Import-export nexus and China's emerging trade in environmental goods

International trade in environmental goods (EG) provides a market-based solution to balance the development-environment relationship. How can developing economies gain new growth opportunities through trade liberalisation in the EGs? This study investigates the structural features of products and firms during the early development of China's EG trade. This study defines the import-export nexus as the product relatedness between imports and exports at the firm level, which may promote the technology spill overs and firm cooperation. This study combines two nationwide data sets and constructs a data panel covering 334 prefectures and 248 EGs during 2001-2012. The conditional logit model with fixed effects is used for coefficient estimation. Empirical results reveal that the import-export nexus promotes new EGs in domestic sectors and export baskets, primarily supported by domestic private firms. The import-export nexus allows state-owned firms, which only represent a small market share, to enrich export baskets. It also helps foreign firms to develop new EGs in domestic sectors. These findings suggest revisiting the role of state-owned firms in industrial policy and developing a broad list of EGs to make use of the product relatedness. These will make developing economies like China gain new growth opportunities from the EG trade.