Trade, growth, and the environment nexus: the experience of China, 1990-2007

The market-oriented economic reforms that started in 1978 have greatly transformed the Chinese economy. China’s GDP has increased tenfold since 1978 while the per capita income has grown at an average annual rate of more than 8% over the last three decades, drastically reducing poverty. China’s foreign trade has grown faster than its GDP for the past 25 years (Chen and Li, 2000). Although industrial emissions increased in absolute terms that has been a noticeable reduction in per capita emissions especially after 1997. The major objective of this thesis is to study the nexus of trade, economic growth, and the environment in China during the period from 1990 to 2007. There are two interrelated hypotheses to be tested for this purpose: (1) The Environmental Kuznets Curve (EKC) hypothesis and (2) Trade liberalisation in China had a short term negative effect on the environment and a long term positive effect based on the assumption that externality can be internalised and that an EKC exists in China. Both quadratic and cubic EKC models were used to capture the relationship between the per capita of income and the per capita of four industrial pollution emissions (SO2, smoke, dust, and COD). Due to an unbalanced development among the regions, this study grouped the whole country into three regions to examine the impact of a geographic location. The fixed effect and panel data were used. The results showed that an inverted-U shaped relationship as hypothesised by the EKC quadratic model in the case of SO2 exists, with a turning point at per capita GDP of 6,376 yuan, while N-shaped curves were found for smoke, dust and COD in different regions. The results also showed that the more developed coastal region appears to have a turning point at a higher income level than the less developed central and western regions. To study the impact of trade liberalisation on the environment, this study adopted a modified version of Dean’s (2002) simultaneous model using a disaggregated sample based on above and below the turning point of the EKC. The Two-Stage Least Squares method was used. The results from the overall sample showed that the scale effects outweighed the technique effects for air pollutant (SO2) and water pollutant (COD), which is evidence for the pollution haven hypothesis. The split sample provided limited support for the EKC hypothesis where a rising level of income at the provincial level via an increased level of international trade was associated with falling emissions from the technique effect, so that rising income among the provinces tended to show a superior performance. In order to harmonise development stricter environmental regulations must be associated with growing incomes because they may provide the motivation for better production techniques