Assessing trade Efficiency: Insights from trade priority, environmental priority, and balanced strategies

Abstract

This study employs Data Envelopment Analysis (DEA) to assess international trade efficiency, incorporating carbon dioxide emissions as an undesirable output and addressing biases in previous assessments that overlooked emissions embodied in trade. The model introduces three distinct strategic objectives: a trade priority, an environmental priority, and a balanced approach between trade and environmental concerns. The proposed framework is then applied to a sample of 42 economies.

Trade efficiency is a crucial economic measure, as it reflects an economy's capacity to maximize productive output while minimizing environmental and resource costs, thereby fostering sustainable economic growth and enhancing global competitiveness. The findings demonstrate that while the Trade Priority Strategy (TPS) yields the lowest overall average efficiency under both constant returns to scale (CRS) and variable returns to scale (VRS) assumptions, the optimal strategy for maximizing efficiency varies significantly across individual economies. Although significant efficiency differences exist across the 42 economies, within each economy, the differences in efficiency values and rankings across the three strategies are relatively minor. A comparison between Organisation for Economic Co-operation and Development (OECD) and non-OECD economies reveals that the OECD group demonstrates higher efficiency under all strategies. These results offer valuable insights for policymakers seeking to align trade and environmental policies in pursuit of sustainable development.