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Is processing trade cleaner? theory and evidence from Chinese industrial firms

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  • Lin, Xi
  • He, Ling-Yun

Abstract

As an important export mode, processing trade differs significantly from other forms of trade. This study examines whether processing-trade firms are cleaner and evaluates the environmental effects of processing trade transformation. Based on the Melitz (2003) framework, this study develops a simple model to analyze the relationship between firms’ export modes and pollution emissions. Using data from Chinese industrial firms, we investigate this relationship and further examine the effects of processing trade transformation. We find that, relative to ordinary-trade firms, whether processing-trade firms generate lower pollution emissions depends on labor productivity and energy intensity. The effect of energy intensity is stronger; consequently, processing-trade firms have lower pollution emissions. Although processing-trade firms are cleaner, the transformation of processing trade does not exacerbate pollution emissions. In particular, when firms transform from primarily engaging in processing trade to primarily engaging in ordinary trade, they reduce emission intensity by improving labor productivity. This study provides both a theoretical framework and empirical evidence regarding the relationship between processing trade and pollution emissions, thereby enriching the literature on the trade–environment nexus.

Suggested Citation

  • Lin, Xi & He, Ling-Yun, 2026. "Is processing trade cleaner? theory and evidence from Chinese industrial firms," Economic Analysis and Policy, Elsevier, vol. 92(C), pages 442-465.
    • Handle: RePEc:eee:ecanpo:v:92:y:2026:i:c:p:442-465
    DOI: 10.1016/j.eap.2026.06.024
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    Keywords

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    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • F64 - International Economics - - Economic Impacts of Globalization - - - Environment
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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