Trade, financial development and the environment: analysis of BRI countries having direct connectivity with China

The number of countries participating in China’s Belt and Road Initiative (BRI) has been increasing since its official launch in 2013. Although the number of BRI participating countries has reached 145, only some are directly connected with China through land, sea, and other trade routes developed under the BRI project. Because of their direct links with China, these countries have significantly increased their trade with China. In addition to increased trade, these countries have also been undergoing financial development (FD). Since trade and financial development are closely related to the production of goods and services, therefore; both of these are expected to have environmental impact. The current study examines the effect of trade and FD on carbon dioxide (CO2) emissions in selected BRI countries for the period 2001–2019. This study follows a proper estimation strategy based on preliminary tests, cointegration analysis, and coefficient estimation. The results suggest that trade between China and selected BRI countries has no significant effect on CO2 emissions, whereas, financial development has significantly increased CO2 emissions in these countries. Moreover, BRI countries’ imports from China significantly reduce CO2 emissions, whereas their exports to China significantly increase CO2 emission in the BRI countries. The policy recommendations suggest that these BRI countries should leverage their direct connections with China for technology transfer. By utilizing environmentally friendly technology, these countries could also reduce the pollution associated with their exports to China and the rest of the world. Furthermore, their financial sectors should divert funds to industries advancing trade in environmental rather than pollution-intensive goods.