Trade openness and the environmental Kuznets curve: Evidence from Chinese cities

• Date: 01 October 2020
• Author: Bihong Huang,Zhuoxiang Yang,Zheng Fang
• DOI: http://doi.org/10.1111/twec.12717
• Published date: 01 October 2020

SPECIAL ISSUE ARTICLE

Trade openness and the environmental Kuznets

curve: Evidence from Chinese cities

Zheng Fang

1

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Bihong Huang

2

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Zhuoxiang Yang

2

1

School of Business, Singapore University of Social Sciences, Singapore, Singapore

2

Asian Development Bank Institute, Tokyo, Japan

KEYWORDS

China, environmental Kuznets curve, trade openness

1

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INTRODUCTION

With an increase in the intensity of environmental degradation, the relationship betwee n economic

growth and environment has attracted growing attention in China. Grossman and Krueger (1995)

put forward the environmental Kuznets curve (EKC) hypothesis, which refers to an inverted U ‐

shaped relationship between environmental degradation and per capita income; that is, the environ-

mental quality initially deteriorates but then improves as income rises. This hypothesis has since

become one of the most hotly debated issues in environmental economics. Most empirical studies

on the EKC hypothesis have presented mixed results (Antweiler, Copeland, & Taylor, 2001; Cole,

2004; Jalil & Feridun, 2011; Shafik & Bandyopadhyay, 1992; Stern, 2004) and focused on devel-

oped countries. Other studies have tried to incorporate openness into the EKC analysis. Although

many theories and evidence indicate that trade is closely related with income and economic

growth, the environmental effect of trade differs systematically from that of economic growth

(Copeland & Taylor, 1994). Growth inevitably increases pressure on pollution if there are no envi-

ronmental regulations. However, demand for environmental quality also increases with income.

The net effect reflected by EKC depends on the income elasticity of demand for environmental

quality. If the income elasticity of demand for environmental quality is 1, governments would

respond to deteriorating pollution by tightening up the environmental regulations. As a result, the

scale and technique effects exactly offset each other, resulting in a neutral economic growth with-

out changes in environmental quality.

1

However, trade driven by comparative advantage yields

very different environmental outcomes. According to the pollution haven hypothesis (PHH), coun-

tries or regions with comparative advantage in polluting industries will observe the concentration

of industries with high emission intensity and experience an environmental degradation. In con-

trast, countries or regions with comparative advantage in clean industries will observe the

1

The impact of trade openness on the environment can be decomposed into scale, technology and composition effects (Cole

& Elliott, 2003; Copeland & Taylor, 1994; Grossman & Krueger, 1991). The scale effect refers to the likely increase in

emission resulting from the overall economic growth generated by trade openness. The technology effect accompanying

trade liberalisation is expected to decrease the emission intensity through the usage of clean production technology. The

composition effect refers to the change of economic structure that may occur when countries specialise in the production in

which they have a comparative advantage.

Received: 1 December 2017

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Revised: 7 July 2018

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Accepted: 30 July 2018

DOI: 10.1111/twec.12717

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© 2018 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/twec World Econ. 2020;43:2622–2649.

concentration of industries with low emission intensity and experience an environmental improve-

ment. Consequently, the growth path for an open economy could be more polluting than the

growth path for a closed economy. Moreover, trade openness may improve the environment in

cities if openness helps to modernise the capital stock, enabling the technology effect to outweigh

the scale effect. Hence, the impact of trade on pollution is uncertain and needs scrutiny.

This paper investigates the EKC and its turning point using different measures of trade open-

ness in the Chinese context. Most empirical studies on the EKC hypothesis have used panels of

country‐level data over time despite the fact that the EKC theory depicts essentially the dynamic

path of the relationship between environmental quality and economic growth within a single coun-

try (Antweiler et al., 2001; Cole, 2004; Jalil & Feridun, 2011; Shafik & Bandyopadhyay, 1992;

Stern, 2004). Hence, this paper assesses how trade affects the relationship between economic

growth and pollution in a single country—China, using city‐level data. Cities play an important

role in shaping China’s trade, production and emission. Liu (2015) shows that 85% of carbon

emissions in the country are attributed to urban economic activities. Although the concentration of

production and emission is expected to increase due to the rapid and large‐scale urbanisation pro-

cess, the patterns and dynamics of city‐level growth–trade–environment nexus remain largely

unexplored.

Furthermore, Chinese cities provide a unique setting to study this issue because both trade and

pollution have grown rapidly over the past three decades. In 1980, China accounts for only 0.92%

of world trade. However, 32 years later, this ratio skyrocketed to 10.48% (Wang, 2014), earning

China the name of ‘World's Factory’. In 2016, China exported 13.2% and imported 9.8% of world

merchandise trade (WTO, 2017a). In 2014–2016, trade amounts to $1,601 trillion and accounts for

20% of its GDP (WTO, 2017b). However, accompanied with the fast‐growing trade sector, envi-

ronmental degradation such as deteriorating water quality, land deforestation and pollution, as well

as frequent haze plague arouses a great deal of attention. Economic burden of premature mortality

and morbidity associated with air pollution was estimated to be over $19 billion in 2003, or 1.16%

of GDP (World Bank, 2007).

In this paper, we attempt to answer the question: what does trade liberalisation/openness bring

to Chinese cities and how does it facilitate the movement of cities on the EKC curve? Specifically,

we analyse the impact of trade openness on EKC using emission of industrial pollutants, industrial

wastewater and sulphur dioxide (SO

2

) in cities. The empirical evidence supports the EKC relation-

ship. The turning points of the inverted U‐shaped curve for wastewater are found to be around

42,991–48,828 yuan per capita GDP and 9,588–10,663 yuan for SO

2

. Furthermore, results from

the regional analysis show that the EKC relationship also holds in different regions. However, if

the cities are grouped by the level of openness, we find that the EKC hypothesis is only true in

cities with high level of trade openness, suggesting that trade openness is a key determinant of the

relationship between environment and income. Furthermore, the heterogenous effect of export and

import on pollution is also examined. Export is mostly found to be positively related with pollu-

tion, while the impact of import is likely to be negative for both the whole of China and across

regions, if the significance is identified in the results.

We contribute to the ongoing debate on openness and EKC in several aspects. First, we infer

the effect of income on pollutant emission with the state‐of‐the‐art empirical method. The reduced‐

form models applied to the empirical study of EKC reflect correlation rather than the causal mech-

anism (Cole, 2004; Kijima, Nishide, & Ohyama, 2010) due to the potential feedback effect from

environmental quality to income growth. Different econometric methods have been adopted in the

recent EKC literature to solve this concern of reverse causality, including system GMM (Li, Wang,

& Zhao, 2016), spatial panel model (Kang, Zhao, & Yang, 2016), fully modified OLS (Kasman &

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