Import Competition and Environmental Performance: Evidence from Mexican Plant-level and Satellite Imagery Data
We investigate the impact of international trade, in particular import competition, on the environment. We tackle this question from a new perspective, i.e., whether trade liberalization affects production plants' environmental performance by changing incentives of firms to undertake two types of investment: investment in the environment and in efficient energy use, and investment in technology in general. Identifying such effects empirically has been challenging. Not only is it unusual to obtain direct information on plants' environmental performance as well as plants' effort towards environmental protection; it is also difficult to find an exogenous source of variation in tariffs on goods produced by plants. We overcome these difficulties by constructing a unique combination of Mexican plant-level data and satellite imagery data, thus providing evidence of the effects of import competition on three direct measures: energy efficiency in terms of electricity use; investment at the plant level in efficient energy and the environment; and measures of pollution around plants' geographic location. We use tariff changes due to free trade agreements as shocks to import competition, which are arguably less endogenous than unilateral tariff reduction and have been shown to have no systematic correlation with initial plant-level characteristics. The key finding is that the reduction of tariffs on goods produced by Mexican plants induced them to increase efficiency in energy use, thus allowing them to reduce pollution and in turn also reduce direct investment in efficient energy and environmental protection. The results suggest that even when detailed data on environmental effort at the plant level are available, caution should be taken when trying to measure the effects of openness to trade on environmental performance, as trade is also likely to change the firms' incentive to invest in technology in general, which may indirectly be more environmentally friendly.
|Date of creation:||2011|
|Date of revision:|
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