Zhao Xiaotao | Export Liberalization and Water Pollution: Firm - level Evidence from China
Recently, the Center for International Finance and Economics Research (CIFER) of the National Institute of Financial Research at Tsinghua University hosted...Academic Symposium on "2022 International Trade Disputes and the Restructuring of Globalization"The event was successfully held.Assistant Research Fellow, Institute of Applied Economics, Shanghai Academy of Social SciencesZhao XiaotaoAttendDepend onCIFER Part-time ResearcherAssociate Research Fellow, China Institute of World Trade Organization, University of International Business and EconomicsDu YingxinHostEnvironment and TradeSub-forum 5Sharing with collaborators on the topic《Export liberalization and water pollution: Enterprise-level evidence from China》(Export Liberalization and Water Pollution: Firm-Level Evidence from China) The article.
ZhaoXiaotao,superiorAssistant Research Fellow, Institute of Applied Economics, Chinese Academy of Social Sciences. Received a PhD in Applied Economics from Southeast University in December 2020. Visiting Scholar, Department of Economics, Nanyang Technological University, Singapore, from September 2018 to September 2019. Research Assistant, School of Business, Hong Kong Polytechnic University, from October 2019 to January 2020. Main research areas: trade policy, intellectual property, and corporate behavior. Has participated in several National Social Science Fund projects and major provincial and ministerial-level research projects.In authoritative magazines in the field of international tradeWorld EconomyPublished one paper, inSingapore Economic Review、China&World EconomyHe has published numerous papers in domestic and international SSCI & CSSCI journals, including "Finance and Trade Research" and "Journal of Beijing Technology and Business University".
Zhao Xiaotao
This paper explores the impact of export liberalization on firm-level water pollution. Based on data on firm-level water pollution in China during the period of China's accession to the World Trade Organization, we utilize exogenous shocks to trade policy uncertainty to identify the negative causal impact of export liberalization on firm-level water pollution intensity. Further analysis reveals a "technology effect" that reduces water pollution intensity and a "specialization effect" that increases it. The technology effect dominates for non-exporting firms, while the specialization effect exists only when firms are exporting. The impact of export liberalization on aggregate firm-level water pollution also depends on the firm's export status.
Water pollution is a major challenge to sustainable development. It is difficult, costly, and often prolonged to remediate, causing lasting negative impacts on the environment and other aspects of life. For developing countries, the problem is even more severe due to the lack of stringent environmental regulations and the opportunity costs of economic development. According to existing theories, export liberalization in developing countries may increase pollution. Based on comparative advantage, developed countries may transfer more polluting production processes or products to developing countries, creating a "pollution haven" effect.
Current research on the relationship between trade and environmental pollution mainly focuses on the industry, regional, and national levels, with relatively few studies at the firm level. This paper uses data on water pollution at the firm level in China to explore the causal effects of increased export opportunities after China's accession to the World Trade Organization (WTO) on firm-level water pollution, examining both the intensity and absolute level of water pollution.
Annual environmental survey data on corporate pollution:This includes information on major pollutant emissions, pollution treatment equipment, energy consumption, and company information.
Annual survey data of industrial enterprises:This includes value added, output, exports, ownership, size, geographic location, and capital stock.
Tariff data:The WTO database, in which the US tariff data for 2000 and 2001 uses data from Feenstra et al. (2002). The sample data used in this paper focuses on the period from 1999 to 2006.
In the theoretical sectionTo analyze the impact of export liberalization on firm-level water pollution, this paper introduces water pollution as a byproduct of product production into a standard heterogeneous firm model (Melitz, 2003). Therefore, each firm incurs two costs during product production: production costs and environmental costs related to water pollution. This can lead to a "pollution haven" effect, and firms will reduce their average pollution intensity due to "competitive effects."
In the empirical sectionUsing water pollution data of Chinese enterprises before and after China's accession to the WTO, and employing the exogenous shock of trade policy uncertainty (TPU) as an identification strategy, we determined the negative causal effect of export liberalization on the intensity of enterprise water pollution.
How to describe the quasi-natural experiment of trade policy uncertainty:In 1980, when the United States established a Normal Trade Relationship (NTR) with China, it granted Chinese exporters Most Favored Nation (MFN) status. Since then, the U.S. Congress has reviewed this status annually to determine whether it should be renewed. Chinese companies exporting to or planning to export to the U.S. market must prepare for the worst-case scenario: if the annual review fails, their export tariffs could rise significantly to non-MFN rates. In October 2000, the U.S. Congress approved granting China Permanent Normal Trade Relationship (PNTR), which took effect after China's accession to the WTO at the end of 2001. Since then, the trade policy uncertainty (TPU) has been eliminated, creating significant export opportunities for Chinese companies. The disappearance of the TPU significantly increased Chinese exports to the U.S. and other destinations. Therefore, WTO accession represented a shock of export liberalization.
This paper employs a generalized DID method to estimate the causal impact of these export liberalization shocks on the water pollution variables of interest in this paper.
Where i, s, and t represent firms, industries, and years, respectively; the explained variable represents the logarithm of COD intensity (chemical oxygen demand, representing the intensity of water pollution) or COD level of firm i in industry s at time t; it is a measure of industry trade policy uncertainty before China's accession to the WTO in 2001; it is a dummy variable representing WTO accession, i.e., a value of 1 after 2002; it is a firm-level fixed effect; it is a provincial-level annual fixed effect, controlling for the common impact on all firms in each province in each year; and it is a time-varying vector of firm and industry characteristics, controlling for other factors that may affect firm water pollution. Firm-level controls include firm age, total factor productivity (TFP), capital-labor ratio, export intensity, and financial constraints.
The authors then conducted a series of robustness, mechanism, and heterogeneity tests.In the heterogeneity test, factors such as firm size, firm productivity, firm ownership, firm geographical location and environmental regulations, and industry pollution intensity were considered.
In the mechanism test, the authors examined two effects on the pollution intensity of enterprises. The first is the "competition effect," where export liberalization lowers export barriers, leading to more enterprises entering and exiting industries with higher levels of trade liberalization. In this case, non-exporting enterprises must reduce their pollution intensity to survive in the intensified market competition. The second is the "specialization effect," where, based on China's comparative advantage in international trade, exporting companies may specialize in exporting products with higher pollution levels. To distinguish between these two effects, the authors studied the impact of export liberalization on the "COD intensity" (a water pollution index) of both non-exporting and exporting enterprises. Furthermore, regarding how enterprises adjust their water pollution intensity after export liberalization, the authors proposed three hypotheses: enterprises adjust their product strategies to change water pollution intensity; enterprises adjust their investment in emission reduction equipment or clean technologies; and Chinese companies must install minimum emission reduction equipment before starting production. The authors then tested the second and third hypotheses.
This paper explores the impact of export liberalization on firm-level water pollution. Using water pollution data from Chinese firms before and after China's WTO accession, and employing the exogenous shock of TPU as an identification strategy, the negative causal effect of export liberalization on firm-level water pollution intensity was determined. Further research revealed that the "competition effect" reduces firm-level water pollution intensity, while the "specialization effect" increases water pollution intensity at the exporting firm level.
This paper highlights the heterogeneous impact of export liberalization on water pollution among different firms. It shows that export liberalization intensifies competition, particularly when profits are widespread. This intense market competition prompts firms to reduce their pollution intensity to increase their chances of survival, especially for smaller, lower-output, pollution-intensive firms on the verge of exiting the market. Furthermore, after export liberalization, some exporting companies tend to specialize in products with higher pollution intensity. This additional "specialization effect" often increases the water pollution intensity of those exporting companies.
This paper expands our understanding of the relationship between trade liberalization and the environment by studying the impact of export liberalization on firm-level water pollution in a developing country. It provides empirical support for the "pollution safe harbor effect" for export firms, highlighting the "technology effect" of reduced water pollution intensity due to widespread market competition. Overall, export liberalization contributes to reducing water pollution intensity in Chinese manufacturing firms.
Chen Yongbing
School of Economics, Xiamen UniversityprofessorChen YongbingThe paper points out that, firstly, the importance of water pollution could be further discussed. Secondly, the function setting of the COD intensity index might affect the empirical results. Thirdly, the selection of control variables is not closely related to the pollution issue, largely following previous methods; relevant data from pollution databases, such as the company's prior pollution status, could be considered. Finally, the paper could further consider the potential impact of domestic and international environmental regulations on the results. For example, national environmental policies issued between 2000 and 2007, and green trade barriers in international trade faced by my country's exports, might also be factors influencing companies' desire to significantly reduce emissions.