Does Intermediate Input Trade Liberalization Reduce Firm Air Pollution? Evidence From China's Accession to the <scp>WTO</scp>

ABSTRACT Trade and environmental protection are significant issues concerning sustainable development. This paper merges the Chinese enterprise pollution database from 1998 to 2007 with industry input tariffs. Utilizing China's accession to the World Trade Organization (WTO) as a quasi‐natural experiment, we employ a differences‐in‐differences strategy to examine the effects and mechanisms of intermediate input trade liberalization on firm air pollution. Our findings indicate that trade liberalization significantly reduces the total sulfur dioxide emissions and per unit output sulfur dioxide emissions of firms. In terms of mechanisms, we find that factor substitution and technology spillover effects of imported intermediate inputs play a crucial role. Trade liberalization increases the importation of intermediate inputs by enterprises, substituting for the consumption of fossil fuels. Furthermore, technology spillover effects lead to capital‐biased technological progress for firms. We also observe that the emission reduction effects of trade liberalization are more pronounced for high‐productivity, low‐energy‐consumption, and capital‐intensive firms. Finally, our empirical evidence shows that environmental regulations and trade liberalization interact, and imposing high emission charges on firms enhances the emission reduction effects of imported intermediate inputs. This paper emphasizes the importance of developing countries implementing trade liberalization reforms for environmental protection.