Widespread concerns have been expressed recently about the relationship between inter­ national competitiveness of environmentally sensitive goods (ESGs, hereafter) and environ­ mental regulations.* 1 Does free trade with countries with lower environmental standards lead to a shift of production activity from home countries with higher environmental standards to foreign countries? Will countries with higher standards be forced to lower their standards if capital and jobs also migrate to exploit lower environmental standards abroad (the so-called race to the bottom)?2 Is it really the case that countries with lower environmental regulations increase their competitiveness in the production of ESGs? This last question receives consider­ able attention whenever countries are in the process of passing new pollution control mea­ sures.