Trade-linked pandemic, enforcement gap, and pollution

Abstract

This paper theoretically and empirically investigates the economic and environmental impact of the global COVID-19 pandemic propagated through trade linkages. Exploiting variation in country-month-specific coronavirus infection rates and heterogeneity in Chinese counties' pre-existing trade networks, we estimate a significant negative effect of foreign trading partners' coronavirus infection rate on Chinese counties' trade volumes and economic output, especially among counties specializing in producing non-stay-at-home and non-medical goods. However, counter-intuitively, the negative output effect of trade contraction during the pandemic is not accompanied by a corresponding decline in pollutant emission or improvement in air quality among Chinese counties. We show evidence that the non-effect of trade contraction on the environment arises because local governments, especially those not well monitored by central government on environmental indicators or facing a less binding environmental target, have intentionally relaxed their environmental regulation enforcement on local firms to spur production and mitigate the negative economic shock of the global trade contraction on local GDP during the pandemic.