Can Trade Integration Reduce Production Emissions? The Role of Within-Firm Product Composition

We develop a stylized trade model showing that lower trade costs can reduce firm-level emissions by encouraging firms to specialize in their most productive intermediate products. This mechanism operates through changes in within-firm product composition rather than industry-level reallocation. Using firm-level data from China (1998–2012), we provide empirical support for this mechanism in the context of domestic trade. Increased trade integration, driven by railway expansion, significantly reduces sulfur dioxide, carbon dioxide, and other pollutant emissions by lowering emission intensity. Consistent with our theoretical conditions for emission reduction, we find that emission reductions occur primarily in cities where a firm's productivity advantage aligns with a location-specific cost advantage, and only for firms with large within-firm productivity dispersion. A calculation based on our estimates suggests that without the 1.88% (1,203-kilometer) railway expansion in 2005—--midway through our sample period—--sulfur dioxide emissions would have been 0.43% higher at the national level.