Climate Economics with Arvid Viaene

#8 - Dr Lorenzo Trimarchi - How the 2018 U.S.– China Trade War Increased Air Pollution and CO2 Emissions in China

• Arvid Viaene

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Did the 2018 US–China trade war make China’s air dirtier and increase its CO2 emissions? This question is not easy ex-ante. On the one hand you have a decrease in production which decreases emissions and pollution. On the other hand, there is more pressure on politicians to relax environmental standards. Notice any similarities with recent events?
 
In my latest episode, I therefore sit down with Prof. Lorenzo Trimarchi to unpack these forces in his new JDE paper, “The Unintended Consequences of Trade Protection on the Environment.” We dig into how a large tariff shock can relax local environmental regulation, and why that raised pollution without delivering big economic gains. 
Episode link:

Topics with time-stamps:
* A puzzling observation: Pollution went up after the Trade War [1:28] 
* 3 Measures of Environmental Stringency [6:33]
* Chinese Political Economy and Politician's Promotion Criteria [11:50]
* Trade-offs Between Growth and Environment [19:46]
* Younger politicians Were More Likely to Relax Environmental Standards [20:30]
* Weak Effects of Environmental Regulation on Economic Performance [24:30]
* The US-China Trade War Explained [28:30]
* The Story of the Targeted Retaliatory Tariffs from China [36:40]
* Chinese Policy Experimentation & A Positive Take-away [38:40
* Implications for EU Carbon Border Tax & Uniform Tariffs [41:30]
* Future Research on Climate Politics [46:08]

Highlights:
* Local political leaders in China are promoted in a “tournament” style format using KPI’s, similar to a company. 
* U.S. tariffs shifted weights of these KPI's back towards GDP over clean air in light of the trade war.
* Key stats from the 2018–2019 trade wars: tariffs of 10–25% on about $200B of exports; by Sept 2019 ~48% of Chinese exports affected to about roughly 6% of China’s GDP. These numbers are massive. I did not realize the 2018 tariffs were that large. 
* Why younger politicians more strongly relaxed environmental standards 
* Easing rules increased emissions (PM2.5/CO₂) but didn’t materially change the economic output. This has implications for the EU’s carbon border policy and for using tariffs to deliver environmental goals.

Naturally, extrapolation to current developments is out-of-sample. But similarities abound!

For more information on the research discussed, see "The Unintended Consequences of Trade Protection on the Environment" in the Journal of Development Economics.


For questions, comments or suggestions, you can contact me at arvid.viaene.ce@gmail.com

Speaker 1:

Hi and welcome to another episode of Climate Economics with me, your host, arvid Fianna, and today I have the pleasure of talking to Professor Lorenzo Trimarchi, an economist who is doing exciting research at the intersection of trade and the environment, and he recently published a paper in the Journal of Development Economics on the US-China trade war of 2018 called the Unintended Consequences of Trade Protection on the Environment, and he shows that a trade war can lead to negative consequences for the environment, which we'll discuss extensively in this episode, and I think there's a lot to be learned from that paper, given that the current US administration has been quite active in not only threatening to raise tariffs but also executing on that threat.

Speaker 1:

So my guest is Lorenzo Trimarchi, who is an associate professor of economics at the Université de Namur in Belgium. He holds a PhD in economics from the European Center for Advanced Research in Economics and Statistics of the Université Libre de Bruxelles, so in some ways, this is a hometown game because he's in Belgium, so this is where else I am based, but it's online, and his research interests are international trade, political economy, banking and corporate finance. So, lorenzo, welcome to the podcast.

Speaker 2:

Thank you very much, Arvind. Thank you for inviting me. Sounds a fantastic project. I'm very happy to participate. Thank you very much, Arvind. Thank you for inviting me. Sounds a fantastic project. I'm very happy to participate.

Speaker 1:

Thank you very much and, as I said in the introduction, I'm very excited to talk to you because I think there's a lot to be learned from your paper, and so I was thinking to start off, could you just give us a general overview of your paper and what you were trying to do?

Speaker 2:

trying to do. Thank you, arvid, for the invitation again. And this is a project that we started years ago, joined with Rui Xie and Tai Peng Li from Unan University and Guo Yang, which is now Assistant Professor of Economics at Lianning University in China, and at the time when I started the project, I was a postdoctoral researcher at Université de Namur. And this is a project in which we try the intersection between international trade and environmental economics and in this project, we try to understand what is the impact of the trade war on environmental regulation in China. But I want to tell you a bit about the story of the project, to understand how the project was born and what was the reasoning behind our research plan. So the project started in January 2021, and Guo started to work on a simpler research line with the Taipeng and Rui in which they were just saying okay, there is a general literature on the path of trade policy on the environment, there is the famous paper of Grossman and Kruger about the cost of NAFTA for the environment. So, starting from this very standard international trade and environment question, guo, taipeng and Rui they were joining regression, investigating the impact of the trade war on pollution, and this preliminary evidence surprising was pointing at the trade war triggering an increase in pollution in China. Why is it? Because, as a trade economist, we tend to think about tariff as mainly as a negative income shock, especially for developing countries. We expect okay, china is a country heavily specialized in manufacturing If we give a large trade shock, we expect China to reduce income and therefore to decrease pollution. And that's the prior. My co-authors added at the beginning and this was also supporting from some preliminary evidence on the economic side by Bin Jingli and Devin Shore that they're showing their now GIE paper that the trade war was a negative economic shock for China. So for us this was absolutely puzzling economic shock for China. So for us this was absolutely puzzling and we were trying to come up with different explanations why this was possible, investigating all the three channels under which trade economists think about the relationship between trade and the environment. That is the scale effect. So the impact, this income effect that we say the tariff should have a negative impact on pollution because we decrease the scale of production. The composition effect maybe China, because tariff are somehow disproportionately accounting for polluting the products. Now China changed the product span and they produce more polluting products.

Speaker 2:

And the third is the famous technique effect and this includes also economic environmental regulation and by discussion with my co-authors, we started to think this may be the channel, also because the general discussion around the world if you remember, at the time we are speaking about 2021, we are in the aftermath of COVID, after we had the Russian aggression to Ukraine, and we observed several reversal of historical environmental policy around the world, including, if you think to Germany, we had this big case of a socialist and the Green Coalition that decided to open again coal plants in Germany and we started to think to this idea.

Speaker 2:

Maybe the government reacted by changing regulation and together with my co-author and I have to give special credits to my co-author for this massive data collection on environmental regulation in China we started to investigate if the trade war had any effect on environmental regulation and the answer is yes. This is the most robust part of our paper. So environmental regulation seems to be affected by the trade war in a way that the trade war induced an easing in environmental regulation for China. So this is the first big result the negative shock in trade policy seems to have a negative effect on environmental regulation.

Speaker 1:

So the first one is because there's tariffs, then the regulators make it easier for companies to comply or they lower the standards, and that leads to the increase in pollution.

Speaker 2:

Exactly, exactly. That's what we measure, because indeed that's the way we measure the change in environmental regulation. With my co-authors we collected three main measures. The first, if you want, is a more of a political, objective-related measure, is by doing a machine learning technique. We went through all the prefecture. Our analysis is at prefecture level. We went through all the prefecture annual reports.

Speaker 2:

So those are official documents by the local Chinese Communist Party, which the Chinese Communist Party explained their policy objective for the next year. So those are very important and we will discuss later about the Chinese political economy. But for the way the Chinese political economy works, those are important documents and this is the first source. So we tried to come up with an index of stringency of environmental policy. Of course those are words, so we needed to collect the complementary information and the first one and this is a unique data set to the second one we collected using something similar to the FOIA request, the Freedom of Information Act request. That is in the United States there is again, it's something surprising, at least for me, but you have a similar type of mechanism in China in which Chinese citizens can ask to the government. Please, for research purposes, tell us what has been the policy in this area and, fortunately enough, many prefectures answered to us.

Speaker 1:

I was surprised by that and for those listeners in Europe, the Freedom of Information Act is something in the US where you can ask for information from the government and they have to give it to you, so it's interesting that there's something similar.

Speaker 2:

There is something similar, then I don't know because I'm using the Freedom of Information Act for the US myself for another project and I don't know if the level of compliance is comparable to what we have in Europe and the United States, but on our side we were happy to see that there was cooperation by local government authorities that they were providing us. Clearly, we didn't get the coverage of 100% of the sample. Also, because it is, there is a manual data collection component, because you need to physically write to all of them and clearly they need to reply to you what was your sample then? Our sample? It changed by measure to measure. So for our main measure, that is, the annual perfector reports, is 246 prefectural over 330. No 246, sorry, 246, I think is for the PM2.5 targets and for the prefectural. I think we have a larger number, I think around 290, because all the prefectural they are assumed to release these annual reports For them. You have to underline it and we have a period from 2013 to 2021.

Speaker 1:

So it's a huge data set and I think that's one of the amazing things is the data set, because it sounds like you've just got most of China, if I can, absolutely.

Speaker 2:

Is that correct? We can clearly see.

Speaker 1:

You've got most of China.

Speaker 2:

This is most of China. I mean, we can clearly see that this is most of China. We might miss some more rural prefectures, some prefectures in some mountain areas, but if you see there is a map which we plot the data in the appendix and there you can see that fundamentally the region with most of the production are there. So we can fairly say we get at least a representative sample of the Chinese population and the Chinese production. That's what we carry. We want to capture where the economies produce it.

Speaker 1:

Exactly so. I think you said you had three measures. So there's the text, there's the CO2 and PM2.5 of air pollution.

Speaker 2:

Yes. And then we have a third one. That are the environmental actions. So this is a data set collected by the Beijing Law School and this data set covers all sort of penalty actions, all sort of government intervention, like fines, like fines against polluting firms. The third data set must be interpreted with the caveat that if we show that the trade war induces a decline in penalty, you can interpret this as either less enforcement, either more compliance, either less enforcement, either more compliance. So since we cannot exclude the second, we use it as a robustness check because clearly we have a measurement problem there. But if you take the sum of the evidence, I think they all point in the same direction and this is quite reassuring, I think.

Speaker 1:

Got it. So thanks for that. And then we got deeper into the measurement, which I think you and your co-authors should give full credit for, because the collection of data is tremendous. And you said you were going through the first part and then I interrupted you and then you were going to continue with this some second.

Speaker 2:

Yeah, we saw this on a mission and then we talked about regulation, and then we find this effect on regulation. That's the logical sequence.

Speaker 1:

So then, maybe I think it'd be useful also for the listeners to understand more how the Chinese prefecture's government works and what promotion criteria are.

Speaker 2:

Of course, of course what promotion criteria are, of course, of course. So one of the cool parts, the interesting part of this project, one interesting part of this project, is to learn a lot about the Chinese political economy. Indeed, in our political system, in our democratic political system, mayors are appointed by electors, and the way they should establish their policies it is by having some electoral platform upon which they are voted for and for Chinese. It's not just there because the mayors, or the local party secretary, they are appointed by a higher level of their political power in China. So, but I think that I mean, I'm not the first to, we are not the first to study the Chinese political economy. There is a huge literature in the political economy trying to understand how bureaucracy and how political power is organized in China, and I think that the Chinese Communist Party was facing a big problem, especially in the aftermath of the collapse of the Soviet Union. The Chinese Communist Party changed a lot compared to the way it was organized in the 70s. So clearly, they observed the collapse of the Soviet Union and they observed that one of the reasons the Soviet Union collapsed was because think how we can introduce incentives for performance within the party, de facto. What I think is fascinating about the Chinese Communist Party is, despite their communist, they are more organized, like what we would consider a private corporation than a public administration body in Europe, because fundamentally they have these public officials that are more like corporate executives with a performance contract, and they all compete in a tournament under which they will be selected for a higher level of power, for promotion, based on some performance indicator established by the hierarchy. That can be the central hierarchy, can be just a higher political hierarchy and geographical level, but it's really top-down.

Speaker 2:

In the 90s, the priority for the Chinese Communist Party was economic growth.

Speaker 2:

As we know, the Chinese Communist Party was very focused on growth.

Speaker 2:

Then, in the 2000s I mean starting really from 2008, we all remember, with the Beijing Olympic Games, the pressure that Chinese citizens were made on government to fight pollution, and in the 2010 year we had this war on pollution declared by the Chinese government, and then environmental standard became more and more important for promotion. So politicians care about career and they know there are some objective indicators that will determine their career. And let's say that up to the trade war, both GDP growth and environmental goals they were equally important. That's what the previous papers established. I think what is important in our paper that we say ah, but now that the Chinese government, for the first time probably since the 80s, is facing a real economic shock, something changed and this shifted attention towards economic goals versus environmental goals, and because there is a trade-off between the two and maybe we want to talk about that later- so you know they are facing promotion criteria I think it's actually a nice way to call it a tournament like they're competing with each other for getting a promotion.

Speaker 1:

They've got two goals, which is economic growth and then limiting air pollution. But then tariffs hit and there's a real economic shock and it seems that the person deciding the tournament is like now we're going to put a higher weight again on economic growth. So maybe you can talk about why there's a trade-off between growth and air pollution.

Speaker 2:

Yes. Another thing for me, this period was super interesting. I learned a lot myself by working with my co-authors Me, I'm more of a political economy guy, and Guao is a trade and environment person and type anger. We are very interested in the environment, so I had to learn a lot by myself as well, and one thing I was convinced is that there is a almost non-trade-off between environmental regulation and productivity or efficiency, because because this is the general idea If we do green investment, this is good for productivity always, but it's actually not true, because it depends from the nature of the firm.

Speaker 2:

If you don't want to pollute, maybe you should make some investment in technology that allows you to pollute less, and this can be costly for the firm, especially in a period in which the margin might be less because you are under a trade war. This might be particularly important for a policymaker. You might want to relax environmental regulation, not because you like pollution per se, but because you want to somehow affect the cost function of the firm by decreasing their cost of production and hopefully be able still to be active on the export markets.

Speaker 1:

Exactly, and I think that's. You even have this great quote in the beginning of your paper by a Chinese official saying, beginning of your paper by, literally, a Chinese official saying now that we have this trade war, we don't think you know, in order to keep growing at the same pace, we'll probably have to go back on some of our environmental goals, which I think is it's a very nice quote that I'm going to put in the transcript and the show notes, because I think it's a very nice quote to illustrate this trade off which, especially because, because it's not only economic growth, I get the sense it's also like this more general social stability and, if you know, if firms like if a firm were to shut down, that would also mean the loss of jobs. So it goes further than well, maybe firms don't make as much money. It's also like this, this social stability type of promotion criteria.

Speaker 2:

Absolutely. This is again not a completely new idea. I mean, this is a beautiful book by the Nobel Prize of this year, so it's always a good moment to mention Darren Acemoglu and James Robinson. There is a book about dictatorship, somehow, and democracy, democracy and dictatorship, which they speak about the fact that all political system, all political leaders, they want to survive a revolution constraint what Deron Asimoglu and James Robinson call revolution constraint and therefore they care about stability. Eventually, in an autocratic system, this stability concern gets larger. But we can fairly say this is true for all political systems, also in Europe. Which one among us would think that the Green Party in Germany is against environmental goals? None of us. But still under economic pressure, they open again coal plants. This we can observe in all Europe. Also in Belgium, and probably I'm not following closely but the Belgian politics, but I perceive the attention towards environmental goal is declining towards the last years. This is probably due to the fact that many families are struggling under the current economic condition is something we should think more about.

Speaker 1:

I mean, yeah, even I think in Europe you see that the trade wars, you know now that there's extra tariffs and people get much worried about their jobs, the livelihood, you know firms shutting down and then generally still environmental regulations are costly. So there's some trade off there that you want to have. And then you've done a lot of regression and robustness exercises and I take them at face value that some politicians, especially younger politicians, might be more willing to make that trade-off of relaxing environmental regulations to promote some more competitiveness. Could you speak to that or what was going on or why that might be the case? Absolutely.

Speaker 2:

This is based on again, this is based on the political economy of China. And still, even when we think about an autocracy, we have to think about politicians as a person that overall they fundamentally feel it's a trade-off. I want to have a career concern, I want to be promoted in the hierarchy, but they still care about their constituency. And I think environmental economics is a field in economics in which the welfare function is quite easy. We all benefit from clean environment and I think any politician in the world knows that for his or her own cities and having less pollution is a good thing for their welfare. So also in China? I don't know, but the idea is that if you are younger, for instance, maybe for your career, concern are more important and you might be tempted to disregard more environmental regulation and depression compared to GDP growth because you hope to be promoted. And the same is for maybe recently appointed mayor. But in reality, what we find as super robust is the role of patronage, which is also quite important in the Chinese political economy. So what we find is, when we also raise these three characteristics, what we find to be the most relevant is being within the network of your provincial leader makes you more likely to implement this policy and we are not sure in the paper, but we also collected the data on the provincial annual report work and we have seen that somehow there's been this shift. Also an upper level of hierarchy and you mentioned the citation of I think it was the director for climate policy I can't remember the ministry, which ministry in China, but you will tell later in the podcast.

Speaker 2:

This was already at the central level this change in regulation, we have seen this at the provincial level and very likely, probably if you have a connection with the provincial level, this change in regulation we have seen this at the provincial level and very likely, probably if you have a connection with the provincial leader, you want to please your province leader because you think it will make more likely that somehow you will enter in the leadership of a province in future. You will appoint it to the Politburo. This type of patronage that in our democratic Do we have this type of measure in our democratic system? This type of a partnership that in our democracy, do we have this type of measure in our democratic system? This type of linkage in our democratic system? Yes, but they are less important because in our system what matters are votes, while in China what matters is being appointed, clearly. So this gives a different incentive. Probably we can get the same same results, but we have different incentives.

Speaker 1:

Let's see exactly, exactly so. So it's the. If you have a clear link to the, the province or like higher up, then you're more likely to make sure you meet the criteria. Then you know someone who's like less well connected maybe you know their prospect for a career is maybe not as good, so they, they care maybe a little bit less about um, you know meeting all the criteria and and and it's like you say. This is one of the things I really learned about the paper is here. A mayor of a city really is is judged by the electric directly on the trade off. But there it's almost. You get judged by the people higher up in the hierarchy. So it is a bit like a company in that sense that there's performance criteria that you get judged on and then there's a scorecard. So we've talked initially about that. Your co-authorsors and you had different priors going into the research. Was there also things that you found in the data along the way that surprised you?

Speaker 2:

There were things. We had the priors. I think something that surprised me was the weak effect on the economic performance, on the economic performance. So we were thinking, ah then because, ok, there is a little to say as I told you that I discover, yeah, regulation should affect productivity. They changed the regulation and somehow we hoped to find, ah, then this will change economic growth. But in reality we don't find this large effect on the economic side.

Speaker 2:

We find some effect for prefectures that eased a lot their environmental regulation. Then, whether on the welfare point of view, easing a lot, this shows that still the Chinese Communist Party was facing trade-off and they were taking account trade-off. So not all prefectures were easing the relaxing environmental regulation by a lot. Some did. For these few ones we find some economic gains, but for us it was surprising to see that the gains were limited. So overall, if easing environmental regulation to counter tariff might seem a good idea, environmental regulation to counter tariff might seem a good idea. I think what we learn is probably not not much, or maybe the welfare costs are too high in terms of yeah, yeah, so.

Speaker 1:

so there was a very observable effect on air pollution and co2 emissions, but the impact on economic performance wasn't that big, so so it's more the, which in some sense would then make you think they score worse than their counterfactual counterpart who didn't relax the environmental regulations.

Speaker 2:

This is true. If they could have gone you mean the economic effect, right Could they have gone worse?

Speaker 1:

Like if we have the older politician with the younger politician in otherwise two similar provinces and the younger politician thinks I'm going to promote economic activity, but the result is that he didn't promote economic activity that much but he now has worse air pollution.

Speaker 2:

Exactly Indeed. That's what probably he found, but still, because I think of this patronage effect, they were still more likely to be promoted. What we find that is interesting is that for mayors that easy deregulation were more likely to be promoted after the trade war. This is quite a striking effect. Maybe it's linked I didn't talk about that but systematically but maybe it's linked with this patronage effect that we found that is most concentrated by connected mayors, our result of regulation. So it seems that maybe okay, you are in the network of the provincial leader, you follow the structure and then you get rewarded with the promotion, regardless of the efficiency of the measures taken in place.

Speaker 1:

Which brings us to the point that sometimes because I've been in environmental economics a lot that sometimes when you need to meet these air pollution standards like PM2.5, you install something and then it drives up some costs, but uninstalling it is quite hard, so it's almost once you've installed it. It doesn't make sense to uninstall it as much, even though you've now lowered the pollution, and if you were to have the choice, you wouldn't do it again. But so so maybe that's also. Could you speak a little bit more about the trade war that happened, because we've been talking a lot about the impact that China had, but because it's you know it happened in 2010. Could you just maybe then provide some information to the background of what the trade war was about?

Speaker 2:

Sure, the trade war, I mean in 2000,. You know that now we are living in a period of history in which we are all caring about the trade war, because Donald Trump is also targeting European products.

Speaker 1:

And other products.

Speaker 2:

worldwide and other products worldwide and the European Union has struck a deal, and this was with the United States and it was involving environmental aspect as well, but the trade war as well. But the trade war, and especially the confrontation between US-China, has deeper roots. So in 2016, donald Trump won the election on a platform fundamentally complaining about the WTO and the World Trade Organization and the free trade policy of his predecessors. Before and I think at that time I remember the environment we were probably not taking seriously so much about these promises, but actually we should have taken President Trump seriously. In February 2018, donald Trump launched a full trade war against China. This was unprecedented. It was unprecedented both for the scale so fundamentally, all manufacturing sectors to some extent, if you look to the data, all manufacturing sectors were covered from the Trump tariff in 2018. And it also was unprecedented for the tools Trump used. So Trump decided I don't care about World Trade Organization rules. I think there is a national security emergency. We will adopt a new tariff and this constitutes a good.

Speaker 2:

Clearly, we can discuss about the Trump policy a lot, but this constitutes an interesting shock for us as a trade economist thinking about environmental regulation in China. Why? For several reasons. First, it was unexpected, somehow in scale. Yeah, now we all know that this is real. We all know that this happened, but I remember very well the discussion in 2016, and I don't think many people were taking the threat of Trump seriously.

Speaker 2:

Second, I think what is quite interesting for us is that there is a lot of heterogeneity in Chinese industry specialization, and this is what is giving us variation by the end of the day. So, fundamentally, we use what economists call Bartik research design, so it is a research design that takes a national level shock that this is the Trump tariff. This affects equally all Chinese regions, but what it changed is the fact that regions are differently exposed to the tariff shock because they have a production specialization that differs from each other. So if I produce more steel and Trump puts tariffs that are higher on steel now, I will be more exposed. If I'm a prefector, that maybe I'm more producing more I don't know agricultural products that were not much covered by tariffs, then I'm less concerned about tariffs. This type of variation is what is really driving our identification strategy and that's what we exploited for metric analysis.

Speaker 1:

I think it's a good point exactly that 2016 was a different world. Maybe it wasn't taken as seriously, whereas today it's much different. What was the size of these tariffs?

Speaker 2:

Thank you for the excellent question. Indeed, what probably most people do not know, because we think that now we are experiencing the most massive trade war, that also the first trade war was massive, and when? If you look at the period from July 2018 to September 2019, which is the month in which the Trump tariff reached their peak we find that during the trade war, the US imposed the tariff between 10% and 25% on around 200 billion worth of Chinese exports and they affected almost 92% of Chinese export in industry. And to give you again a sense of the size of the trade war around, by September 2019, around 48% of Chinese exports to the US were facing an increase in tariff and this accounted for around 6% of Chinese GDP. So we are looking at, we are speaking about, a massive shock to the Chinese economy.

Speaker 1:

You said it, so the tariffs amounted to 6% of Chinese GDP. Yes, that's a crazy statistic. That puts it in perspective for sure.

Speaker 2:

Yeah, clearly China is, I mean, Belgium is a little bit.

Speaker 1:

I know, but it's still like you know, to say tariffs and six percent of gdp, because when you hear I go, it's 10 to 25, 92 percent. So anyway, I I am shocked to hear that number. Let me just so. It's like six percent of gdp is really a lot in terms of that and like I know there's differences, but it's still for a country like China. I might cut this out. Sometimes I'm just bewildered in the moment and then I just yeah, no, this is big, this was big.

Speaker 2:

We are talking about a lot of yeah, I'm anti-60% of China's GDP. No, this is big. The Trump tariff for China was a big shock, but I think also because, as economists, we tend to study more the US economy. That is a relatively closed economy, I think. So you have this bias in thinking how much trade is important for many countries.

Speaker 1:

I still remember at the University of Chicago when I was there and one of the professors was like that's why we don't have very good international trade economists in the US, because it doesn't matter to the US. I mean, of course it's not true, but he was semi-joking, especially in the 70s and the 80s, that most of these you know the monetary policy with trade and interest rates. They were all like international economists doing it.

Speaker 2:

And it's one reason why in Belgium we care a lot about trade, because Belgium is one of the most open economies in the world.

Speaker 1:

Exactly. How did this trade war end? Were those tariffs kept in place? Were they diminished at some point? How did it change over time?

Speaker 2:

For us. This is what people underestimate. Basically, the trade war never ended. So now I think they were partially removed by Joe Biden if I recall correctly by Joe Biden in the aftermath of the Russian aggression to Ukraine during the flash tsunami spike. I think they were partially removed, but in reality this is a broader discussion about the trade war. But in reality, I don't know if I would conclude that the confrontation between the US and China is particularly driven by Donald Trump. I think what is different between the Republicans and the Democrats is the trust towards multilateral organizations, which is crucial also for our discussion on trade.

Speaker 1:

Because I still want to pick out one thing of your paper, which is you've also studied the retaliatory tariffs from China to the US, but there you found no impact, I think, on these emissions. Could you speak to that?

Speaker 2:

It's a good point. I mean fundamentally this type of regression are addressing, if you want an omitted variable problem. Ah yes, you speak about tariff. They were also retaliatory tariff from China to the US, so maybe you can expect the reverse effect, because China puts protection this is a positive income shock and then this will change regulation and we find no effect. For me it's unsurprising in the sense that, if you think what the retirees and retirees were about, these were mainly soybeans and agricultural products. So this is, I think, the reason. So they were not really targeting polluted industry, while Trump was targeting steel, was targeting washing machine, solar panel producer. Those are energy intensive industry under which the Chinese government might think rationally okay, if I manipulate the environmental policy, I might change the path of growth for firms in the sectors.

Speaker 1:

Yeah, that makes sense. I actually remember now because it was a big thing in America, because the soybeans were. You know, soybean farmers are a big lobby group.

Speaker 2:

There was a beautiful paper by Timo Fetzer and Carlo Schwarz on the Economic Journal showing, actually, how the Chinese government was smart in targeting retaliatory products, because they were targeting actually constituencies that massively voted for Trump and usually agricultural districts in the south of the United States, a usually Republican area. And not surprising the Chinese were targeting these products.

Speaker 1:

Yeah, I was in the US at the time and that definitely caught the attention for sure. I think the other thing, why the size of the tariffs and the way you mentioned it? I think it helps me understand why there was the effects that the tariffs and the way you mentioned it is. I think it helps me understand why there was the effects that you saw in the paper. You know, because sometimes there's like things and there's like some macroeconomic things that happen in productivity or growth slows down a bit or there's some. You know these things but this is such a big shock that you would actually expect people to change Because to some more minor macroeconomic shocks, you would not expect the Chinese Politburo to redesign the promotion criteria because it would just create a lot of uncertainty and like people be like, ok, what do I have to aim for now? But in response to like a big shock like that you would Like, then it's more clear that there's some reallocation happening, maybe among objectives.

Speaker 2:

Of course, and maybe some experimentations. They are even experimenting. Maybe I mean it didn't work for the economy, but they were trying several policy tools. We know that they were implementing massive subsidies. They were using monetary policy, so probably I don't claim that environmental regulation was the only, and maybe not the main tool in the end of the Chinese government to tackle. We never had this, we never pretended our paper to be like that, but it was one of the tools and probably was not so effective. That's what we learned in our paper. To be like that, but was one of the tools and probably was not so effective, that's what we learned in our paper okay, well, that's actually a positive takeaway.

Speaker 1:

I would say I didn't quite get that. This is a positive takeaway that they weren't so effective in promoting the um.

Speaker 2:

It's something you should learn as a European as well, now that we are under a trip and we think about you know there was a discussion about the competitive compass in the European Parliament around one month ago in which the President of the underlying and the College of Commissioners decided to give less importance to environmental goals in their competitive compass, in their competitive goals. Then I don't know, even in this setting, I don't know how much this will translate in concrete measure, also because I didn't follow so strictly European legislation. But I think there is something to learn. Right, if we stop caring about the environment, it's not that magically the economy will grow.

Speaker 2:

Why? Because I think one of the strongest things we learn international trade. That comparative advantage applies. So probably there are force, market forces that are so strong that environmental regulation will not be able to change. Unless you do, probably a massive change in environmental regulation and I don't deny this will have effect, not one effect, but do probably a massive change in environmental regulation, and I don't deny this will have an effect. But you need a massive change in environmental regulation.

Speaker 1:

Which maybe brings me to another question. In the conclusion of your paper, you actually mentioned two potential also takeaways, and you mentioned that your results cast doubt on using trade policies to address environmental problems, such as the EU carbon border tax, and you also mentioned this Shapiro 2020 paper. Could you maybe speak to that, to what you meant with that comment?

Speaker 2:

Yeah, sure, no. There are, I think, two points to be made. In Brussels there is a lot of enthusiasm around the carbon border tax because it's a way to say oh look, we have our current job for our foreign policies the access to the single market. So if foreign firms want access to the single market, they should enforce the same level of environmental regulation as we do, otherwise they will pay a tariff, same level of environmental regulation as we do, otherwise they will pay a tariff. And I think our paper does not disqualify, does not invalidate this European policy, but just want to induce people to think more carefully over the spillover of increasing tariffs, because by the end, carbon tax is a tariff in developing countries or countries with weaker environmental institutions. Because the reaction might be ah, but if I needed to pay anyhow, I need to pay a tariff. Our idea is a bit of a behavioral story, right? If I know that I need to pay a fine, I will have bad behavior. Anyhow, if I know that I need to pay a tariff, why not relax environmental regulation today to be able to anyhow to enjoy growth? Because anyhow, the European will make me pay. So I think that we should more carefully think about the political economy in our partners when we set the trade policy. Because what we learned in the Chinese case that many developing countries at some point I mean if we see the Chinese case before the trade war, in the moment in which many developing countries will grow we will do pressure for a green policy anyhow. So I will look to the. I will not be so negative about trade as a trade way to promote growth and to promote a better environmental standard, but I don't say neither that this would be completely useless.

Speaker 2:

I think as economists we should be always careful in drawing policy conclusions, but still I think our paper deserves double thinking on this issue and going to the great contribution of Shapiro, which I think is a fantastic paper I mean I advise all graduate students to read the paper of Shapiro on QGEE. And why I enjoyed it so much? Because I think the author of this paper took a stylish fact we all know in international trade that input products enjoy lower MFN tariff compared to final good and then it took from the environmental economics leader the intuition that the input goods are also more polluted than Shapiro in his papers. Ah, look, but then we are subsimplicity, subsidizing polluted products. And I found it fantastic because those were two style aspects. They were there and this is how, being a great researcher, because you had the two things known, but then you put them together with great economics and this is a fantastic paper.

Speaker 2:

But I think the final part of his conclusion in his paper he says OK, then we should change, we should reform trade policy and something like that. We should increase tariff in polluting process. So this is a substantial, if I understand correctly, the proposal of Shapiro in his QJ and in his paper, in the conclusion himself says ah, but there is a political economy that can be problematic, and I think our paper supports a bit this conclusion, we believe, because, yes, it can be problematic. If we start to go in the world in which we increase tariffs, ok, yes, maybe the famous scale effect will be such that maybe we'll produce less of these polluted products, but it's not straightforward. Which would be the effect for regulators? Because still there is a demand for polluted products and and they might decide to act again on the cost function and to to be competitive. Yeah, awesome.

Speaker 1:

That's, that's awesome. Then maybe a final question is has there been a question that I haven't asked you? Is there something you want to talk about that I haven't asked you about that? You're like this is important, or is there um something like that?

Speaker 2:

I will do a small promotion for my next work in environmental economics. So this this is, I think, a great idea to conclude our interview. So I think this is a project. I've always been interested in the question regarding the political economy and the environment because I think the biggest challenge for us. As I told you before, I think all politicians all over the world agree on the idea that a world that is cleaner is a better world. I don't think any politician thinks it's good to pollute. It's good to live in a polluted world. The point is the political economy. What are the incentives for politicians to enforce environmental reform or greener policy? And now I'm happy to share that I'm working on an exciting new project with Alvaro Zuniga Cordero, who is a postdoc at the University of Namur, and Juan Robalino from the University of Costa Rica, in which we ask a related question, but in this case for a democracy. So for a democracy. Maybe it's not too politically correct to say, but it's the truth.

Speaker 2:

I can cut it out if you want I don't want to put Michael out of view, it's too much in difficulties but we're asking a very similar research question, but in a country with a more democratic institution. What is the research question that we are trying to ask? Does climate change induce voters to vote more for green parties? And why? We think it's relevant? Because we believe there is a trade-off. In a world in which climate change is active, we have more extreme weather events and in this world you might expect two things. We believe One can be okay. I meet from a severe extreme weather event, I become more sensitive. I will vote more for green parties or for parties that enforce green policies. On the other side, you know, an extreme weather event might be a negative economic shock for me and, as we observe in the recent populistic wave, we might be unhappy. You might be unhappy about the current parties and vote for populists, for parties that want to reverse climate policy.

Speaker 2:

We believe Costa Rica is an interesting setting for two reasons. One first I learned and we learned. I learned because my quarters are from Costa Rica, so they knew already. I learned that Costa Rica is a country with enormous climate variability indeed, and this will give us this type of geographical variation that we used in our China paper Now we put, I hope, to use in this paper in Costa Rica.

Speaker 2:

And the other part of the Costa Rica project in Costa Rica is interesting, I think, is that Alvaro Zuniga Cordero, that is my co-author in this project, collected in his John Marker paper a fantastic data set linking electoral data at a very granular level in Costa Rica with employer-employee data. So I know in a constituency the economic pattern, we know in a constituency the economic story of a voter and somehow we can at the macro level see first of all how a climate shock affects voters and second, test a potential mechanism what are how the, the voters, uh were affected by this climate shock. So I hope that we will get some new results and we can speak together about these results in your poster podcast I, I would be very excited, I would be very excited.

Speaker 1:

so that sounds like a really cool paper. And again now Costa Rica on a whole different setting, with a very finely tuned microdata. So I'm looking forward to that too already, lorenzo. So thank you much for taking the time. I really really appreciate it, and thanks for coming on the podcast.

Speaker 2:

Thank you, arvid, and thank you for inviting me to this great initiative. We know you need to know more about climate economics and to know also more about what my colleagues around the world are doing, so I hope you will continue to do this podcast. Thank you very much. Thank you.