Does pollution affect exports? Evidence from China

This paper examines the effects and mechanisms of air pollution on firm exports using Chinese firm–product data (2000–2007) and thermal inversion as an instrumental variable. We find that a 1% increase in PM2.5 reduces export values by 0.65%, with the 28% pollution increase over our sample period reducing overall exports by 18.30%. We identify two channels through which pollution affects exports: Pollution reduces labor productivity (0.83% decrease per 1% increase in PM2.5) and trigger environmental regulations (lowering exports by 20%–25% based on spatial regression discontinuity estimates). The effects are stronger for low-productivity firms and labor-intensive industries. Our results highlight significant economic costs of air pollution as it reduces international trade.