Ka Zeng - Greening China: The Benefits of Trade and Foreign Direct Investment

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Michigan Studies in International Political Economy

SERIES EDITORS: Edward Mansfield, Lisa Martin, and William Clark

Michael J. Gilligan
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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
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Kerry A. Chase
Trading Blocs: States, Firms, and Regions in the World Economy

David H. Bearce
Monetary Divergence: Domestic Policy Autonomy in the PostBretton Woods Era

Ka Zeng and Joshua Eastin
Greening China: The Benefits of Trade and Foreign Direct Investment

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KA ZENG AND JOSHUA EASTIN

The University of Michigan Press
Ann Arbor

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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
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 policyChina. 2. ChinaEnvironmental conditions. 3. International trade. I. Eastin, Joshua. II. Title.

ge190.c6z45 2011

333.720951dc22 2011003378

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For Fei and Ellen; For Allie

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We have greatly benefited from the comments and suggestions of many individuals in the course of writing this book. We are especially indebted to Margaret Reid at the University of Arkansas for her encouragement and unwavering 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 framework and analytical approach. Her enthusiasm for the project gave us the much-needed confidence 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 constructive comments and Melody Herr at the University of Michigan Press for her support of this project at various stages of the publication process.

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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 empowers citizens and enables higher levels of domestic investment in environmental protection. They argue that in order to remain competitive in a global environment, developing-country governments have incentive to reduce environmental regulatory standards to attract increased levels of foreign investment and maintain competitiveness in export markets. This process generates a race to the bottom (RTB) among political jurisdictions competing for investment and low-cost export production. Investors motivated by cost savings seek out these pollution 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 Page 2 environmental negotiations. This project seeks to fill this lacuna through an extensive, 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 find that foreign firms do not seek out pollution havens in China. Nor do Chinese provinces lower environmental standards to attract foreign investment. We find that trade can actually increase the financial incentives of export-oriented firms to self-regulate environmental performance to developed-world regulatory standards in the mode of the California Effect. Ultimately, we expect increasing trade and investment to lead to an overall improvement in Chinese environmental health. However, as our book elaborates, it matters whom the trade is with, and where the FDI originates. The following sections provide an overview of our project and detail our key theoretical contentions.

Unfortunately, China's remarkable economic growth in recent decades has been accompanied by considerable environmental externalities. China is currently experiencing environmental degradation on a monumental scale. Industrial, agricultural, and municipal pollution is at or exceeding catastrophic levels for much of the Chinese population. In its rush toward economic modernization, China absorbed the products and processes that fueled similar industrializations in the United States and Europe, but in a world more vulnerable to their costs. The costs, both financial 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 percent of annual gross domestic product (GDP), though some estimates measure the actual cost, in terms of human life and livelihood, to be much higher.

Environmental pollution is manifested in different forms, with the most serious threats arising from industrial, agricultural, and municipal air and water pollution. These threats are both local