How does trade policy uncertainty affect firms’ pollution emissions? Theory and evidence from China

Abstract The literature investigates trade-environment relationship at the firm level, but does not focus on the environmental effect of trade policy uncertainty. In the context of de-globalization and Sino-US trade friction, trade policy uncertainty significantly increases. How does trade policy uncertainty affect firms’ pollution emissions? In this study, we incorporate energy, pollution, and trade policy uncertainty into Melitz’s (2003) framework and construct a theoretical model to reveal the relationship between trade policy uncertainty and pollution emissions. Then, we employ the event that the USA granted permanent normal trade relationship to China as a quasi natural experiment. We use difference-in-difference-in-difference model and the data of Chinese manufacturing firms for empirical analysis. Our results indicate that the decrease in trade policy uncertainty reduces emission intensity of exporting firms, but has no significant impact on emission levels. Given that these firms do not aggravate emission levels under the condition of expanding output scale, we conclude that the decrease in trade policy uncertainty can improve environmental performance. Mechanism analysis shows an interesting finding that the decrease in trade policy uncertainty reduces emission intensity mainly by improving energy efficiency rather than improving abatement technology and optimizing energy structure. In addition, pollution reductions mainly occur in pollution-intensive and capital-intensive industries as well as coastal regions. Altogether, this study contributes to the literature on trade-environment relationship and trade policy uncertainty.