Trade War 'Winners' Revisited: Environmental Consequences of Manufacturing Relocation
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The US-China trade war has reshaped global production networks, with some countries experiencing economic gains from redirected manufacturing activity. While these relocations may boost employment and growth, their environmental consequences remain poorly understood. This study investigates whether nations benefiting from trade diversion face unintended environmental costs due to expanded manufacturing scales, even as they reap economic rewards. We propose an integrated framework combining international trade theory and environmental economics to analyze how multinational firm relocations—particularly to Southeast Asian countries like Vietnam and Malaysia—affect emissions through three key channels: (1) sectoral composition shifts, (2) production scale effects, and (3) technology transfer through firm-level abatement investments. Our methodology develops a quantitative model incorporating sector-specific energy intensities and productivity-dependent abatement technologies, building on recent advances in trade and environmental economics literature. This research makes two primary contributions: First, it provides systematic evidence on whether trade war-induced production shifts exacerbate pollution in host countries. Second, it examines the conditions under which multinational firms' technology advantages might mitigate environmental damage. The analysis will distinguish between local pollutants (e.g., SO₂) and global emissions (e.g., CO₂), as their policy implications differ substantially. By quantifying these complex interactions, the study aims to inform debates on sustainable trade policy. Potential findings could help policymakers design targeted interventions—such as green FDI incentives or carbon-adjusted tariffs—to align economic diversification with environmental objectives. The project underscores the need to evaluate trade conflicts through both economic and ecological lenses.
Principal Investigator (PI): Deyu Rao
Department/ Division: Economics
This project is funded by the HKUST IEMS Research Grants 2025.
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