Linking international trade and foreign direct investment to CO2 emissions: Any differences between developed and developing countries?

Abstract

International trade, together with foreign direct investment (FDI), promotes economic integration with complex global supply value chains, which is now recognized as a crucial factor in determining CO2 emissions. Production reallocation across countries, often associated with FDI, promotes cross-border trade of emission-embodied products. By applying panel pooled mean group-autoregressive distributive lag (PMG-ARDL) models, this study discusses the long-run relevance among CO2 emissions, international trade, and FDI inflows with the consideration of the short-run dynamics over 52 countries during the period from 1991 to 2014. Focusing on possible differences between developed and the developing countries, this study reveals that CO2 emissions have a negative long-run relationship with trade exclusively for developed countries, while they have a positive long-run relationship with FDI inflows solely for developing countries. The recent trend of increased trade and FDI would promote the transfer of high emission-intensive production units from developed countries to developing countries, causing developed countries to achieve emission reduction at the expense of developing countries.