Modelling trade and environmental linkages in China

Interactions between trade and the environment have been studied extensively as a reaction to the pressure that the accelerated pace of globalisation has placed on environment and trade. Distinguishing itself from previous work, this study focuses on a modelling analysis of the interactions between trade and the environment in China. A non-linear simultaneous equation trade and environment model (TEM) is presented that expands Dean's basic model by endogenising the trade and foreign direct investment variables. This model can be used not only to analyse the trade impacts of environmental policies and the environmental impact of trade, but also to identify the sources of those influences. In addition, the non-linear specification of the relationship between emissions and economic scale allows for an explicit test of the environmental Kuznets curve. Using the White heteroscelasticity consistent covariance matrix estimates and employing a Chinese regional panel dataset, the empirical results suggest that there may indeed have existed a tradeoff between economic growth and environmental protection in China's development. That is, increased trade and rapid economic growth may have led to greater pollution emissions on the one hand, while environmental policies may have led to reduced economic growth and trade on the other. Policy alternatives to mitigate these negative impacts are also explored.