contribute directly to greener production and more sustainable infrastructure.

The analysis summarised in this column provides a strong rationale for advancing policy efforts to design and implement services trade reforms that promote environmental objectives. It aligns with recent regional and multilateral initiatives, such as APEC’s list of environmentally related services (Nordås and Steenblik 2021), the Trade and Environmental Sustainability Structured Discussions (TESSD) at the WTO, and the dedicated environmental services chapter in the new Agreement on Climate Change, Trade and Sustainability.³

This work can also help shape a growing research agenda on services trade and the environment. In particular, it underscores the need for analytical frameworks capable of jointly estimating the scale, composition, and technique effects of services trade on environmental outcomes, and for further empirical work investigating how services trade affects the composition and the environmental footprint of economic activity. 

References

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Antweiler, W, B Copeland and M Taylor (2001), “Is Free Trade Good for the Environment?”, American Economic Review 91(4): 877-908.

Ariu, A, F Mayneris and M Parenti (2020), “One way to the top: How services boost the demand for goods”, Journal of International Economics 123: 103278.

Arnold, J, B Javorcik and A Mattoo (2011),  “Does services liberalisation benefit manufacturing firms? Evidence from the Czech Republic“, VoxEU.org, 1 October.

Baldwin, R (2022), “The peak globalisation myth: Part 4 – Services trade did not peak“, VoxEU.org, 3 September.

Benz, S and A Jaax (2022), “The costs of regulatory barriers to trade in services: New estimates of ad valorem tariff equivalents,” Economics Letters 212.

Benz, S, A Jaax and Y Yotov (2022), “Shedding light on the drivers of services tradability over two decades”, OECD Trade Policy Paper 264 (October).

Beverelli, C, M Breitkopf, M Fiorini and E Tresa (2025), “Services trade and environmental sustainability: Conceptual linkages and empirical patterns”, OECD Trade Policy Paper 292.

Beverelli, C, A Keck, M Larch and Y Yotov (2024), “Institutions, trade, and development: Identifying the impact of country-specific characteristics on international trade”, Oxford Economic Papers 76(2).

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Cadestin, C and S Miroudot (2020), “Services exported together with goods”, OECD Trade Policy Papers.

Copeland, B R, J S Shapiro and S M Taylor (2022), “Globalization and the environment”, in Handbook of International Economics: International Trade, Volume 5, pp. 61-146.

Fang, H, Q Huo and K Hatim (2023), “Can Digital Services Trade Liberalization Improve the Quality of Green Innovation of Enterprises? Evidence from China”, Sustainability 15(8) 6674.

Grossman, G and A Krueger (1991), “Environmental Impacts of a North American Free Trade Agreement”, NBER Working Paper no. 3914.

Heid, B, M Larch and Y Yotov (2021), “Estimating the effects of non-discriminatory trade policies within structural gravity models”, Canadian Journal of Economics 54(1).

Imbruno, M and T Ketterer (2018), “Energy efficiency gains from importing intermediate inputs: Firm-level evidence from Indonesia”, Journal of Development Economics 135: 117-141.

Liang, H and X Hao (2023), “Can Service Trade Effectively Promote Carbon Emission Reduction?—Evidence from China”, Sustainability 15(17): 12807.

Morard, S (2024), “Liberalizing Trade in Environmental Services to Support Environmental Goals,” Journal of World Trade 59(1): 77-100.

Nachtigall, D, L Lutz, M Cárdenas Rodríguez, I Haščič and R Pizarro (2022), “The climate actions and policies measurement framework: A structured and harmonised climate policy database to monitor countries’ mitigation action”, OECD Environment Working Papers.

Nordås, H and R Steenblik (2021), Environmental Services in the APEC Region: Definition, Challenges and Opportunities, APEC Group on Services.

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OECD (2023), “Trade in Value Added (TiVA)”.

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Sauvage, J and C Timiliotis (2017), “Trade in services related to the environment,” OECD Trade and Environment Working Papers 2017/2.

Song, M and S Wang (2016), “Participation in global value chain and green technology progress: evidence from big data of Chinese enterprises,” Environmental Science and Pollution Research 24(2): 1648-1661.

Steenblik, R and M Geloso Grosso (2011), “Trade in services related to climate change: An exploratory analysis,” OECD Trade and Environment Working Papers 2011/03.

WTO – World Trade Organization (2019), The future of services trade. World Trade Report 2019.

Xu, A and J-A Monteiro (2022), “International trade in the time of climate crisis,” VoxEU.org, 12 December.