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Lim, Heehyun Rosa
Limão, Nuno
Lee, Eunhee
This dissertation examines the relationship between international trade and environmental outcomes. In particular, I study the impact of international trade on airborne pollutants, including the change in emissions and concentration as well as their welfare consequences. In the first chapter, I suggest the intermediate import channel as a new perspective to understand the linkage between international trade and air pollutant emissions. I first review the existing literature's understanding of the impact of trade on emissions. The review shows that the literature mostly focuses on the increased market access but overlooks the increased access to imported inputs. Using the data on the US manufacturing industries, I then document a few stylized facts that are suggestive of the linkage between intermediate imports, input usage, and emissions. I show that in the US, the import penetration among inputs used has increased while the energy intensity of US manufacturing has declined, the latter of which explains a third of the within-industry reduction in $NO_x$ emission intensity. To analyze the channels by which trade in intermediate inputs affects emission intensity, I build a model of heterogeneous firms, intermediate trade, and inputs with different emission profiles. By focusing primarily on the emissions linked with input usage, my model examines the effect of improved access to foreign intermediates on firms' input choices and emission outcomes. The model shows that with lower intermediate import costs, firms become less energy-intensive by either increasing their intermediate intensity, using energy-saving technology, or both. Moreover, the general equilibrium force, as well as amplification through the input-output linkage, bring a further decrease in emission intensity in all firms. The model also presents the selection and reallocation effect which further amplifies the within-firm improvements. In the second chapter, I run empirical and quantitative analyses to test the theoretical model from the first chapter against the US manufacturing data. In the empirical analysis, I estimate the model prediction, which states that industry-level emission intensity can be expressed in the producer price index when the cost of energy and market access are controlled,using the industry-level panel data between 1998 and 2014. By using the import price of intermediates as an instrumental variable for the producer price index, I find evidence that a lower producer price, driven by a lower intermediate import price, leads to lower $NO_x$ emission intensity. The reduced-form evidence supports the model mechanism that states that a lower import price of intermediates decreases emission intensity. I then calibrate the model to 1998 aggregate US manufacturing and quantify the change in emission intensity driven by the change in intermediate import cost. The quantification shows that the fall in intermediate import cost between 1998 and 2014 explains about 8-10\% of the observed technique effect in $NO_x$ emissions. 68\% of the decrease comes from the within-firm changes via firms' substituting away from energy inputs, global sourcing, and adopting energy-saving technology, which highlights the importance of taking within-firm channels into account to understand the effects of trade policies on emissions. The third chapter (co-authored) re-examines the welfare gains from international trade by incorporating the transboundary nature of air pollutants.\footnote{This chapter is from a joint work with Eunhee Lee.} We run country-level panel regressions and find that concentration is correlated with transboundary pollution, constructed as the weighted sum of other countries' emissions. We then build a general equilibrium model of international trade and environmental externality from local pollutants of transboundary nature, in which the concentration of a country is affected by both its own and other countries' emissions. The model shows that the change in welfare can be decomposed into the change in real income and the change in air pollutant concentration, the latter of which can further be decomposed into that driven by own emissions and by other countries' emissions. We use this model to quantify the welfare implications of two trade shocks -- China shock and the EU 2004 enlargement. The results show multiple channels that shape heterogeneous welfare consequences across countries. First, liberalizing countries experience an increase in emissions due to an increase in production. Second, the emissions of other countries move in either direction, depending on the effects of pollution relocation and increased production due to cheaper inputs. Third, the levels of concentration increase in liberalized countries and some other countries due to the increase in own emissions or transboundary pollution, or both. We run additional counterfactual exercises with stricter environmental regulations imposed on liberalized countries and show that there can be welfare gains in many countries by lowering emissions and transboundary pollution, suggesting the potential effects of combining trade and environmental policies.