#8 - Dr Lorenzo Trimarchi - How the 2018 U.S.– China Trade War Increased Air Pollution and CO2 Emissions in China
Outline
Introduction
Transcript
1. Introduction
In this episode, I am joined by Professor Dr. Lorenzo Trimarchi to discuss his paper "The Unintended Consequences of Trade Protection on the Environment" in the Journal of Development Economics.
We discuss how how the 2018 US-China trade war triggered unexpected environmental consequences when Chinese officials relaxed pollution standards to
Topics with time-stamps:
* A puzzling observation: Pollution went up after the Trade War [1:28]
* 3 Measures of Environmental Stringency [6:33]
* Chinese Political Economy and Politician's Promotion Criteria [11:50]
* Trade-offs Between Growth and Environment [19:46]
* Younger politicians Were More Likely to Relax Environmental Standards [20:30]
* Weak Effects of Environmental Regulation on Economic Performance [24:30]
* The US-China Trade War Explained [28:30]
* The Story of the Targeted Retaliatory Tariffs from China [36:40]
* Chinese Policy Experimentation & A Positive Take-away [38:40
* Implications for EU Carbon Border Tax & Uniform Tariffs [41:30]
* Future Research on Climate Politics [46:08]
counter economic pressure from tariffs.
2. Transcript
Introduction Interview
Arvid Viaene: So, hi and welcome to another episode of Climate Economics with me, your host, Arvid Viaene. And today I have the pleasure of talking to Professor Lorenzo Trimarchi , an economist who is doing exciting research at the intersection of trade and the environment. And he recently published a paper in the Journal of Development Economics, on the US-China trade war of 2018 called the “Unintended consequences of trade protection on the environment”. And he shows that a trade war can lead to negative consequences for the environment, and which we'll discuss extensively in this episode. And I think there's a lot to be learned from that paper, given that the current US administration has been quite active in not only threatening to raise tariffs but also executing on that threat.
So my guest is Lorenzo Trimarchi, who is an associate professor of economics at the University de Namur in Belgium. He holds a PhD in economics from the European Center for Advanced Research in Economics and Statistics of the Université Libre de Bruxelles. So in some ways, this is a hometown game because he's in Belgium. And his research interests are international trade, political economy, banking and corporate finance. So Lorenzo, welcome to the podcast.
Lorenzo Trimarchi: Thank you very much, Arvid. Thank you for inviting me. Sounds a fantastic project. I'm very happy to participate.
General Introduction to the Paper - Counter-intuitive: Air Pollution and CO2 Went Up following the Trade War
Arvid Viaene: Thank you very much. And as I said in the introduction, I'm very excited to talk to you because I think there's a lot to be learned from your paper. And so I was thinking to start off, could you just give us a general overview of your paper and what you were trying to do?
Lorenzo Trimarchi: Thank you, Arvid, for the invitation again. And this is a project that we started years ago, joined with Taipeng Li, Rui Xie, and Guohao Yang. And this is a project in at the intersection between international trade and environmental economics. And in this project, we try to understand what the impact is of the trade war on environmental regulation in China. But I want to tell you a bit about the story of the project, to help you understand how the project was born and what the reasoning was behind our research plan. So the project started in January 2021, Guahao started to work on a simpler research line with the Taipeng and Rui, in which they were just saying: there is a general literature on the impact of trade policy on the environment. And there is the famous paper of Grossman and Kruger about the cost of NAFTA for the environment.
So starting from this very standard international trade and environment question, Guahao, Taipeng and Rui were running regressions investigating the impact of the trade world on pollution. And this preliminary evidence and surprise was pointing at the trade world triggering an increase in pollution in China.
Why is that surprising? Because as a trade economist, we tend to think about tariff as mainly as a negative income shock, especially for developing countries. So we expect, okay, China is a country heavily specialized in the manufacturing. If we give a large trade shock, we expect China to reduce income and therefore to decrease pollution. And that's the prior my co-authors had at the beginning. And this was also supported from some preliminary evidence. So on the economic side, by Beijing Li and Devin Shore show in their QJE paper that the trade war was a negative economic shock for China.
So for us this was absolutely puzzling and we were trying to come up with different explanations of how this was possible, investigating all the three channels under which trade economists think about the relationship between trade and the environment, that is the scale effect, so the impact, this income effect that we say the tariff should have a negative impact on pollution because we decrease the scale of production.
So take the composition effect: maybe China, because tariffs are somehow disproportionately accounting for polluting the polluted products, China changed the product span and they produced more polluted products. And the third is the famous regulatory effect. And through discussion with my co-authors, we started to think this may be the channel, also because the general discussion around the world, if you remember the time, we are speaking about 2021, we are in the aftermath of COVID, after we had the Russian aggression to Ukraine, and we observed several reversals of historical events and environmental policies around the world. Iincluding if you think to Germany, we had this big case of a socialist and the Green Coalition that decided to open again coal plants in Germany and we started to think to this idea, maybe the government reacted to shape by changing regulation.
And together with my co-author, and I have to give especially credit to my co-author for this massive data collection on environmental regulation in China, we started to investigate if the trade war had an effect on environmental regulation.. And the answer is yes. This is the most robust part of our paper. So environmental regulation seems to be affected by the trade war in a way that the trade war induced an easing in environmental regulation for China. So this is the first big result. A negative shock in trade policy seems to have negative effect on environmental.
Arvid Viaene: So the first result is because there's tariffs, then the regulators make it easier for companies to comply or they lose lower the standards and that leads to the increase in pollution.
Lorenzo Trimarchi: Exactly, exactly. That's what we measure, because indeed that's the way we measure the change in environmental regulation. With my co-authors we collected three main measures. The first, if you want, is a more of political objective related measure, is by doing a machine learning technique, we went through all the prefectures, our analysis is at prefecture level, we went through all the prefectures annual reports, so those are official documents,
By the local Chinese Communist Party, in which the Chinese Communist Party explain their policy objective for the next year. So those are a very important. And we will discuss little about the Chinese political economy, but for the way the Chinese political economy works, those are important documents because
Arvid Viaene: Yeah, I can imagine.
Lorenzo Trimarchi: So this is the first source, so we tried to come up with an index of but environmental stringency of environmental policy. Of course, those are words, so we needed to collect the complementary information. And the first one, and this is a unique data set to the second one, we collected using something similar to the FOIA request, the Freedom of Information Act request that is in the United States. It’s something surprising, at least for me, but you have a similar type of mechanism in China in which a Chinese citizens can ask to the government, please, for research purposes, tell us what has been the policy in this area. And the fortunately enough, many prefectures answered to us
Arvid Viaene: I was surprised by that, and for those listeners in Europe, the Freedom of Information Act is something in the US as where you can ask for information from the government and they have to give it to you. So it’s interesting that there's something similar because it.
Lorenzo Trimarchi: There is something similar. Then I don't because I'm using the Freedom of Information Act for the US myself for another project, and I don't know if the level of compliance is comparable to what we have in Europe, in the United States.
But on our side, we were happy to see that there was cooperation by local government authorities that they were providing us clearly didn't get the coverage of 100% of the sample also because it is there is a manual data collection component because you need to physically write to all of them and clearly they need to reply to you.
Arvid Viaene: What was your sample then?
Lorenzo Trimarchi: Our sample, it changed by measure to measure. So for our main measure, that is the annual prefecture reports, is 290 prefectures from the 330. Because all the prefectures are assumed to release these annual reports. We have a period from 2013 to 2021.
Arvid Viaene: So this is a huge data set. And I think that's one of the amazing things is the data set, because it sounds you've just got most of China. Is that correct?
Lorenzo Trimarchi: Absolutely, this is most of China. , we might miss some more rural prefectures, some prefectures some mountain area. But if you see there is a map with with which we plot the data and the appendix, and there you can see that and fundamentally the region with most of the production are there. So we can fairly say we get at least a representative sample of the Chinese population and the Chinese production. That's what we care about. We want to capture where the economy is produced.
Arvid Viaene: Exactly. So you I think you had, you said you had three measures. So there's the text, there's this CO2 and PM2.5 of air pollution.
Lorenzo Trimarchi: Yes. And then we have a third one that are the environmental actions.
Arvid Viaene: Yeah.
Lorenzo Trimarchi: So this is a data set collected by the Beijing Law School and this dataset covers all sorts of penalty actions, all sorts of government fine intervention, fines against polluting firms. The third dataset must be interpreted with the caveat that if we show that the trade war induced a decline in penalty, you can interpret this as either less enforcement, either more compliance,
So since we cannot exclude the second, we use it as a robustness check because clearly we have a measurement problem there. But if you take the sum of the evidence, I think they all point in the same direction and this is quite reassuring, I think.
Arvid Viaene: Got it. So thanks for that. And then I we got deeper into the measurement, which I think you and your co-authors should give full credit for because the collection of data is tremendous. And because I think in you said you were going to get to the first part and then I interrupted you and then you were going to continue with this some second,
Lorenzo Trimarchi: Yeah, we saw this on emission and then we thought about regulation and then and then we found this effect on regulation.
Arvid Viaene: Then, I think it might be useful also for the listeners to understand more how the Chinese prefectures government works and what promotion criteria are. Because generally here, it's the major who gets elected in Europe and then there is some enforcement elections. So on this prefecture level, how does it work? And why were potentially politicians sensitive to relaxing environmental regulations, given the objective criteria that they had? So can you expand on that?
Lorenzo Trimarchi: Of course, of course. So one of I think of the cool part of the interesting part of this project, more interesting part of this project is to learn a lot about the Chinese political economy. Indeed, in our political system, in our democratic political system, mayors are appointed by electors. And the way they should establish politics, their policies,
It is by having some electoral platform upon which they are voted for. And the and for China, this is not just there, right? Because the the mayors or the local party secretary, they are appointed by higher level of their political power in China.
So, but I think that, I'm not the first to, we are not the first to study the Chinese political economy. There is a huge literature in the political economy to try to understand how bureaucracy and how political power is organized in China. And I think that the Chinese Communist Party was facing a big problem, especially in the aftermath of the collapse of the Soviet Union, the Chinese Communist Party changed a lot compared to the way it was organized in the 70s.
So clearly, they observed the collapse of the Soviet Union, and they observed that one of the reasons the Soviet Union collapsed was because there was a lack of incentives through the hierarchy.
And then the Chinese Communist Party started to think, how we can introduce incentives for performance within the party, And de facto, what I think is fascinating about the Chinese Communist Party is that more they are more organized like what we would consider a private corporation than a public administration board in Europe, because fundamentally they have these public officials that are more corporate executives with a performance contract. And they all compete in a tournament under which they will be selected for a higher level of power, based on some performance indicator established by the hierarchy. That can be the central hierarchy, it can be just a higher political hierarchy and geographical level, but it's really top-down. And in the 90s, the priority for the Chinese Communist Party was economic growth, as we know. So the Chinese Communist Party was very focused on growth.
Then in the 2000s, starting lady from 2008, we all remember with the Beijing Olympic Games, the pressure that the Chinese citizens were made on government to fight pollution. And in the 2010 year, we had this war on pollution declared by the Chinese government, and then environmental standards became more and more important for promotion.
So politicians care about career, and they know there are some objective indicators that will determine their career. And let's say that up to the trade war, both gdp and GDP growth and environmental goals, they were equally important.
Arvid Viaene: Thank you.
Lorenzo Trimarchi: That's what the previous papers established. I think what is important in our paper is that we say but now that the Chinese government for the first time probably since the 80s is facing a real economic shock, something changed and this shifted attention towards the economic goals versus environmental goals and because there is a trade-off between the two and maybe we want to talk about that later
Arvid Viaene: Exactly. So they are facing promotion criteria. I think it's actually a nice way to call it a tournament, they're competing with each other to get a promotion. They've got two goals, which is economic growth and then limiting air pollution. But then tariffs hit and there's a real economic shock and it seems that the person deciding the tournament is, now we're going to put it higher weight again on economic growth potentially.
Trade-offs between Economic growth and Air Pollution
Arvid Viaene: So, because then maybe can talk about why there's a tradeoff there, because it is not always recognized that there can a tradeoff between growth and and air pollution.
Lorenzo Trimarchi: Yes, another thing, for me this paper was super interesting. I learned a lot myself by working with my co-authors. I'm by region more of a political economy guy, and Guao is a trade and environment person, and Taipeng, we are very interested in the environment, so I had to learn a lot by myself as well. And one thing I was convinced of is that there is almost no trade-off between environmental regulation and productivity or efficiency. If we do green investment, this is good for productivity always. But it's actually not true because it depends from the nature of the firm. If you don't want to pollute, maybe you should make some investment in a technology that allow you to pollute less, and this can be costly for the firm, and especially in a period in which the margin might be less because you are under a trade war, this might be particularly important for a policymaker. You might want to relax environmental regulation. Not because you pollution per se, but because you want to somehow affect the cost function of the firm by decreasing the cost of production and hopefully be able still to be active on the export markets.
Arvid Viaene: Exactly. And I think that's, you even have this great quote in the beginning of your paper by literally a Chinese official saying, now that we have this trade war, we don't think, in order to keep growing at the same pace, we'll probably have to go back on some of of our environmental goals, which I think is was a very nice quote that I'm I'm going to put in the transcript in the show notes, because I think it's a very nice quote to illustrate this trade-off.
Because it's not only economic growth, I get the sense, it's also this more general social stability. And if firms were to shut down, that would also mean the loss of jobs. So it is also this social stability type of promotion criteria.
Lorenzo Trimarchi: Absolutely. This is, again, not a completely new idea. , this was is a beautiful book by the Nobel Prize of this year, so it's always a good moment to mention Daron Acemoglu and James Robinson. And there is a book about dictatorship. Democracy and dictatorship, which they speak, about the fact that all political systems, all political leaders, they want to survive a revolution, which they call revolution constraint.
And therefore, they care about stability. Eventually, in an autocratic system, this stability concern gets larger, but we can fairly say this is true for all political systems, also in Europe. Which one among us would think that the Green Party in Germany is against environmental goals? None of us. But still, under economic pressure, they open coal plants again. Or in Belgium, which I'm not following closely, but the Belgian politics, I perceive the attention towards environmental goal is declining towards the last years. And this is probably due to the fact that families are struggling, many families are struggling under the current economic condition. This is something we should think more about.
Arvid Viaene: I think in Europe, you see that the trade wars, now that there's extra tariffs and people get much worried about their jobs, the livelihood, firms shutting down and then, generally still environmental regulations are costly. So, there is some trade off there that you want to have. So you've done a lot of regression and robustness exercises, and this is, I take them at face value.
Why younger politicians might be more willing to relax environmental standards
Arvid Viaene: So, but one thing and I also observed is that you mentioned that some politicians, especially younger politicians might be more willing to make that trade-off of relaxing environmental regulations to promote some more competitiveness. Could you speak to that what was going on or why that might be the case?
Lorenzo Trimarchi: Absolutely. This is based again on the political economy of China. And still, when we think about an autocracy, we have to think about politicians as a person that, overall, fundamentally, faces a trade-off. A politician has a career concern; he wants to be promoted in the hierarchy, but they still care about their constituency. And I think environmental economics is a field in economics in which the welfare function is quite easy. We all benefit from a clean environment, and I think any politician in the world knows that for his or her own citizen having less pollution is a good thing for their welfare. So this is also the case in China. But the idea is that if you are younger, for instance, maybe for your career concerns are more important and you mightbe tempted to disregard more environmental regulations under pressure compared to GDP growth because you hope to be promoted.
And the same is for maybe a recently appointed mayor, but in reality, what we find as a super robust [result] is the role of patronage, which is also quite important in the Chinese political economy literature.
So what we find is when we all raise these three characteristics, what we find be the most relevant is being within the network of your provincial leader makes you more likely to implement this policy. And we are not sure in the paper, but we also collected the data on the provincial annual report work and we have seen that somehow there's been this shift also at the upper level. We have seen this at the provincial level, and very likely probably if you have a connection with the provincial leader, you want to please the your province leader because you think it will make more likely that somehow you will enter in the leadership of a province in future, you will have appointed to the Politburo, this type of partner that in our democratic.
Do we have this type of measure in our democratic system, this type of linkage in our democratic system? Yes, but they are less important, because in our system, what matters are votes, while in China what matters is being appointed. So this gives different incentives. Probably we can get same results, but we have different incentives.
Arvid Viaene: So if you have a clear link to the province or higher up, then you're more likely to make sure you meet the criteria. Then, someone who's less well-connected, maybe, their prospect for a career is maybe not as good. So they care maybe a little bit less about, meeting all the criteria. And it's as you say, this is one of the things I really learned about the paper is here, a mayor of a city it really is judged by the electorate directly on the trade-off. But there it's almost, you get judged by the people higher up in the hierarchy. So it is a bit like a company in that sense that there's performance criteria that you get judged on. And then there is a scorecard.
Relaxing of Chinese Environmental Standards Had a Surprisingly Weak Impact on Competitiveness
Arvid Viaene: So we've talked about, initially about that your co-authors and you had a different prior going into the research. Was there also so things that you found in the data along the way that surprised you?
Lorenzo Trimarchi: I think something that surprised me was the weak effect on the economic performance. Because, okay, there is a literature that says that regulation should affect productivity. And they changed the regulation. And somehow we hoped to find that this would change economic growth. But in reality, we don't find this large effect on the economic side. We find some effect for prefectures that eased environmental regulation a lot, then whether on the welfare point of view easing a lot, this shows you this entire saidures you that still a the Chinese Communist Party was facing trade-off and they were taking account trade-off, so not all prefector were easing environmentally we relaxing environmental by a lot, some did, for this few one we find some economic gains,
But for us, it was surprising to see that the gains were limited. So overall, if easing environmental regulation to counter-tariff might have seemed a good idea, I think what we learn that the effect was probably minimal. Or maybe the welfare costs are too high.
Arvid Viaene: So, there was a very observable effect on air pollution and CO2 emissions, but the impact on economic performance wasn't that big. Which in some sense would then make you think they score worse than their counterfactual counterpart who didn't relax the environmental regulations.
Lorenzo Trimarchi: Exactly. This is true. You mean the economic effect, right? Could they have gone worse?
Arvid Viaene: But like if we have the older politician with the younger politician and otherwise two similar provinces and the younger politician thinks I'm going to promote economic activity, but the result is that he didn't promote economic activity that much, but he now has worse air pollution.
Lorenzo Trimarchi: Exactly, indeed. That's what probably he found. Because I think of this patronage effect, they were still more likely to be promoted. So what we find that is interesting is that for mayors that eased deregulation, they were more likely to be promoted after the trade war, And this is quite a striking effect. Maybe easily. I didn't think about that systematically, but maybe it's linked with this pattern range effect that we found that is most concentrated by connected the mayors, our a result of regulation. So it seems that maybe, okay, you are in the network of the provincial leader. You follow the structure and then you get rewarded with the promotion, regardless of the efficiency of the measures taken in place.
Arvid Viaene: Which brings us to the point that sometimes, because I've been in environmental economics a lot, that sometimes when you need to make meet these air pollution standards, like PM 2.5, you install something. And then it drives up some costs. But uninstalling it is quite hard. So it's almost once you've installed it, it doesn't make sense to uninstall it as much, even though you've now lowered the pollution. And if you were to have the choice, you wouldn't do it again.
The U.S.-China Trade War of 2018
Arvid Viaene: Could you speak a little bit more about the trade war that happened? Because we've been talking a lot about the impact that China had, it happened in 2010. So could just maybe then provide some information to the background of what the trade war was about.
Lorenzo Trimarchi: Sure. The trade war, in 2000, we know that now we are living in a period of history in which we are all caring about the trade war because Donald Trump is also targeting European products and other products worldwide, and the European Union now struck a deal, and this was with the with the United States, this was involving environmental aspects as well.
The United Trade War, and especially the confrontation between US-China has deeper roots. So in 2016, Donald Trump won the election on a platform, fundamentally complaining about WTO and the World Trade Organization and the free trade policy of his predecessors before him. And I think at that time, I remember the environment. We were probably not taking these promises seriously that much, but actually we should have taken President Trump seriously. And in February 2018, Donald Trump launched a full trade war against China. This was unprecedented.
And it was unprecedented both for the scale, so fundamentally all manufacturing sectors to some extent were covered by the Trump tariff in 2018. And it was unprecedented for the tools Trump used. So Trump decided, I don't care about World Trade Organization rules. I think there is a national security emergency. We will adopt a new tariff. And this constitutes an interesting shock for us as a trade economist thinking about the environmental regulation in China.
Why? For several reasons. First, this was unexpected somehow in scale. Now we all know that this is real. We all know that this happened. But I remember very well the discussion in 2016, and I don't think many people were taking the threat of Trump seriously. Second I think what is a quite interesting for us is that there is a lot of heterogeneity in Chinese specialization industry specialization and this is what is giving us variation by the end of the day so fundamentally we use a bar what the economists call bartik research design so it is such design that takes a national level shock. These are the trump tariffs that affects equally all Chinese regions. But what it changed is the fact that the region regions are differently exposed to the tariff shock because they have a production specialization that differs from each other. So if I produce more relatively more steel and Trump puts a tariff that are higher on steel, now I will be more exposed than if I'm a prefecture that is producing more agricultural products that were not much covered by tariffs. So I'm less concerned about tariff this type of variation is what is really driving our identification strategy and that's what we exploited for analysis,
The size and impact of the 2016 U.S. Tariffs on the Chinese Economy
Arvid Viaene: I think it's a good point exactly that, 2016 was a different world. Maybe it wasn't just taken as seriously, whereas today it's much different. So what was the size of these tariffs?
Lorenzo Trimarchi: No thank you for the excellent question and indeed what probably most of people do not know because we think that now we are experiencing the most massive trade war, that also the first trade war was massive. And when you look at the period from July 2018 to September 2018, which is the month in which the Trump tariff reached their peak, we find that during the trade war, the U.S. imposed the tariff between 10 and 25 percent on around 200 billion worth of Chinese exports, And they affected almost 92% of Chinese exports in the industry. And to give you a sense of the size of the trade war, by September 2019 around 48% of Chinese exports were facing an increase in tariff, and these tariffs accounted for around 6% of Chinese GDP. So we are speaking about and massive shock to the Chinese economy.
Arvid Viaene: You said that the tariffs amounted to 6% of Chinese GDP.
Lorenzo Trimarchi: Yes.
Arvid Viaene: That's a crazy statistic. That puts it in perspective for sure.
Lorenzo Trimarchi: Yeah, no, this is big. This was big. We are talking about a lot of [impact]. The Trump tariff for China was a big shock. But I think because also because as economists we tend to study more the US economy that is a relatively closed economy. So do you have this bias. But trade is important for many countries. Goes
Arvid Viaene: I still remember at the University of Chicago when I was there and one of the professors , that's why we don't have very good trade, international trade economists in the US because and it doesn't matter to the US. Of course, it's not true, but he was, he was semi joking. But especially in the 70s and the 80s that most of these, the monetary policy would trade and interest rates. They're all international economists doing it..
Lorenzo Trimarchi: And it's one reason why in Belgium we care a lot about trade because Belgium is one of the most open economy in the world that they care a lot.
Arvid Viaene: So did this trade war end? Were those tariffs kept in place? Were they diminished at some point? How did the tariffs change over time?
Lorenzo Trimarchi: This is what people underestimate. Basically the trade war never ended. Somehow, I think they were partially removed by Joe Biden, if I recall correctly, in the aftermath of the Russian aggression to Ukraine during the inflationary spike. But in reality, this is a broader discussion about the trade war. But in reality, I don't know if I would conclude the confrontation between the U.S. And China is particularly driven by Donald Trump. I think what is different between the Republican and the Democrats is the trust towards multilateral organization, which is crucial also for our discussion on trade.
Retaliatory Tariffs from China to the US – hitting the Trump electorate
Arvid Viaene: I still want to pick out one thing of your paper, which is you've also studied the retaliatory tariffs from China to the US. But there you found no impact, I think, on these emissions. Could you speak to that?
Lorenzo Trimarchi: It's a good point. Fundamentally, these type of regressions are addressing, if you want, an omitted variable problem. There were also retaliatory tariff from China to the US. So maybe you can expect the reverse effect, because there China puts protection. This is a positive income shock. And then this will change regulation. And there we find no effect.
For me, it's unsurprising in the sense that if you think what the retaliatory tariffs were about, these were mainly soybeans and agricultural products. So this is, I think, the reason. So they were not really targeting polluted industry. While Trump was targeting steel, was targeting washing machines, solar panels produced. Those are energy-intensive industries. And under which the Chinese government might think rationally, okay, if I manipulate the environmental policy, I might change the path of growth for firms in these sectors.
Arvid Viaene: Yeah, that makes sense. I actually remember now because it was a big thing in America because the soybeans were, soybean farmers are a big lobby group.
Lorenzo Trimarchi: Yeah, of course. And there's beautiful paper in an economic journal by Timo Fetzer and Carlo Schwarz on the Economic Journal not showing on actually how the Chinese government were smart in targeting retaliatory products because they were targeting actually constituencies that massively voted for Trump. And usually, agricultural districts in the south of the United States are usually Republican areas. And not surprising, the Chinese were targeting these products.
Arvid Viaene: Yeah, I was in the US at the time and that definitely caught the attention for sure. I think the other thing why the size of the tariffs and the way you mentioned it is I think it helps me understand why there was an and such a re-
Lorenzo Trimarchi: Thank
Arvid Viaene: Why there was the effects that you saw in the paper. Because sometimes there are macroeconomic things that happen in productivity or growth slows down a bit or there's some, these things. But this is such a big shock that you would actually expect people to change. Because to some more minor macroeconomic shocks, you would not expect the Chinese politburo to redesign promotion criteria. Because it would just create a lot of uncertainty and people would be like , okay, what do I have to aim for now? But in response to a big shock that, you would, then it's more clear that there's some reallocation happening maybe among objectives.
Lorenzo Trimarchi: Of course, a maybe some experimentation. It didn't work for the economy, but they were trying several policy tools. We know that they were implementing massive subsidies. They were using monetary policy. So, I don't claim that environmental regulation was the only and, maybe not the main tool, in the end of the Chinese government to tackle this. We never pretended in our paper that it was. It was one of the tools and probably was not so effective, so that's what we learned in our paper
Arvid Viaene: Okay, well, that's actually a positive takeaway. I didn't quite get that yet this is a positive takeaway, that they weren't so effective in promoting [the economy through deregulation].
Lorenzo Trimarchi: It's something we should learn as a European as well. Now that we are under a trade war and we think about, there was there were discussion about the Competitive Compass in the European Parliament around one month ago in which President von der Leyen and the College of Commissioners decided to give less importance to environmental goals in their competitive compass, in their competitive goals.
Now I don't know, even in this setting, I don't know how much this will translate in concrete measures. Also because I didn't follow European legislation so strictly. But there is something to learn, right? If we stop caring about the environment, it's not that magically the economy will grow. Why? Because I think one of the strongest things we learn in international trade is that comparative advantage applies. So probably there are forced market forces that are so strong that the environmental regulation will not be able to change unless you do probably massive change in environmental regulation. And I don't deny this will have an effect, but you need a massive change in environmental regulation.
Arvid Viaene: That maybe brings me to another question. In the conclusion of your paper, you actually mentioned two potential takeaways. So you mentioned that your results cast doubt on using trade policies to address environmental problems such as the EU carbon border tax. And you also mentioned this Shapiro 2020 paper. Could you maybe speak to that, to what you meant with that comment?
Lorenzo Trimarchi: Yeah, sure. There are two points to be made. In Brussels, there is a lot of enthusiasm around the carbon border tax because it's a way to say, oh look, we have our current goal for our foreign policies, the access to the single market. So if foreign firms want to access to the single market, they should enforce the same level of environmental regulation as we do. Otherwise, they will pay a tariff. And I think our paper does not disqualify, does not invalidate this European policy approach, but just want to induce people to think more carefully about the spillover of increasing tariffs, because by the end, carbon tax is a tariff in developing countries or countries with weaker environmental institutions.
Because their reaction might be: if I need to pay a tariff anyhow, why not relax environmental regulation today to be able to enjoy growth, because anyhow the European will make me pay. So I think that we should more carefully think about the political economy in our partners when we set the trade policy, because what we learned in the Chinese case, that many developing countries at some point. If we see the Chinese case before the trade war, in the moment in which many developing countries will grow, we will put pressure for a green economy policy anyhow.
So I would be negative about trade as a way to promote growth and to promote better environmental standards. But I wouldn’t say either that this would be completely useless. I think as economists we should be always careful in drawing policy conclusion. But still I think our paper says it deserves double thinking on this issue.
Implicit subsidies to CO2 emissions due to Trade Tariffs
And then getting to the great contribution of Shapiro, which I think is a fantastic paper. I advise all graduate students to read the paper of Shapiro in QJE. Why I enjoyed the paper so much isbecause I think the author of this paper took a stylized fact we all know in international trade. Namely, that the input products enjoy a lower MFN tariffs compared to final goods. And then he took from the environmental economics literature the intuition that the input goods are also the more polluted goods. Then Shapiro in his paper makes the conclusion that we then are implicitly subsidising polluted products.
And this I found fantastic because those were two stylized facts that were there and this is how you are a great researcher because you had the two things known but then you put them together with great economics. And this is a fantastic paper, but I think it is the final part of his QJE-paper in the conclusion in his paper that he says: We should reform trade policy and we should increase tariffs on polluting products.
So if I understand this correctly, this is the proposal of Shapiro in QJE. And in this paper, in the conclusion, he himself says, there can be a political economy challenge that can be problematic. And I think our paper supports a bit this conclusion, and we believe, because, yes, it can be problematic if we start to go in world in which we increase tariffs.
Okay, yes, maybe the famous scale effect will be such that it maybe we'll produce less of these polluted products, but it's not straightforward, which will be the effect for regulators, and because there is still a demand for polluted products, and they might decide to act again on the cost function and to be competitive.
Arvid Viaene: Yeah. Awesome. Then maybe a final question is, has there been question that I haven't asked you? Is there something you want to talk about that I haven't asked you about that found important? Or is there something that?
Next Research Project
Lorenzo Trimarchi: I will do a small promotion for my next work in environmental economics. So this is, I think, a great idea to to conclude our interview. So I think this is a project I've always been interested in regarding political economy and the environment.
Because I think the biggest challenge for us, as I told you before, I think all politicians all over the world agree on the idea that a world that is cleaner is a better world. So I don't think any politician thinks it's good to pollute, it's good to live in in in a polluted world.
The point is the political economy. So is it, what are the incentives for politicians to enforce a environmental reform or greener policy. And now I'm happy to share that I'm working on an exciting new project with Alvaro Zuniga Cordero, who is a postdoc at the de Namur, and Juan Robalino from a University of Costa Rica, in which we ask a related question, but in this case for a democracy.
And what is the research question that we are trying to ask? Does climate change induce voters to vote more for green parties? And why we think it's relevant, because we believe there is a trade-off.
In a world in which climate change is active, we have more extreme weather events, and in this world, you might expect two things, we believe. One can be that when you meet a severe extreme weather event, I become more sensitive to climate issues, so I will vote more for green parties, or for parties that enforce green policies. On the other side, it may might an extreme weather event might be a negative economic shock for me, and as we observe in the recent populistic wave, you might be unhappy about the current parties that vote for populists, for parties that want to reverse climate policy.
We believe Costa Rica is an interesting setting for two reasons. One, Costa Rica is a country with enormous climate variability, and this will give us this type of geographical variation that we used in our China paper. And the other part of the Costa Rica project is that Álvaro Zúñiga Cordero, wo is my co-author in this project, collected a fantastic dataset in his JMP linking electoral data at a very granular level in Costa Rica, with employer-employee data. So I know in a constituency, the economic pattern, we know in a constituency, the economic story of a voter.
And somehow we can, at the macro level, see, first of all, how a climate shock affects voters, and second, test a potential mechanism. How the voters were affected by this climate shock. So I hope that we will get soon new results and we can speak together about these results in your podcast.
Arvid Viaene: I would be very excite, that sounds a really cool paper. And again, Costa Rica is a whole different setting with very finely tuned microdata it sounds. So I'm looking forward to that too already, Lorenzo. So thank you much for taking the time. I really, really appreciate. And thanks for coming on the podcast.
Lorenzo Trimarchi: Thank you, Arvid, and thank you for inviting me to this great initiative. We know need to know more about climate economics and what my colleagues around world are doing. So I hope you will continue to do this podcast. Thank you very much.
Arvid Viaene: Thank you.