How Does Trade Policy Uncertainty Affect Firms’ Pollution Emissions? Theory and Evidence from China

In the context of deglobalization and Sino-US trade friction, trade policy uncertainty significantly increases. How does trade policy uncertainty affect firms’ pollution emissions? In this study, we incorporate energy, pollution and trade policy uncertainty into Melitz’s (2003) framework, and construct a theoretical model to reveal the relationship between trade policy uncertainty and pollution emissions. Then, we employ the event that the United States granted permanent normal trade relationship (PNTR) to China as a quasi-natural experiment. We employ difference-indifference-in-difference (DDD) model and the data of Chinese manufacturing firms for empirical analysis. Our results indicate that the decrease in trade policy uncertainty can improve environmental performance. These effects are greater for firms with higher export intensity and firms exporting to the United States. Mechanism analysis shows that the decrease in trade policy uncertainty reduces emission intensity mainly by improving energy efficiency rather than improving abatement technology and optimizing energy structure.