The empirical relationship between openness and environmental pollution in China

Abstract

By using a vector autoregression (VAR) model, this paper examines the relationship between openness and environmental degradation in China. The empirical results suggest that, during 1981–2008, the long-run equilibrium relation between China's foreign trade, foreign direct investment (FDI) and industrial pollutants can be positive or negative, depending on the pollutants concerned. Therefore it is hard to say whether openness is good or bad for the environment in China. Moreover, a short-run causality test reveals that China's exports expansion leads to an increase in sulphur dioxide (SO₂) emissions, while imports and FDI enlargement result in the growth of solid waste generation. On the other hand, China's control of SO₂ emissions discourages its exports, whereas control of wastewater discharge encourages its imports.

Keywords:

• foreign trade
• foreign direct investment
• environmental pollution; China

Acknowledgments

The author is grateful to two anonymous referees for helpful comments and very good suggestions that have improved the paper significantly.

Notes

1. McAusland (2008) indicates that the direct effects of trade and foreign direct investment on environment include emissions and environmental damage associated with the physical movement of goods between exporters and importers, such as emissions from fossil fuel use, oil spills, and introductions of exotic species. At the same time, trade and foreign direct investment also has numerous indirect effects on environment, these indirect effects are often classified as falling under one of three categories: scale, composition and technique effects.

2. Bahmani-Oskooee and Alse (1993) point out that one shortcoming of some time-series studies is the use of annual data: if the time delay between cause and effect is small, compared to the time interval over which data is collected, the lack of causation could be the result of temporal aggregation.