Wang Junbo | FTA Environmental Clauses, Product Quality, and China - ASEAN Bilateral Green Trade

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.Doctoral student at the School of International Economics and Trade, Central University of Finance and EconomicsWang JunboAttendDepend onCIFERAssistant ResearcherPostdoctoral Fellow, Tsinghua University PBC School of FinanceFeng LuHostGreen Trade Sub-Forum 11，Sharing with collaborators (see below) on the topic of《FTAEnvironmental terms, product quality and China-ASEAN bilateral green trade》(FTA Environmental Clause, Product Quality and China-ASEAN Bilateral Green Trade）The article.

Wang Junbo,Doctoral candidate at the School of International Economics and Trade, Central University of Finance and Economics. Research interests: International trade theory and policy.   

Wang Junbo

This articleResearch BackgroundThe following points highlight the challenges: ① Over the past few decades, the WTO has played an increasingly important role in formulating international trade rules and maintaining international trade development. However, with changes in the international trade landscape and the emergence of international trade disputes, the WTO is finding it increasingly difficult to adapt. This has led to a phenomenon where multilateral trade negotiations are slow while regional ones are fast, with various regional negotiations springing up like mushrooms after rain. The new round of negotiation frameworks has broken through the existing WTO framework, with environmental clauses being particularly prominent. ② In the process of signing bilateral green trade agreements between China and ASEAN, China and ASEAN have signed four FTAs, most of which include environmental-related clauses, emphasizing the interaction between urban development and the environment. Despite the importance of these issues, two major challenges remain in identifying the impact of environmental clauses on green trade: ① the availability of data on environmental clauses; and ② the difficulty in constructing instrumental variables at the national and product levels, which can easily lead to reverse causality issues.   

This article uses the following...Research MethodsThis study: ① Extends the standard Melitz model to incorporate the regulatory use of environmental clauses; ② Using the number of FTA environmental clauses as an exogenous shock, it comprehensively applies the DID and DDD models, effectively addressing endogeneity issues such as omitted variables and reverse causality; ③ Decomposes the role of environmental clauses into environmental regulation and green barrier effects. This research answers the following questions:question① What is the actual impact of FTA environmental provisions on green trade between China and ASEAN? ② To what extent do FTA environmental provisions reduce bilateral trade in polluting goods while increasing bilateral trade in clean goods? ③ Through what mechanisms do FTA environmental provisions promote the development of green trade between China and ASEAN?   

existData sourceIn this regard, this paper uses customs data from 2002 to 2016, and matched data from industrial enterprises, customs data, and enterprise pollution data from 2002 to 2007. The data on the number of environmental clauses comes from the Trade and Environment Database.   

existModel settingIn this regard, this paper proposes: ① a multi-sectoral Melitz (2003) model, in which each firm in the industry produces only one type of good under the framework of monopolistic competition, and the firm productivity is φ(); ② exports require the payment of fixed costs, iceberg trade costs, tariff costs, and environmental regulation costs; ③ environmental regulation costs only apply to importers and exporters in polluting industries.   

Mechanisms by which FTA environmental provisions affect trade volume:   

This article proposes threeTheoretical hypothesisThe FTA environmental provisions lead to a decrease in the import and export volume of enterprises in signatory countries within the region; ② The FTA environmental provisions cause a decrease in China's trade in polluting products with ASEAN, while increasing the trade in clean products; ③ The FTA environmental provisions reduce China's import and export trade in polluting products with ASEAN countries through micro-mechanisms that influence enterprise entry and exit from polluting industries, trade diversion, and product prices, quantities, and quality. On the other hand, as green trade barriers, environmental provisions force enterprises to improve product quality to maintain market share. Therefore, assuming enterprises' emission reduction expenditures remain unchanged, the quality and trade volume of polluting products will increase.   

according toEmpirical AnalysisThe results of the DID model show that environmental clauses reduced China's import and export volume with ASEAN. The results of the DDD model show that the more environmental clauses included in the FTA, the greater the inhibitory effect on the import and export volume of polluting products between Chinese enterprises and the ten ASEAN countries. The results of the event analysis method show that environmental clause agreements take effect in the second and third years, consistent with known typical facts.   

Finally, the article concludesin conclusion① FTA environmental provisions reduce the import and export trade volume between China and ASEAN; ② Compared to trade in clean products, FTA environmental provisions reduce the import and export trade volume of polluting products. The more environmental provisions there are, the greater the inhibitory effect on the trade of polluting products; ③ FTA environmental provisions primarily reduce import and export revenue from polluting products through mechanisms such as increasing enterprise exit, inhibiting enterprise entry, promoting trade diversion, increasing product prices, reducing product quantity, and lowering product quality; ④ When given enterprise emission reduction inputs, the product quality and trade volume of polluting products will increase.   

Based on the above conclusions, Dr. Wang Junbo and his supervisor proposed the following:Policy RecommendationsWhile strengthening the development of environmental provisions in FTAs ​​and aligning them with international trade rules, we should also increase green trade financing for affected enterprises and build a sound green finance system, such as providing interest reductions or allowing them to repay interest at the end of the period. This will encourage domestic enterprises to carry out green innovation, improve the quality of import and export products, and thus promote the development of green trade.   

Lin Xi

Lecturer, School of Economics and Statistics, Guangzhou UniversityLin XiThe paper begins by briefly summarizing the article's content and fully affirming its forward-looking nature. However, it also offers its own critiques regarding the title, theoretical framework, and empirical evidence.suggestion：① The bilateral green trade mentioned in the title, if identified solely from clean and polluting industries, lacks sufficient evidence. ② Although product quality is listed alongside FTA environmental clauses and China-ASEAN bilateral trade, its role is not clearly demonstrated in the discussion, either theoretically or empirically, and is not adequately discussed. ③ The explanation of variables in the theoretical model needs strengthening, and the economic interpretation of the derivation formulas should be enhanced. ④ The theoretical derivation approach should be presented first, followed by the actual derivation, making the article's structure clearer, and the endpoint of the derivation should return to the main theme. ⑤ The hypothesis is presented in deductive form, which does not correspond well with the theoretical model or the mechanism diagram; it is recommended to use a theoretical model. ⑥ Hypothesis 3 mentions numerous and complex theoretical mechanisms; a more focused approach is suggested. ⑦ Is the research sample limited to ASEAN countries or all destination countries? If the sample is limited to ASEAN countries, are there differences in environmental clauses among different destination countries (among ASEAN countries), i.e., can they be identified using the DID model? If the sample includes all destination countries, how can the influence of environmental clauses from other countries be excluded? ⑧ Controlled variables include the environmental regulations of the destination country, but the environmental regulations of the home country also affect imports and exports. How should these be controlled?