The unintended consequences of trade protection on the environment

Abstract

Using the 2018–2019 US–China trade war as a quasi-natural experiment, we analyze how rising trade barriers undermine environmental regulation in China through political incentives. Through a difference-in-differences strategy exploiting variation in Chinese prefecture-level exposure to US tariffs, we find more exposed areas significantly reduce environmental regulation emphasis and raise pollution limits. This response operates through political incentives: connected Chinese officials more readily relax standards, and those who do gain higher promotion probability in exposed areas. Using satellite data and instrumental variables, we show this deregulation increased CO${}_2$ emissions in China. While finding no significant effects on aggregate economic activity, firm-level analysis reveals environmental deregulation helped sustain production and employment, but only in prefectures implementing substantial regulatory changes. Our results provide first evidence that protectionist policies targeting countries with weak environmental institutions may trigger a “race to the bottom” in regulatory standards.