Robustness to different tariff measures

The positive relationship between tariffs and the aerosol index also holds for alternative tariff measures. We calculate labour-weighted output and input tariffs by replacing the weight in equation (3.1) and (3.2). The labour-weighted output and input tariff regression results are presented in Table 3.8. The evidence shows a similar relationship with the aerosol index as the labour-weighted ones, but with higher magnitudes. These relations support our main results that tariff reforms have contributed to a decrease in air pollution in Indonesia.

Table 3.8. Air pollution effects of tariff reforms, labour-weighted tariffs.

Aerosol Index

Specifications Model

(1) (2) (3) (4)

Panel A

Labour weighted output tariffs _{0.027** 0.028** 0.033** 0.034**}

_{(0.007) (0.006) (0.006) (0.006)}

Panel B

Labour weighted input tariffs _{0.041** 0.041** 0.042** 0.042**}

_{(0.006) (0.005) (0.005) (0.005)}

Panel C

Labour weighted output tariffs _{-0.010 -0.005 -0.005 -0.005}

_{(0.008) (0.008) (0.009) (0.009)}

Labour weighted input tariffs _{0.048** 0.044** 0.045** 0.045**}

_{(0.009) (0.008) (0.008) (0.008)}

N observations _{696 696 696 696}

N districts 232 232 232 232

Year-island dummies Yes Yes Yes Yes

Time-variant controls No Yes Yes Yes

Initial labour force and rural population shares

No No Yes Yes

Dependent variable 1993 No No No Yes

Note: Each block of the table reports separate weighted tariff coefficients, generated by first difference estimates of the change of aerosol index on tariffs and further controls. Time-variant controls include the first difference of precipitation, temperature, expenditure per capita, household access to electricity and population. Robust standard errors are reported in parentheses. ***,**,* mark statistical significance at the 1, 5 and 10% levels.

120

3.7 Conclusions

This study tries to examine the effects of reducing input tariffs on air pollution in 232 Indonesian districts from 1993 to 2002. During this period, Indonesia reformed its trade policy by reducing barriers to trade in the form of import tariffs across sectors, with average import tariffs decreasing from 14.9% in 1993 to 6.2% in 2002. Meanwhile, this period also saw increased air pollution, measured by the aerosol index, in almost all Indonesian districts.

We combine tariff data with labour structure and industrial data to investigate the effects of changes in tariffs on air pollution. Our results suggest that reductions in industrial input tariffs have contributed to a decreasing air pollution index in Indonesia. One percent reduction in the manufacturing-weighted input tariff corresponds to a 0.017 decline in the aerosol index over a three-year period. Cheaper industrial input tariffs seem to have contributed to mitigating the increasing air pollution in Indonesia. On the other hand, we found no evidence of correlation of the tariff reduction for output markets with air pollution in Indonesia. Our results are robust to alternating tariff measures and potential spatial spillover effects as well as to controlling for initial conditions and regional-year dummies. The placebo regressions show no evidence of confounding trends, which supports our empirical specification.

We also consider a variety of potential causal channels that may change with tariff reforms and whose change may help to explain the observed relationships. The results indicate that the potential channels are through composition and technical effects. Trade liberalisation seems to have moved industries away from relatively dirty sectors to relatively cleaner sectors. Cheaper intermediate inputs have also helped industries to be able to invest in new and cleaner technology as well as to improve industrial efficiency.

121 References

Aklin, M. (2014). Re-exploring the Trade and Environment Nexus Through the Diffusion of Pollution. Environmental and Resource Economics, 1-20.

Aldaba, R. A., & Cororaton, C. B. (2001). Trade liberalization and pollution: evidence from the Philippines. Unpublished manuscript, Philippine Institute for Development Studies, Manila.

Amiti, M., & Cameron, L. (2012). Trade liberalization and the wage skill premium: Evidence from Indonesia. Journal of International Economics,87(2), 277-287.

Amiti, M., & Konings, J. (2007). Trade liberalization, intermediate inputs, and productivity: Evidence from Indonesia. The American Economic Review, 1611- 1638.

Anderson, K., & Blackhurst, R. (Eds.). (1992). The greening of world trade issues (pp. 25-48). London: Harvester Wheatsheaf.

Anderson, K., Hoekman, B., & Strutt, A. (1999). Agriculture and the WTO: Next steps. Centre for International Economic Studies.

Anselin, L. (2013). Spatial econometrics: methods and models (Vol. 4): Springer Science & Business Media.

Anselin, L., & Griffith, D. A. (1988). Do spatial effects really matter in regression analysis?. Papers in Regional Science, 65(1), 11-34.

Antweiler, W., Copeland, B. R., & Taylor, M. S. (1998). Is free trade good for the environment? (No. w6707). National Bureau of economic research.

Bernard, A., Jensen, J.B., 2004. Why some firms export. The Review of Economics and Statistics 86, 561–569

Castilho, M., Menéndez, M., & Sztulman, A. (2012). Trade liberalization, inequality, and poverty in Brazilian states. World Development, 40(4), 821-835.

Cole, M. A., & Elliott, R. J. (2003). Determining the trade–environment composition effect: the role of capital, labour and environmental regulations. Journal of

122

Environmental Economics and Management, 46(3), 363-383.

Copeland, B. R., & Taylor, M. S. (1994). North-South trade and the environment. The quarterly journal of Economics, 755-787.

Daly, H. E. (1993). The perils of free trade. Scientific American, 269(5), 50-50.

Dasgupta, S., Laplante, B., Wang, H., & Wheeler, D. (2002). Confronting the environmental Kuznets curve. The Journal of Economic Perspectives, 16(1), 147- 168.

Dean, J. M. (2002). Does trade liberalization harm the environment? A new test.

Canadian Journal of Economics/Revue canadienne d'économique, 35(4), 819- 842.

Driscoll, J. C., & Kraay, A. C. (1998). Consistent covariance matrix estimation with spatially dependent panel data. Review of economics and statistics, 80(4), 549- 560.

Edmonds, E., Pavcnik, N., & Topalova, P. (2005, February). Trade liberalization, child labour, and schooling: Evidence from India. In NEUDC (Northeast Universities Development Consortium Conference) (pp. 23-25).

Faiz-Ur-Rehman, Ali, A., & Nasir, M. (2007). Corruption, trade openness, and environmental quality: A panel data analysis of selected South Asian countries.

The Pakistan Development Review, 673-688.

Feridhanusetyawan, T., & Pangestu, M. (2003). Indonesian trade liberalisation: estimating the gains. Bulletin of Indonesian Economic Studies,39(1), 51-74.

Frankel, J. A., & Rose, A. K. (2005). Is trade good or bad for the environment? Sorting out the causality. Review of economics and statistics, 87(1), 85-91.

Fukase, E. (2013). Export liberalization, job creation, and the skill premium: evidence from the US–Vietnam Bilateral Trade Agreement (BTA). World Development, 41, 317-337.

Grossman, G. E., & Krueger, A. B. (1992). Environmental Impacts of a NAFTA. CEPR Disc. Pap. Ser, 644.

123 Grossman, G. M., & Krueger, A. B. (1991). Environmental impacts of a North American free trade agreement (No. w3914). National Bureau of Economic Research. Gumilang, H., Mukhopadhyay, K., & Thomassin, P. J. (2011). Economic and environmental impacts of trade liberalization: The case of Indonesia. Economic Modelling, 28(3), 1030-1041.

Grossman, G. M., & Krueger, A. B. (1993). Environmental Impacts of a North American Free Trade Agreement in The US-Mexico Free Trade Agreement P. Garber, ed. Harbaugh, W. T., Levinson, A., & Wilson, D. M. (2002). Re-examining the empirical

evidence for an environmental Kuznets curve. Review of Economics and Statistics, 84(3), 541-551.

Herman, J., Bhartia, P., Torres, O., Hsu, C., Seftor, C., & Celarier, E. (1997). Global distribution of UV-absorbing aerosols from Nimbus 7/TOMS data. J. Geophys. Res, 102(16), 911-916.

Hettige, H., Lucas, R. E., & Wheeler, D. (1992). The toxic intensity of industrial production: global patterns, trends, and trade policy. The American Economic Review, 478-481.

Hsu, N. C., Herman, J., Torres, O., Holben, B., Tanre, D., Eck, T.,Lavenu, F. (1999). Comparisons of the TOMS aerosol index with Sun‐photometer aerosol optical thickness: Results and applications. Journal of Geophysical Research: Atmospheres (1984–2012), 104(D6), 6269-6279.

Kis-Katos, K., & Sparrow, R. (2011). Child labour and trade liberalization in Indonesia. Journal of Human Resources, 46(4), 722-749.

Kis-Katos, K., & Sparrow, R. (2015). Poverty, labour markets and trade liberalization in Indonesia. Journal of Development Economics, 117, 94-106.

Kovak, B. K. (2010). Regional labour market effects of trade policy: Evidence from Brazilian liberalization. Paper presented at the Research Seminar in International Economics, University of Michigan Working Papers.

Lee, H., & Roland-Holst, D. (1997). The environment and welfare implications of trade and tax policy. Journal of Development Economics, 52(1), 65-82.

124 Lemieux, T., 2002. Decomposing changes in wage distributions: a unified approach.

Canadian Journal of Economics 35, 646–688.

Low, P., & Safadi, R. (1992). Trade policy and pollution. World Bank Discussion Papers[WORLD BANK DISCUSSION PAPER.]. 1992.

Lucas, R. E., Wheeler, D., & Hettige, H. (1992). Economic Development, Environmental Regulation, and the International Migration of Toxic Industrial Pollution, 1960- 88 (Vol. 1062): World Bank Publications.

Magrini, S. (2004). Regional (di) convergence. Handbook of regional and urban economics, 4, 2741-2796.

Mani, M. S. (1996). Environmental tariffs on polluting imports. Environmental and Resource Economics, 7(4), 391-411.

Mani, M., & Wheeler, D. (1998). In search of pollution havens? Dirty industry in the world economy, 1960 to 1995. The Journal of Environment & Development, 7(3), 215-247.

Markusen, J. R., Morey, E. R., & Olewiler, N. (1995). Competition in regional environmental policies when plant locations are endogenous. Journal of Public Economics, 56(1), 55-77.

McCaig, B. (2011). Exporting out of poverty: Provincial poverty in Vietnam and US market access. Journal of International Economics, 85(1), 102-113.

Minnesota Population Center. Integrated Public Use Microdata Series, International:

Version 6.4 [Machine-readable database]. Minneapolis: University of Minnesota, 2015.

Mobarak, A. M., & Purbasari, D. P. (2006). Corrupt protection for sale to firms: evidence from Indonesia. Unpublished working paper, University of Colorado at Boulder.

Rauscher, M. (1995). Environmental regulation and the location of polluting industries. International Tax and Public Finance, 2(2), 229-244.

Resosudarmo, B. P., & Irhamni, M. (2008). Indonesia's industrial policy reforms and their environmental impacts. Journal of the Asia Pacific Economy, 13(4), 426-450.

125 Rey, S. J., & Janikas, M. V. (2005). Regional convergence, inequality, and space. Journal

of Economic Geography, 5(2), 155-176.

Robison, H. D. (1988). Industrial pollution abatement: the impact on the balance of trade.

Canadian Journal of Economics, 187-199.

Stern, D. I. (2004). The rise and fall of the environmental Kuznets curve. World development, 32(8), 1419-1439.

Sugiharti, L. (2014). A Regional Income Convergence Process in East Java (Indonesia): Do Spatial Dependence and Spatial Regimes Matter?.International Proceedings of Economics Development and Research, 76, 97.

Taylor, M. S., & Copeland, B. R. (2003). Trade, growth and the environment. National Bureau of Economic Research.

Tobey, J. A. (1990). The effects of domestic environmental policies on patterns of world trade: an empirical test. Kyklos, 43(2), 191-209.

Tonelson, A. (2002). The race to the bottom: Why a worldwide worker surplus and uncontrolled free trade are sinking American living standards. Westview Press. Topalova, P. (2007). Trade liberalization, poverty and inequality: Evidence from Indian

districts. In Globalization and Poverty (pp. 291-336). University of Chicago Press.

Torres, O., Bhartia, P., Herman, J., Ahmad, Z., & Gleason, J. (1998). Derivation of aerosol properties from satellite measurements of backscattered ultraviolet radiation: Theoretical basis. Journal of Geophysical Research: Atmospheres (1984–2012), 103(D14), 17099-17110.

Ulph, A. (1997), International Trade and the Environment: A Survey of Recent Economic Analysis, in: Henk Folmer and Tom Tietenberg (eds.), The International Yearbook ofEnvironmental and Resource Economics 1997/1998, Edward Elgar Publishing.

Vidyattama, Y., & Resosudarmo, B. P. (2006). Regional income disparity in Indonesia: A panel data analysis. ASEAN Economic Bulletin, 23(1), 31-44.

126

870(03), 9-10.

Wheeler, D. (2001). Racing to the bottom? Foreign investment and air pollution in developing countries. The Journal of Environment & Development, 10(3), 225- 245.

http://disc.sci.gsfc.nasa.gov/acdisc/TOMS

127