Environmental policy and trade performance: Evidence from China

This paper aims at assessing the impact of environmental regulations on the export activity of firms in China. The environmental policy we study is the so- called Two Control Zones (TCZ) policy, which has been implemented in 1998 in China. The aim of this policy was to reduce the sulfur dioxide (SO2) emissions in targeted cities with particularly high air pollution. We use a data set of 265 Chinese cities for the years 1997 to 2003, and exploit variations across time, sectors and firm types to extract the causal effect of the policy on firms’ performance. We indeed expect the TCZ policy to have a larger impact the heavier the pollution content of the activity and the lower the political status of the firm. In line with the political pecking order of firms that exists in China, we expect the impact of the environmental policy to be mitigated by state ownership. Our results are in line with our expectations and suggest that the TCZ policy has been effective. We find that State-owned firms are less intensively affected and thus able to export relatively more, especially in energy intensive sectors. By contrast, we see a relative decline in foreign and private firms’ exports; the more the energy-use of the sector the larger the decline.