An Analysis of the Effect of Environmental Regulations on Industrial Competitiveness

Economic activities are closely related to real-world environmental issues. Currently, more attention is paid to the association between environmental regulations and industrial competitiveness because of the pressures on economic development and environmental protection. Usually, the public holds the point of view that environment regulations inevitably have a negative impact on competitiveness because of the presumed increase in costs. This opinion is also shared by many academics. In the 1990s, another hypothesis was developed which is represented by Porter. The researchers argue that the innovative aspects of environmental regulations can have a positive impact on industrial competitiveness. To this day, there is no consensus. This study aims to identify and explain the association between environmental regulations and industrial competitiveness within an appropriate theoretical framework. It makes use of data from China, as there has been little research in this field in that country; and China, the biggest developing country, has the unavoidable responsibility to protect the environment and promote world economic development. This study is conducted on two levels. First, the association between regulations and the competitiveness of different industries in the secondary sector in China is studied on the national level. Then it studies the association from the perspective of the whole secondary sector of 30 provinces on the provincial level. The modelling method is used in that part. Finally, the study applies the General Equilibrium Theory to build a theoretical framework to analyse the mechanism behind the association and use the mechanism to interpret the results of the modelling. Several important findings are summarised. First, the impact of environmental regulations on industrial competitiveness is not a simple linear one but a U-relationship, meaning that the traditional hypothesis works first and Porter's Hypothesis fits later. Second, the traditional hypothesis and Porter's Hypothesis are not contradictory but can be integrated within the General Equilibrium framework. Third, the crucial point to activate the U-relationship or Porter's Hypothesis is the innovation, which, among others, can be triggered by stringent regulations, well-designed policies and better education. Last, moving back to the case of China, China on the whole enjoys a positive association between environmental regulations and industrial competitiveness. However, conditions vary from province to province. The impact of environmental regulations on industrial competitiveness varies. The eastern provinces are experiencing a positive impact, while other provinces are in the dilemma where there is a trade-off between the regulations and competitiveness. This study proposes some suggestions to activate the positive impact at last, including the following points: use market-based instruments; adopt stringent rather than lax regulations; set different policies for different provinces and strengthen the interaction; continue to improve the level of education.