Free trade and carbon emissions revisited: The asymmetric impacts of trade diversification and trade openness

Abstract In the context of trade protectionism impacting economic and environmental sustainability, a more comprehensive understanding of the impact of trade on carbon emissions is critical to economic and environmental sustainability. Existing literature mainly explores the impact of trade on carbon emissions from the perspective of trade openness, neglecting the perspectives of trade diversification and trade direction. This study aims to fill this gap by investigating the impact of trade openness (measured by trade volume, import, and export), and trade diversification (measured by import diversification and export diversification) on carbon emissions based on data from OECD and G20 countries between 1997 and 2019. The study further explores the heterogeneity, asymmetry, and mediation effects. The results demonstrate that (i) the impact of trade on carbon emissions is heterogeneous, with trade openness leads to an increase in carbon emissions, while trade diversification leads to a reduction in carbon emissions. Moreover, import diversification has the strongest effect on reducing carbon emissions. (ii) The impact of trade openness on carbon emissions is asymmetry. Trade openness increases carbon emissions at 10%–50% quantile levels and reduces carbon emissions at 80%–90% quantile levels. However, the impact of trade diversification on carbon emissions is consistent. (iii) The impact of trade openness on carbon emissions is mediated by technology effect and structural effect. On one hand, trade openness leads to an increase in carbon emissions by the industrial structure. On the other hand, it contributes to the reduction of carbon emissions by technological progress. These findings could serve to better understand the complexity of free trade's impact on economic and environmental sustainability.