A trade-related pollution trap for economies in transition? Evidence from China

This study argues that economic growth does not necessarily reverse the pollution haven behavior, even if one economy shifts from the low-income group to the high-income one (i.e., the economy in transition). The economy in transition can become a convergence of trade-related pollution, then getting stuck in a “pollution trap”. Through investigating the case of China during 2003-2009, this study examines the features and causes of trade-related pollution trap. Supported by the World Input-Output database and the product-specific statistics from China Customs, this study applies the input-output analysis to trace the distribution of pollution embodied in China's foreign trade. Then it constructs a “sector-country-year” panel and applies the fixed effect model to examine causes of the pollution trap. The results show that China's pollution terms of trade (PTT) with developing economies increases and exceeds one, while the PTT with developed economies keeps larger than one. It supports the feature of “pollution trap”. The results also demonstrate that “pollution trap” is determined by the synergy of environmental regulation, inter-industry trade, and intra-industry trade: (1) Environmental regulations keep China from becoming pollution haven of developed economies rather than relocating pollution-intensive production to other developing economies. (2) The current intra-industry trade of low value-added products worsens China's environmental performance. (3) The diluting advantage on labor and the accumulating advantage on capital keep China specializing in pollution-intensive production. Overall, the “pollution trap” may alert economies that applies the outward-oriented growth model to prepare for sustainability transition. Our findings imply that “going green” rather than “moving away” is essential in response to trade-environment effects. More stringent regulation should improve the environmental performance of production and encourage the utilization of clean technology. The increasing role of intra-industry trade requires to upgrade the commodity structure towards one with higher added-value.