Trade and Strategic Adjustments to EU Environmental Policy in Italian Industry

This research examines how firms adjust to stringent environmental regulation, focusing on the strategic and trade responses of Italian manufacturing firms to the European Union’s REACH framework and, specifically, to the progressive restriction of perfluorooctanoic acid (PFOA). PFOA, a persistent and hazardous chemical widely used across industrial value chains, entered the Candidate List in 2013, was subject to Annex XVII restriction in 2017, and became regulated under the EU POPs Regulation in 2020. This regulatory trajectory provides an ideal quasi-natural experiment to study the evolution of firm behavior in response to tightening environmental constraints. Building on the trade-shock literature (Autor et al., 2013; 2014), the study translates a well-established framework into the regulatory domain. A difference-in-differences design compares “treated” Italian firms , those ever importing or exporting PFOA-related goods, to structurally similar firms that have never traded such inputs. The analysis exploits firm-level administrative trade data merged with financial statements from AIDA and SCIP notifications, constructing a novel exposure indicator that captures firm-specific reliance on substances affected by regulatory tightening. By integrating environmental regulation into the empirical architecture traditionally used to study trade shocks, this research contributes to a growing strand of literature on regulatory competitiveness. Beyond its academic value, the study highlights policy implications for designing industrial and environmental measures that support firm innovation and mitigate adjustment costs in strategic manufacturing systems.