Regional Heterogeneity in Environmental Quality: The Role of Firm Production Networks and Trade

We study how globalization shapes regional environmental accounts by developing a general equilibrium model capturing the effect of trade liberalization on the spatial distribution of firms and regional disparities in environmental quality within countries in a setting of multistage firm-to-firm trade. Reductions in trade costs cause more firms to collocate in regions with better access to foreign markets. Consequently, more pollution is generated in such regions while spatial selection and outsourcing activities through endogenously established production networks lower these regions’ emission intensities. Additionally, we establish that reductions in international trade costs give rise to a positive environmental spatial spillover effect mediated through networks, which reduces disparities in emission intensities between regions with differential access to foreign markets. Our findings thus highlight the role of supply networks between firms as a key factor linking globalization and differences in regional environmental quality.