Differences in Environmental Policies and Transfer of Regional Industry: A Perspective of New Economic Geography (NEG).

The industrial development in western China and the industrial structure adjustment in eastern China are both closely related to inter-regional industry transfer. During the process of regional industrial development and inter-regional industry transfer, environmental problems related to differences in environmental policies have become increasingly prominent. It can be observed that, on the one hand, the issue of environmental pollution in the western region is more severe than that in the eastern region on the other hand, the ratios of high-tech industry and GDP of the eastern region have been increasing year by year compared with those in the western region. It can be demonstrated to a large extent that the phenomenon and trend of "pollution moving westward, high-tech industry shifting eastward, and the value of industrial output agglomerating in the eastern region" have emerged. In response to this "phenomenon and trend, the existing literature has attached more attention to pollution moving westward" rather than make any integrated analysis of the relevant phenomenon like "high-tech industry shifting eastward." However, this paper, based on the New Economic Geography (NEG) paradigm, offers a unified explanation for this phenomenon by looking at the differences in regional environmental policies and regional industry transfer and taking full account of agglomeration economy and transport cost. For this purpose, this paper constructs a two-region, two-department and two-factor model, and further divides the manufacturing sector into high-pollution and low-pollution industries. This research shows that as long as the differences in environmental policies exist between the less-developed region and developed region, even if the difference is minor, there is only one stable equilibrium form: low-pollution industry agglomerates in the developed region while high-pollution industry is distributed in both regions, but mainly in the less-developed region. In other words, the regional industrial structure is very sensitive to differences in the environmental policy. The reason for this is that low marginal cost drives high-pollution industry to agglomerate in the less-developed region where the environmental policy is loose. The agglomeration of high-pollution industry in turn eventually drives low-pollution industry to agglomerate in the developed region through inter-industry demand substitution effects, even though "the low-pollution industry is not in an inferior position in the less-developed region. However, due to the relatively small proportion of environmental costs in the production costs of enterprises, the geographical distribution of the manufacturing sector is not sensitive to the differences in environmental policies. Further welfare analysis indicates that owing to the presence of the agglomeration economy, the developed regions have enjoyed a higher level of welfare while the less-developed region has to accept most of the high-pollution enterprises in the regional industrial transfer caused by the differences in environmental policies and has to suffer the welfare losses related to environment pollution. The policy implication of this paper is very clear. On the one hand the low-threshold environmental policies in the less-developed region will dramatically change the industrial structure of the two regions, "strongly expel low-pollution clean" industry, and at 'the same time attract a large number of high-pollution "contaminative" industries to agglomerate in less-developed regions. On the other hand, the regional policy of lowering the environmental standards in exchange for value of industrial output is actually of no help in increasing the regional share of manufacturing production or promoting local economic development. [ABSTRACT FROM AUTHOR]