Trade and dynamics of environmental degradation : theory and evidence from Yangtze River Delta

This paper develops a theoretical model to argue that trade and economic growth cannot always be harmful to the environment if investors value the environment as an important asset, or ingredient, in their production process. In other words, the incentives of investors to move away from highly polluted locations to less polluted regions can unleash a virtuous process of environmental improvement. We empirically examine the impact of trade and economic growth on pollution in China's Yangtze River Delta to ascertain the findings of our theoretical model. Our analysis of the panel data from 16 cities, over the period 2004 to 2007, reveals that the positive correlation between trade, growth and pollution is weakened if the environment is taken into account in production and location decisions of investors. In addition, this paper also attempts to decompose the impact of trade on the environment in terms of scale, technique, and structure effects. By making use of data from 1999 and 2009, however, we stress that the impact of technique and structure effects of trade on environment in Yangtze River Delta has been adverse — a sharp increase in exports has resulted in strong scale effect.