Restricting Trade for the Environment? Evidence from Import Restrictions on Used Vehicles in China (Job Market Paper)

Abstract

Trade of dirty goods, such as used vehicles and waste, has increased dramatically over time. Some countries and regions impose trade restrictions to address the environmental concerns. However, the effectiveness and efficiency of such policies remain unclear. This paper examines the welfare effect of decentralized trade restrictions, taking into account interjurisdictional spillovers and strategic interactions in the context of intercity import restrictions on used vehicles within China. Leveraging comprehensive data on bilateral trade of vehicles across Chinese prefecture cities and the staggered rollout of import restrictions on used vehicles implemented by city governments, this paper finds that empirically, import restrictions reduce net imports of used vehicles, and cities’ import restrictions are strategic complements. To quantify the welfare effect, this paper builds a multi-sector multi-region structural trade model à la Armington and estimates key parameters of the model. Counterfactual simulations show that unilaterally restricting imports of used vehicles have two effects on welfare. It reduces gains from trade but can increase environmental benefits through two channels— reducing net imports and increasing scrappage. Restricting heavy-polluting vehicles makes some cities better off, especially lower income cities. However, these unilateral restrictions generate significant spillovers onto other cities and incentivize cities to adopt or tighten restrictions in response. The decentralized equilibrium is socially inefficient. A centralized policy to restrict used vehicle trading could increase national welfare gains by 26%. To put import restrictions into perspective, they can achieve 14% of emission reductions and 12% of welfare gains attainable under emission taxes.