Evaluating the impact of free trade zone construction on urban air pollution in China-Empirical evidence from a spatial differences-in-differences approach

Abstract

The construction of China's Free Trade Zone (FTZ) is an important strategy for China's thorough deepening of opening up and achievement of long-term high-quality development. Based on the panel data of 283 prefecture-level and above cities in China from 2008-2019, this paper adopts the methods of Spatial Differences-in-Differences (SDID), Spatial Differences-in-Differences-in-Differences (SDDD), and spatial intermediary effect test to empirically examine the impact and the spatial spillover of China's free trade zone on the environmental pollution of the pilot areas and its influencing mechanism. According to the findings of the study, the establishment of pilot free trade zones may suppress urban PM2.5 emissions by around 2.9 percent, and FTZs can also greatly enhance the air quality of neighboring cities. Further examination of the influencing mechanism reveals that the establishment of a FTZ inhibits PM2.5 pollution and has a significant positive spillover on PM2.5 reduction in surrounding cities by the following means: attracting more foreign direct investment; improving the industrial structure through increasing the proportion of tertiary industry; prompting the local government to strengthen environmental regulation as part of the FTZ's supporting policies; increasing the investment in science and technology innovation, developing scientific and technological level to achieve green production. The empirical results of this paper are still robust after a series of robustness tests when the explained variable is replaced by the traditional air pollution indicator industrial nitrogen oxide emissions, another sort of spatial matrix is introduced, the propensity score matching SDID (PSM-SDID) and placebo tests as well as winsorize method are carried out. Furthermore, the inhibitory effect of FTZs on air pollution is modified by changes in city size, geographic location and city type, according to heterogeneity analysis. Finally, this paper proposes feasible policy recommendations.