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The Benefits of Trade and Foreign Direct Investment Greening China Greening China Michigan Studies in International Political Economy SERIES EDITORS: Edward Mansfield, Lisa Martin, and William Clark Michael J. Gilligan Empowering Exporters: Reciprocity, Delegation, and Collective Action in American Trade Policy Barry Eichengreen and Jeffry Frieden, Editors Forging an Integrated Europe Thomas H. Oatley Monetary Politics: Exchange Rate Cooperation in the European Union Robert Pahre Leading Questions: How Hegemony Affects the International Political Economy Andrew C. Sobel State Institutions, Private Incentives, Global Capital Roland Stephen Vehicle of Influence: Building a European Car Market William Bernhard Banking on Reform: Political Parties and Central Bank Independence in the Industrial Democracies William Roberts Clark Capitalism, Not Globalism: Capital Mobility, Central Bank Independence, and the Political Control of the Economy Edward D. Mansfield and Brian M. Pollins, Editors Economic Interdependence and International Conflict: New Perspectives on an Enduring Debate Kerry A. Chase Trading Blocs: States, Firms, and Regions in the World Economy David H. Bearce Monetary Divergence: Domestic Policy Autonomy in the Post–Bretton Woods Era Ka Zeng and Joshua Eastin Greening China: The Benefits of Trade and Foreign Direct Investment Greening China The Bene‹ts of Trade and Foreign Direct Investment ka zeng and joshua eastin The University of Michigan Press Ann Arbor Copyright © by the University of Michigan 2011 All rights reserved This book may not be reproduced, in whole or in part, including illustrations, in any form (beyond that copying permitted by Sections 107 and 108 of the U.S. Copyright Law and except by reviewers for the public press), without written permission from the publisher. Published in the United States of America by The University of Michigan Press Manufactured in the United States of America c Printed on acid-free paper 2014 2013 2012 2011 4 3 2 1 A CIP catalog record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Zeng, Ka, 1973– Greening China : the benefits of trade and foreign direct investment / Ka Zeng, Joshua Eastin. p. cm. — (Michigan studies in international political economy) Includes bibliographical references and index. isbn 978-0-472-11768-0 (hardback) — isbn 978-0-472-02710-1 (e-book) 1. Environmental policy—China. 2. China—Environmental conditions. 3. International trade. I. Eastin, Joshua. II. Title. ge190.c6z45 2011 333.720951—dc22 2011003378 For Fei and Ellen; For Allie Acknowledgments We have greatly bene‹ted from the comments and suggestions of many indi- viduals in the course of writing this book. We are especially indebted to Mar- garet Reid at the University of Arkansas for her encouragement and unwaver- ing support for this project. She has generously offered to read through earlier versions of the book manuscript and provided many valuable suggestions and criticisms that pushed us to think more critically about our conceptual frame- work and analytical approach. Her enthusiasm for the project gave us the much-needed con‹dence to bring the book to completion. We would also like to thank Todd Shields at the University of Arkansas for his help with methodological issues. In addition, Aseem Prakash and Susan Whiting at the University of Washington have offered advice which improved the analysis. Finally, we would like to thank the two anonymous referees for their con- structive comments and Melody Herr at the University of Michigan Press for her support of this project at various stages of the publication process. Contents chapter 1. Theoretical Contentions and Analytical Approaches 1 chapter 2. Debunking the “Pollution-Haven” and “Race-to-the-Bottom” Hypotheses 14 chapter 3. Environmental Pollution and Regulation in China 37 provincial-level analyses chapter 4. Pollution Havens and Racing to the Bottom: A Provincial-Level Analysis 65 chapter 5. Do Chinese Provinces “Trade Up” and “Invest Up”? 97 firm-level analyses chapter 6. How Do Firms Behave? Survey Evidence from Business Executives 117 chapter 7. Asia Pulp & Paper: Local Standards, World Markets, and Environmental Protection 143 chapter 8. Implications, Caveats, and Future Research Questions 170 notes 185 bibliography 211 index 229 chapter 1 Theoretical Contentions and Analytical Approaches The debate over the effects of trade liberalization and foreign direct investment (FDI), or economic “globalization,”on environmental protection has generated intense scrutiny from environmentalists, policymakers, and academics alike. On the one hand, many economists and globalization proponents contend that the economic gains captured from free trade and FDI offset environmental damage by increasing host-country wealth. In their view, increased wealth em- powers citizens and enables higher levels of domestic investment in environ- mental protection.1 On the other hand, environmentalists and trade critics ar- gue that a reduction of trade barriers and an increase in FDI should increase environmental pollution, especially in less-developed countries (LDCs) that lack the willingness or capacity to maintain stringent environmental regula- tion.2 They argue that in order to remain competitive in a global environment, developing-country governments have incentive to reduce environmental reg- ulatory standards to attract increased levels of foreign investment and maintain competitiveness in export markets. This process generates a “race to the bot- tom” (RTB) among political jurisdictions competing for investment and low- cost export production. Investors motivated by cost savings seek out these “pol- lution havens” (PH) to establish production operations, creating a vicious circle of diminishing regulation and increasing pollution. China is a key front in this debate. Yet, analysts have generated surprisingly little empirical evidence from China to inform it. It’s even more surprising given China’s phenomenal economic growth, its increasing integration into the global economy, and its ability to affect both the global ecology and global en- 2/greening china vironmental negotiations.3 This project seeks to ‹ll this lacuna through an ex- tensive, multimethod empirical examination of the effects of increasing trade and investment on the Chinese environment. Our results challenge both the pollution-haven and the race-to-the-bottom hypotheses. We ‹nd that foreign ‹rms do not seek out pollution havens in China. Nor do Chinese provinces lower environmental standards to attract for- eign investment. We ‹nd that trade can actually increase the ‹nancial incen- tives of export-oriented ‹rms to self-regulate environmental performance to developed-world regulatory standards in the mode of the California Effect.4 Further, we ‹nd that FDI from the developed world conveys superior regula- tory standards from parent company to subsidiary and facilitates the interna- tional diffusion and spillover of environmentally cleaner technology.5 Ulti- mately, we expect increasing trade and investment to lead to an overall improvement in Chinese environmental health. However, as our book elabo- rates, it matters whom the trade is with, and where the FDI originates. The fol- lowing sections provide an overview of our project and detail our key theoret- ical contentions. background and overview of the project Unfortunately, China’s remarkable economic growth in recent decades has been accompanied by considerable environmental externalities. China is cur- rently experiencing environmental degradation on a monumental scale. Indus- trial, agricultural, and municipal pollution is at or exceeding catastrophic levels for much of the Chinese population. In its rush toward economic moderniza- tion, China absorbed the products and processes that fueled similar industrial- izations in the United States and Europe, but in a world more vulnerable to their costs. The costs, both ‹nancial and human, have been high. Recent reports from China’s State Environmental Protection Administration (SEPA) claim that environmental pollution costs the Chinese economy approximately 10 per- cent of annual gross domestic product (GDP), though some estimates measure the actual cost, in terms of human life and livelihood, to be much higher.6 Environmental pollution is manifested in different forms, with the most se- rious threats arising from industrial, agricultural, and municipal air and water pollution. These threats are both local and global in nature. According to the Netherlands Environmental Assessment Agency, China is the largest overall emitter of greenhouse gases in the world and emits roughly twice the amount of sulfur dioxide and particulate matter as does the United States.7 This has se- Theoretical Contentions and Analytical Approaches /3 rious health consequences for Chinese people, but the problem ›oats well be- yond China’s borders. With the right wind directions, air pollution can easily blow across international boundaries and into the atmosphere, driving up global temperatures, fueling acid rain, and affecting the respiratory health of people everywhere. Putrid water undermines the health and prosperity of the Chinese and those downstream that rely on Chinese rivers for drinking and ‹shing. For Chi- nese people, water pollution is catastrophic, as China supports a ‹fth of the world population with access to only 7 percent of the global water supply. Some 90 percent of Chinese cities and 75 percent of Chinese lakes suffer from some degree of water contamination from ef›uent discharge. As an example,
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