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

Abstract

We study the effectiveness and distributional effects of an intranational trade policy: city-level import restrictions on used vehicles in China. Using a unique dataset on used vehicle trade across Chinese cities and a difference-in-differences design based on staggered policy rollout, we find that these restrictions substantially reduce net imports of used vehicles but produce little improvement in local air quality. Restrictions are positively associated across space, sustaining an inefficient environmental federalism. We develop and quantify a spatial general equilibrium model to evaluate the economic and environmental effects of the trade restrictions. The forgone gains from trade substantially exceed any environmental benefits.