Trade openness, air pollution, and the pollution haven hypothesis

Until a couple of years ago, in my ECONS102 class (at that time, it would have been ECON110) I used to go through a fairly detailed summary of the evidence in favour of, and against, globalisation. The 'globalisation debate' material covered many dimensions, one of which was the environment. Among the arguments against globalisation in terms of its environmental impacts is the pollution haven hypothesis. When a globalised firm has choices over which country to locate manufacturing operations in, they are likely to choose the location with the lowest levels of environmental protection, because that would entail the lowest cost to the firm. So, if this results in a relocation of manufacturing from high-cost, high-environmental-protection countries to low-cost, low-environmental-protection countries, it effectively exports pollution to the low-environmental-protection countries. Those countries provide a 'haven' for pollution.

Evidence that would support this hypothesis would include countries (or parts of countries) that are more open to trade experiencing higher levels of pollution. So, I think that is why I had this 2017 paper by Faqin Lin (Central University of Finance and Economics, China), published in the journal China Economic Review (sorry, I don't see an ungated version online), waiting on my pile of papers to read. Lin uses Chinese prefecture-level data on exports and imports, and pollution data from NASA (to overcome any data-quality issues related to using Chinese pollution data) over the period from 2004 to 2011. Using distance to the coast as an instrument for trade allows Lin to extract plausibly causal estimates of the impact of trade openness on pollution. They find that:

...the coefficients for trade openness show that a 1% expansion in trade openness quantitatively raises NO2 (Aerosols) concentration by approximately 0.736–1.383% (0.723–0.806%) on average...

In other words, trade openness causes higher levels of pollution in China. The results are robust to alternative data sources (including Chinese pollution data), and different specifications produce similar results. That includes Lin's preferred analysis where they first use distance to the Huai River as an instrument for pollution (because of differences in access to coal-fired heating between the north and south of China) to account for reverse causation, then use the residuals from that analysis as the measure of trade openness. I'm less convinced by this analysis, but the results are at least consistent with the others.

Overall, this research provides some support in favour of the pollution haven hypothesis that differs from the usual cross-country analyses, and therefore doesn't suffer from being confounded by unobserved differences between countries (although you may argue that there are unobserved differences between Chinese prefectures, at least the regulatory system is plausibly consistent).