Restricting Trade for the Environment? Import Restrictions on Used Vehicles in China

By Hui Zhou, PhD ’23

The trade of dirty goods

Over the past two decades, the trade in “dirty goods,” or goods that harm the environment, such as used vehicles and waste, has increased dramatically. Most of them flow from developed countries to developing countries, but in doing so, they create substantial environmental consequences. Policymakers face a difficult choice between allowing imports of dirty goods to satisfy consumption or recycling demand and restricting imports to protect the local environment.

However, little is known about the effectiveness, efficiency, and distributional effect of restriction policies. Do trade restrictions protect the local environment? Do they improve welfare? Are decentralized policies socially efficient? Who gains and who loses? My job market paper answers these questions in the context of intercity import restrictions on used vehicles in China.

Emission-based import restrictions in China

To control vehicle emissions, in 2001 China introduced China 1, the first set of vehicle tailpipe emission standards,  and tightened the standards over time from China 1 to China 6. In 2008, Beijing started to use the emission standards to restrict imports of used vehicles from other cities. Residents in Beijing were prohibited from buying used vehicles below China 3 from other cities but were free to purchase used vehicles regardless of emission standards within the local market. This policy, an emission-based import restriction, in essence, was quickly adopted by many other cities. At the end of 2015, almost 95 percent of cities in China had adopted the import restriction on used vehicles, most of which used China 4 as the minimum standard for imports.

Based on the universe of used vehicle registration data from 2013 to 2015, I compiled bilateral trade flows of used vehicles in 312 cities (prefecture-level divisions) in China at the quarterly level. I collected data on the timing and stringency of import restrictions on used vehicles by the city from government websites, news media, and other sources. I also obtained ambient air quality measures of aerosol optical depth (AOD) which are strongly correlated with PM2.5 (fine inhalable particles with diameters that are generally 2.5 micrometers and smaller), and aggregated the data to the city-quarter level from 2013 to 2015.

Using a newly developed econometric method, I first examined the effect of import restrictions on the trade flows of used vehicles. I found that one city’s net imports of restricted used vehicles decreased by 409 units in the next year. However, the decrease only accounts for about 0.1% of the mean motor vehicle stock by city. In the short term, the import restriction does not lead to a significant improvement in ambient air quality. Next, I examined whether cities’ restriction adoptions are interdependent. Using a spatial lag model, I find that import restrictions of cities are strategic complements—one city is more likely to restrict in response to restrictions of other cities.

Motivated by the empirical evidence, I develop a multisector, multi-region general equilibrium trade model featuring the bilateral trade of new and used vehicles across cities. Through market clearing conditions, general equilibrium prices and trade flows of vehicles could be solved. I use the model to simulate four policy counterfactuals:

(1) unilaterally optimal restrictions in which each city chooses an emission-based import restriction to maximize its welfare (gains from trade net of environmental costs from vehicle lifetime emissions);

(2) non-cooperative Nash equilibrium in which cities strategically interact in choosing their optimal import restriction;

(3) nationally optimal import restrictions in which a social planner decides which cities should restrict imports of used vehicles at what stringency to maximize the total social welfare; and

(4) emission taxes levied on both imported and locally traded used vehicles based on local lifetime emission damages. I use exact hat algebra to solve for changes in equilibrium outcomes under different counterfactuals and quantify welfare effects.

My findings

Simulation results show that unilaterally restricting imports of used vehicles leads to welfare trade-offs between economic losses vs. environmental benefits. Restricting heavy-polluting vehicles makes some cities better off, especially lower-income cities.

However, decentralized restrictions are socially inefficient, achieving about 80 percent of welfare gains under the socially optimal restriction. This is because unilateral restrictions generate significant spillovers onto other cities and incentivize other cities to tighten restrictions in response. Furthermore, the effectiveness and efficiency of using import restrictions as an environmental instrument are limited — socially optimal restrictions can only achieve 14 percent of emission reductions and 12 percent of welfare gains attainable under emission taxes.

With the support of the Cornell Emerging Markets Theme PhD grant, I traveled to Fort Lauderdale, Florida, in November 2022, and presented my paper at the Southern Economic Association 92nd Annual Conference. I received helpful feedback to improve my research, attended several research sessions, and interacted with scholars from different universities. I am very grateful to the Emerging Markets Institute for supporting my attendance and helping me to advance my research.

About Hui Zhou, PhD ’23

Hui Zhou is a PhD candidate in Applied Economics and Management at the Charles H. Dyson School of Applied Economics and Management in the Cornell SC Johnson College of Business at Cornell University. Her main research interests are in environmental and energy economics, transportation economics, and trade. She focuses on environmental policies regarding used vehicles and electric vehicles.