Environmental Effects of Trade Liberalization–Evidence from China’s Pilot Free Trade Zone

Abstract

Free trade zone (FTZ) in China has been demonstrating remarkable achievements since its establishment, yet its effects on the environment in the zones cannot be ignored. However, there is still a lack of research on the impact of the quasi-natural experiment in the China pilot FTZ on China’s environment. Based on this, this paper uses panel data from 196 cities in China from 2010 to 2017 and uses the propensity score matching and difference in difference (PSM-DID) model to empirically test the environmental effects of the establishment of the FTZ. The result shows that there is an obvious causal relationship between the establishment of the FTZ and environmental quality. The establishment of the FTZ has exacerbated the environmental pollution problem in the pilot zone. Through a series of robustness tests, it is concluded that the estimated results of the benchmark model are robust. However, after a further study on whether the effect of the FTZ on environment is time varying, it was found that the effects of the FTZ on the environmental pollution in the test zones gradually weakened over time, which means that with the gradual maturity of China’s free trade pilot zone, the positive effect on environmental improvement will gradually highlight.