Pandemic shock and the sustainability of international trade flows - Finanziamento dell’Unione Europea – NextGenerationEU – missione 4, componente 2, investimento 1.1.

This research proposal addresses the environmental impact of economic downturns, taking the COVID-19 shock as a natural experiment. The COVID-19-imposed lockdowns had significant short-term environmental effects (Elsaid et al., 2021), but their implications for the longer-run sustainability of production technology remain understudied (Hepburn et al., 2020; OECD, 2021). The economic crisis shrunk the firms' resource buffer and imposed cuts on input costs. These shocks may have led firms to reallocate their input portfolio, with potential implications for their sustainability: if "greener" inputs are more expensive than polluting inputs, the production technology of affected firms may become more polluting (Antweiler et al., 2001; Copeland and Taylor, 2004; Egger et al., 2021). At the same time, the sudden halt imposed by the pandemic on economic activities may have represented an opportunity to revise the production technology and to reduce inefficiencies, including the use of polluting inputs, in line with classical arguments of the Porter Hypothesis (PH; Porter and Van den Linde, 1995; see also, e.g., Devece et al. 2016). In particular, the increased transaction costs arising from the pandemic may have reduced the incentives for firms to disintegrate vertically, reduced the incentives to offshore production, and possibly even to outsource domestically. The environmental impacts of these changes might be relevant if the pandemic represented an opportunity to invert decisions initially motivated by "pollution haven" considerations (Levinson and Taylor, 2008), bringing production back to countries with stricter environmental regulations and reducing the environmental costs of cross international transportation. Empirically, we exploit the COVID-19 pandemic as a shock that exogenously imposed a temporary halt to production depending on whether the firm's industry was "essential" vs. "non-essential" in a diff-in-diff approach (cf. Di Porto et al., 2022, Goodman-Bacon and Marcus, 2020). Firms more strongly affected by temporary closures had to face production slowdowns, value-chain disruptions, and revenue erosion; hence will have stronger reasons to revise their production strategies. To measure input adoption, we critically rely on the availability of unique population data on Italian firms' international trade. Under some circumstances, imports may represent a valid measure of input adoption (Brunel, 2019). Drawing on detailed information about the value and product classification of imports, we expect to derive an accurate measure of the sustainability of the imports. This will allows us to study whether Italian firms reacted to the COVID-19 shock by adjusting their sourcing strategies. The results will be informative about the environmental impacts of economic downturns and speak to the broader debate about the trade-off between "growing and greening" the economy (e.g., Brandi et al., 2020).