Trade and Foreign Investment Can Benefit Environment in China

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Ka Zeng, professor of political science and director of the Asian studies program at the University of Arkansas.

FAYETTEVILLE, Ark. – Trade and foreign direct investment can have a positive effect on the serious environmental degradation confronting China, according to political scientist Ka Zeng at the University of Arkansas.

In their book Greening China: The Benefits of Trade and Foreign Direct Investment, Zeng and colleague Joshua Eastin explore the influence of international economic integration on the environment in China. Their empirical results, derived from both quantitative and qualitative analyses, point toward a conclusion that surprised Zeng, who had not expected to see such a strong beneficial effect of trade and foreign direct investment on the environment.

 “Chinese provinces that are move heavily embedded in global trade and production networks tend to have more sound environmental conditions,” the researchers wrote.

However, not all foreign trade or direct investment has an equal impact. It matters who the trading partner is and where the foreign direct investment originates.

 “Chinese provinces that either export to or receive most of their foreign investment from countries with more stringent environmental standards are also more likely to exhibit superior environmental performance,” Zeng and Eastin wrote.

Further, the researchers noted, “businesses from developing countries with lax environmental regulations may pose the greatest threat to Chinese environmental governance,” as they found in their case study of an Indonesian-owned pulp and paper plant in China.

The researchers examined two common explanations for the levels of pollution in China and developing countries, the “pollution haven” and the “race to the bottom” hypotheses. The pollution haven hypothesis contends that foreign investors motivated by cost savings seek out pollution havens to establish production operations, creating a vicious circle of diminishing regulation and increasing pollution. The researchers found, however, that this dynamic does not apply to China. Similarly, the notion that developing countries compete with each other in a race to the bottom did not hold true.

Foreign businesses operating in China, Zeng said, increasingly require that Chinese subsidiaries comply with environmental practices mandated by their country of origin or by international certification organizations. Additionally, the implementation of “green” tariffs by importing countries encourages Chinese exporting firms to improve their own environmental standards.

The researchers suggest that if trade and foreign investment are not responsible for China’s environmental problems, then “it may be necessary to strengthen domestic environmental governance in China by expanding the participation of public and private actions in the environmental policy process.”

Zeng is professor of political science and director of the Asian studies program in the J. William Fulbright College of Arts and Sciences at the University of Arkansas. Eastin earned his master’s degree at the University of Arkansas and is a doctoral candidate at the University of Washington. Greening China: the Benefits of Trade and Foreign Direct Investment is published by the University of Michigan Press as part of the series Michigan Studies in International Political Economy.