Environmental impact of the changing Chinese consumption behavior

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Environmental impact of the changing Chinese consumption behavior

An analysis of the final demand for the Food and Beverages sector in China

Master’s Thesis International Economics & Business

University of Groningen

Faculty of Economics & Business

By: Roel de Boer

Supervisor: D.H.M. Akkermans

Co-supervisor: S. Brakman

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Abstract

This study investigates the effect that a change in consumption behavior in the Chinese Food and Beverages sector has had on the ecological impact its production generates. Using an input-output analysis, it is re-assessed where the production of Chinese final demand takes place and what the environmental impact is. Data from the World Input-Output Database shows that while relative production to meet final demand inside China has not significantly decreased, the accompanied environmental indicators did. A notable shift has taken place, where the ecological footprint to meet Chinese final demand has moved out of China, in to other regions in the world. Together, these findings indicate that due to the changes in the Chinese consumption pattern, the ecological burden of production has grown and simultaneously shifted away from China into countries which supply China in the production of Food and Beverage products with a higher environmental impact.

Key words:

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China is a good example of a country where population and economic development have increased in the past decades. The country is playing an increasingly important role in global agricultural markets as it has emerged from isolation, liberalized its economy, and experienced rising living standards (Gale, Hansen & Jewison, 2015). Besides, between 1995-2009, China’s population increased from 1,204,855,000 to 1,331,260,000, which is an increase of 10,49% percent. In that same period, GDP per capita of China increased from $609.70 dollar to $3838.40 dollar (World Development Indicators). Due to a rise in GDP per capita and the ongoing urbanization within China, many aspects with respect to the consumption of Food and Beverages changed. First, the consumption pattern of its people changed. As income rises above poverty levels, people's demand for more expensive and luxurious Food and Beverage products increases: they consume, for example, more dairy products and meat (Fukase & Martin, 2006; Chen, 2007; Gale & Huang, 2011). Moreover, simultaneously with the rise of income, people request so-called ‘premium foods’ that are of higher quality and convenience (Gale & Huang, 2011). Western-style packaged convenience.foods and beverages are becoming more common in China, just like premium supermarkets and dining out more often (Veeck & Veeck, 2000). It is therefore a logical consequence that supermarkets and convenience stores started to show large growth around the year 2000 (Zhai, Du, Wang, Zhang, Du, & Popkin, 2014). Chinese expenditures with regard to western-style processed foods in supermarkets and convenience stores primarily go to meats, fruits, cereals, non-alcoholic beverages and vegetables (Bhandari & Smith, 2000).

Where the change in the consumption pattern of the Chinese market has been established in several studies (Zhou et al., 2012; Ma et al., 2006; Huang, Wang & Tian, 2017), so has the relationship between China’s change in consumption patterns and the demand for agricultural imports and imports of livestock products (Gale, Hansen & Jewison, 2015; Fukase & Martin, 2015; Cao et al., 2013). The vast trend showing that the demand has been increasing for a diverse range of foods and for foods of higher quality than traditionally has been supplied. Constrained by limited and sometimes degraded agricultural resources, China will be unable to fully meet the increasing, and changing, demand for foods and therefore has to import these from abroad. This is also shown in several import data on China, where especially the import of pork meat, beef and dairy products surged in the period of 1995-2009 (Gale, Hansen & Jewison, 2015; CIRS, 2018).

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Figure 1. The process towards a shifting ecological footprint

2.2 Changing consumption pattern to imports

These phenomena described above could lead to a higher demand for Food and Beverage products from other countries as China may not be able to provide all these desired products itself. Namely, China’s immense increase in this production caused large problems to its environmental status. Among them are air pollution, loss of cropland, degradation of grassland, soil erosion, water pollution and shortages. All are considered production effects that have negative consequences for the domestic production of food (Liu & Diamond, 2005). However, self-sufficiency with regard to the provision of its own food and beverages is something the Chinese government prioritizes on their political agenda (Fukase & Martin, 2006). Maintaining their water and food security for its huge population with its limited available resources, while at the same time sustaining the economic growth momentum, creates significant challenges for China on a macroeconomic scale (Ghose, 2014). Vast amounts of land are required for the production of food, but the area suitable for growing crops is limited. As like many other countries, China is a subject of ecological degradation, where overpopulation, air and water pollution, overconsumption, global warming and unsustainable agricultural and fishing practices cause the ecology to suffer from a growing economy (Tyagi et al., 2014). In the past era’s, China had its focus on internal colonization, moving farmers to regions where unused farmland was available for cultivation, creating the ‘Green Revolution’ as it meant a great increase in food production (Wallech, 2016). However, nowadays China has its focus towards urbanization, decreasing the amount of arable land, while simultaneously increasing the amount of resources required to meet their changing demand (Lin, 2017). Especially limitations in fresh water supply and a lack of irrigated land force China to acquire their consumption basket somewhere else around the globe.

Because of China’s limited amount of arable land per citizen, its ecological degradation and increased demand, many researchers suggest that China buys or leases agricultural land in developing countries, known as land grabbing (Xu, 2018). This could bring along unequal ecological exchange relations between core countries like China and peripheral countries like Africa. Unequal ecological exchange implies that China would export the hazardous production and waste disposal activities from the developed to the less developed countries, while shifting the ecological footprint for their production to these less-developed countries (Gellert, Frey & Dahms, 2017), where these countries would function as pollution havens (Bogmans, Withagen, 2010). Whether these claims of Chinese land grabbing in especially Africa are exaggerated by Western countries is debatable, since neither investment nor trade data support the idea that

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Chinese are using African products for their own food security – at least, not yet (Allan et al., 2013). Information from the Land Matrix Database, the most comprehensive open access database currently available on land acquisition activities worldwide, suggests that land acquisitions in Africa are mainly being operated by European countries rather than Asiatic ones, when looking at the period of 1995 till 2009 that this paper will investigate (Land Marix, 2019). Although imports have increased for certain types of products, there is no sign that China is dependent for its food supply on other countries, and foreign land acquisition does not appear to be part of China’s strategy for food security in the period this paper investigates (Kersting, 2013). Still, if land grabbing is not present in the observed period, the Chinese production itself probably will not be enough to have a sufficient amount of affordable food for its population in the second half of this century. That is the reason why China has to import its shortage from other parts of the world and is spending billions on technology that aids in developing sustainable, high-yield farms (Bloomberg News, 2017). Furthermore, Chinese politicians and officials have ambitious strategic ideas for agricultural investments to reshape patterns of trade and increase China’s influence in the global market. Over 1,300 Chinese enterprises had overseas investments in over a 100 countries in agriculture, forestry, and fisheries valued at $26 billion in 2016, according to China’s Ministry of Agriculture (USDA, 2018). All these investments are known as the ‘Belt and Road Initiative’, an initiative by the Chinese government which is based on the original silk road which connected China to Europe. It is one of the most ambitious and costly infrastructure projects ever conceived and exemplifies the focus of China on overseas strategic positioning to secure its future demand needs (CFR, 2019). 2.3 Shifting the ecological footprint

The two trends mentioned and discussed above give rise to the expectation that the production in other countries to meet Chinese demand in the Food and Beverages sector has seen an increase over the period of 1995-2009. The first trend being the change in consumption pattern of the Chinese population, with a higher demand for livestock products as meat and dairy products. The second trend is the increasing inability of China to produce these particular goods on domestic ground, which in turn leads to higher demand for goods from outside the country. Therefore, the Food and Beverages sector, to be able to meet demand for China, is likely to demand more inputs from the Agricultural sector and other Food and Beverages sectors around the world. This brings along an important relationship which, to the best of my knowledge, has not yet been researched. Namely the accompanied environmental impact that this increasing import of agricultural and livestock demand has caused. While emissions from production stagnated in developed countries, emissions for their consumption kept growing. The rapid growth of exported emissions from developing countries to developed countries, with the largest contribution from China (Pan et al., 2017), played a significant role in this change.

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impact as they produce high amounts of carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O) (Gerber et al., 2013, Corré, 2002). During the life-cycle of food, numerous human-induced activities cause emissions of these gases. For example, the use of fossil fuel in agriculture causes net emissions of CO2 as the cultivation of organic soils often does. The fabrication and application of N-fertilizers causes emissions of N2O. From the digestive tracts of cows, sheep and pigs, CH4 is released. Thus, food consumption directly and indirectly causes emissions of both energy related greenhouse gases and greenhouse gas emissions from other sources (Carlsson-Kanyama, 1998). This would imply that changes in the Chinese consumption pattern have caused direct impact on the ecological footprint of China and other countries which produce to meet Chinese demand.

In fact, this change in the consumption pattern of China creates a completely new value-chain, with an international scope to it. This brings along the question how far we will go in tracing back the ecological inputs needed for the final demand in China. For instance, the production of pork for China not only brings along ecological costs in greenhouse emission gasses CO2, CH4 and N20, but also on water usage. The projected increase in the production and consumption of animal products is likely to put further pressure on the globe’s freshwater resources, since most of the water-use along the supply chain of animal products takes place in the growing of feed (Mekonnen & Hoekstra, 2012). Researchers have shown that almost 90% of an individual’s water requirement is needed for food production (Liu & Savenije, 2008). Because of this, the focus here will be on the greenhouse emission gasses CO2, CH4 and N20, since agriculture is a main contributor for the latter two gases and other parts of the food system contribute carbon dioxide emissions that emanate from the use of fossil fuels in transportation, processing, retailing, storage, and preparation (Carlsson-Kanyama & González, 2009). Next to that, the water-use for the agricultural inputs will be assessed. With these four indicators, the most prominent emissions in Food and Beverage production are believed to be considered, which will give a good overview of the overall trend.

In the upcoming paragraphs, this research focuses on the increasing demand of China for Food and Beverages in the years 1995 and 2009 and thereby the environmental impact it generates. This creates the following hypotheses;

Production related hypotheses:

Hypothesis 1: As a result of the change in consumption pattern, absolute amount of Food and Beverages demand has risen in China, even when correcting for population growth and food price changes.

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Emission related hypotheses:

Hypothesis 3: The ecological footprint for the Food and Beverage consumption in China has increased for all emission indicators.

Hypothesis 4: The ecological outputs needed to meet Chinese demand have shifted out of China and have moved more to other regions, due to an increase in emission intensive imports.

Hypothesis 5: Emission outputs in the agricultural sector to meet Chinese final demand in the Food and Beverage sector have increased for all four indicators.

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3. Methodology

For the core of the analysis the World Input-Output Database (WIOD) is used as a global multi-regional input output (GMRIO) source. This to explain the shifting patterns and linkages of the production process and emissions in China’s final demand for the Food and Beverage sector. Two notes are important here. First, tobacco is also part of the data for Food and Beverages. Tobacco, which accounts for about three percent of this sector in terms of final demand (Department of Commerce, 2012), also has a clear environmental impact due to the complete lifecycle of growing, curing, manufacturing and distributing the product and can therefore not be neglected (WHO, 2017). As this research does not consider tobacco a first necessity of life, it would have preferred to let tobacco out of the data. However, as the data cannot be disaggregated further, tobacco is also included in the data. Since this research intends to focus specifically on the Food and Beverage sector, it can only give a rough estimate of the effects of the changing consumption demand. For ease of notation we will refer to the sector of interest as the Food and Beverage sector. Secondly, the Food and Beverage sector includes a great variety of goods. Since there is no specified data on specific consumption goods, the results give a good overview of the overall trend for the inputs needed to meet Chinese final demand. However, this raises the limitation that it cannot for instance focus on one particular good such as dairy products or pork. The WIOD includes 35 sectors in 41 countries of which one is a region (defined as the ‘Rest of the World’). It does so over a period ranging from 1995 to 2009. To start off, a standard model is used which can be written as:

𝑬 = 𝝁𝑴𝒀, (1)

where 𝑬 is the matrix of the total impact that the changed final consumption demand in China has on the observed ecological factors (CO2, CH4, N2O & water usage). 𝝁 is the summation of all the 35 sectors in all 41 countries divided by their output at basic prices to create a coefficient which equals the chosen factor’s contribution per output for all the sectors. 𝑴 is the Leontief inverse, which accounts for the cumulative input coefficients between different sectors between and within countries. 𝒀 is the final demand vector of China, which is equal to the summation of the five final demand groups presented in the WIOD database1. The five groups are aggregated, since we are interested to see what the effect of the total final demand in China is, regardless of its final destination. To illustrate; this will tell us how much of, for instance, CO2 is necessary to meet the total final demand of China in all sectors. For ease of methodology, we use 𝝁𝑴 = 𝑸, to arrive at:

𝑬 = 𝑸𝒀 (2)

1_{Final consumption expenditure by households, final consumption expenditure by non-profit organizations}

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Equation 2 gives us a 1435 x 1435 matrix with all the outputs for all the countries for a given year. This is a necessary first step, as all the data is needed before it is possible to zoom in on the specific data needed for this research. As the effect of the Food and Beverages final demand in China is the particular interest of this research, it starts with isolating China’s final demand for Food and Beverages consumption. This is done by creating a row vector which only contains a 1 if it links to final demand in the Food and Beverages sector, which is the third sector in the dataset, and a 0 is inserted for every other sector. In this way, only the final consumption for China’s Food and Beverages sector is included. This creates the following final demand: 𝒀 = [ 0 0 1 0 0 0 ⋯ 0 0 0] [ 𝑌1,1 𝑌_1,2 𝑌_1,3 𝑌_1,𝑖 𝑌_2,1 𝑌_2,2 ⋮ 𝑌_41,1 𝑌_41,2 𝑌_41,𝑖] , (3)

where the first subscript describes the country in which the product is originally produced and the second subscript describes the sector in which that specific product is produced. So that 𝑌1,3 is the final demand of China in the Food and Beverage sector from Australia (the first country in the dataset), as the Food and Beverage sector is classified as the third sector. Now, the 1435 x 1 row vector is multiplied, in which every third sector of the 35 sectors is a 1, and all other sectors are a 0, with the 1 x 1435 column vector which represents the final demand of China for every sector from all 41 countries, leaving final demand as:

𝒀 = [ 𝑌_1,1𝐹 0 ⋮ 𝑌_41,1𝐹 0 ] , (4)

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12 [ 𝐸_1,1 𝐸_2,1 ⋮ 𝐸_40,1 𝐸_41,1] = [ 𝑄_1,1 𝑄2,1 ⋮ 𝑄_40,1 𝑄41,1 𝑄_1,2 𝑄2,2 ⋮ 𝑄_40,2 𝑄41,2 ⋯ ⋯ ⋱ ⋯ ⋯ 𝑄_1,40 𝑄2,40 ⋮ 𝑄_40,40 𝑄41,40 𝑄_1,41 𝑄2,41 ⋮ 𝑄_40,41 𝑄41,41][ 𝑌_1,1𝐹 0 ⋮ 𝑌_41,1𝐹 0 ] , (5)

where 𝐸_41,1, for instance, is the impact produced in all the sectors in country 41 (‘Rest of the World’) for the final demand of the Food and Beverage sector in China. And where 𝑄_41,1 is the coefficient of the indicator multiplied by the Leontief inverse, showing what part of the production in the ‘Rest of the World’ is demanded for the production in China. Finally, 𝑌_41,1𝐹 , for instance, describes how much of final demand in the Food and Beverage sector of China is required from the Rest of the World. In more simplistic language; what is the ecological output created by every country to supply in the intermediate inputs and final demand for Chinese consumption demand.

Equation (5) can now be ran for every year from 1995 – 2009 and for all of the different indicators to obtain the primary results. The summation of the first part of equation (5) gives the impact of all sectors in every country which are necessary to meet the final demand in China in Food and Beverage sector.

As the emissions of the Agricultural sector to the final demand for the Food and Beverage sector in China are also of interest, for each of the observed factors the sectoral contribution of Agriculture is calculated. This is done by multiplying (5) with a row vector where there is a 1 for the Agricultural sector and a 0 for all the other sectors, hereby obtaining the contribution of the Agricultural sector for the final demand of the Food and Beverage sector in China: = [1 0 ⋯ 0 0 ] [ 𝐸_1,1 𝐸_2,1 ⋮ 𝐸_40,1 𝐸_41,1] (6)

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3.1 Data and indicators

All the data that is used to conduct this research is gathered from the World Input-Output Database. The World Input-Output Tables (WIOT) are used in a combination with the Environmental Accounts to obtain the core results. Briefly clarified, the WIOT provides data which entails 41 countries (this consists of 27 European countries, 13 other major countries around the globe and a model for the ‘Rest of the World’) for the period ranging from 1995 to 2011. Data for the 35 included sectors are classified following the International Standard Industrial Classification revision 3 (Timmer et al., 2015). For the calculations and the results, the specific focus was at the Food, Beverages & Tobacco sector. In this sector, all production, processing and preservation of meat, vegetables, fruit, fish, oils and fats and the manufacturing of dairy product are included.2

The Environmental Accounts contains and provides data for the different environmental indicators, including for instance sector energy use, emissions to air and water usage. The database again covers 27 European countries and 13 other major countries around the globe and a model for the Rest of the World ranging from 1995 to 2009. This paper observes the period ranging from 1995 – 2009 for this research, because of two main reasons. Firstly, the data available from the WIOD database is available up until this year. Note that from 2009 until now changes have taken place in the Chinese consumption, production and trade environment, but that these are not observed in this paper. This will be elaborated on in the discussion section. Secondly, this particular period is believed to include the most prominent rise GDP per capita growth in the history of China (World Bank).

For the different environmental indicators, a selection of four different indicators was made. To examine the effect that changes in production bring about, a production footprint was constructed following Mair et al. (2014). This footprint will examine what share of final demand for the Chinese Food and Beverage sector is caused by production within China, and what share is caused by the production in other countries. Also, it is examined whether final demand has, as was hypothesized, increased in 1995-2009 by aggregating the final demand of China for the Food and Beverages sector from all countries. For the environmental indicators, four different indicators are gathered from the Environmental Accounts; carbon dioxide (CO2) emission, methane (NH4) emission, nitrous oxide (N2O) emission and water usage. CO2 might be the most obvious and intuitive of the four indicators, since we are all familiar with the fact that the use of machines, powering factories and product transportation requires carbon dioxide which is retrieved from fossil fuels. Since agriculture is the largest input for the Food and Beverages sector, CH4 and N2O are also included in the research, as CH4 is mainly emitted by farm animals and N2O is emitted by for example the fertilization of soils. Since the particular interest of this research is towards the changes in livestock consumption, omitting these two indicators would not provide the correct results and would drastically decrease the significance of this research.

2_{A full and detailed description of the Food, Beverage & Tabaco sector is available at}

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It is important to note that all the environmental indicators are measured in millions of dollars (at current prices). Thereby, all CO2 emissions and water usage are measured in kilotons, where NH4 and N2O emissions are measured in tons.

3.2 Aggregation of regions

To obtain a better indication of the effect on the production and the environmental output which is required for the final consumption in China, the countries are aggregated into five regions. Using this aggregation of regions, more accurate statements can be made about the origin of the factors observed. This could help in determining whether any major trends are present in the regional decomposition of the observed factors. The countries are aggregated in to the five different groups as is hown in Table 1.

Region Countries

Western Europe Austria, Belgium, Cyprus, Denmark, Finland, France, Germany, Great Britain, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Spain, Sweden

Asian Orientated India, Indonesia, Korea, Russia, Taiwan

First world economies Australia, Canada, Japan, United States of America

Eastern Europe, Brazil & Mexico Brazil, Bulgaria, Czech Republic, Estonia, Hungary,

Latvia, Lithuania, Mexico, Poland, Romania, Slovak Republic, Slovenia, Turkey

Rest of the World Rest of the World

Table 1: regional composition

The logic behind this aggregation can be found in the relationship between China and each specific group of countries. For the Asian Orientated Group, these are the countries which share some major cultural and political beliefs and are geographically close to China. Most of China’s foreign agricultural projects involve relatively small companies investing in neighboring countries in Southeast Asia, Russia’s Far East, and Africa that have unexploited land and are often receptive to Chinese investment (USDA, 2018). In these countries, China has obtained strategic positions in the past decades and therefore is likely to have seen a bigger growth in ecological footprint in comparison to the other groups. The Western-Europe

Countries Group is made out of countries which, as the name suggests, are geographically

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absolute as relative numbers, since a larger, more differentiated demand from China would result in a higher demand for Food and Beverage goods supplied in these countries. The First

World Economies Group contains countries which are considered as major economies and first

world countries following the World Population Review, but are not located in Western Europe. These groups are kept separated, since they have no geographical similarity. The reason Japan is not included in the Asian Orientated Group is due to the fact it has a more democratic and Western orientated focus than the other countries in that group. The First World Economies Group is expected to have seen some growth as well, since these economies provide exports to the whole world. With the growth of demand in China, these countries are expected to have increasingly contributed in supplying this demand and the associated environmental costs. The

Eastern Europe, Brazil & Mexico Group consists of countries which have no major connection

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4. Results

The results section discusses the results obtained from the calculations that were provided in MatLab3. The choice for using MatLab is based on its competence to easily import input-output data into matrices and its mathematical efficiency in rearranging the data in the way that was most fit for this research. The result section first discusses the change of final demand in the Chinese Food and Beverages sector in the observed period. Second, it assesses the fluctuations in the production share that originate from inside China and the production share that originates from other countries to meet Chinese final demand. Furthermore, the regional aggregation discussed in Table 1 is used to examines from which of the regions China mainly imports its Food and Beverages. Third, it provides calculations to visualize the changes in the emissions of CO2, CH4, N2O and water usage with regard to production for Chinese Food and Beverages demand. Lastly, the results examines the emission of CO2, CH4, N2O and water usage which are needed in the agricultural sector to provide in the final demand of China. In order to easily link the different hypothesis to the results, Table 2 is created. That way, the expected results can be compared with the actual results and possible reasons for differences between the two will be elaborated upon.

Production Description Expected effect

Overall production

The absolute change in worldwide production to meet the final demand for the Chinese Food and Beverage sector, correcting for population growth and food price changes

The absolute amount of production has risen, even when correcting for population growth and food price changes

Production composition

Which part of production for Chinese final demand is produced where in the world

The relative amount produced inside China has dropped in comparison to all other countries

Emissions

Overall emissions

The absolute change in worldwide emissions output to meet final demand in the Chinese Food and Beverage sector.

The absolute amount of emission output has risen over the examined period

CO2, CH4, N2O & water usage composition

The composition of the four indicators and where they are produced to meet final demand for the Chinese Food and Beverages sector

The relative amount of emissions outputs produced in China has dropped in comparison to other countries, for each indicator Agricultural

output

The emission output in the agricultural sector to meet Chinese final demand in the Food and Beverages sector

Per million dollar of final demand, all four emissions have risen in the agricultural sector

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Table 3. Expected results

4.1 Chinese changing demand

Using the final demand vectors of China in the Food and Beverage sector, Figure 2 is constructed, where the black line shows the unadjusted final demand.

Figure 2. Chinese demand for Food and Beverages

The major driving forces of food demand have gradually shifted from population growth to rising income and urbanization, leading to significant changes in food demand and consumption patterns. Considering that final demand might have increased due to population growth and not due to a changing consumption pattern, the final demand is adjusted for population growth by dividing the final demand with the relative population growth in the same period (World Data Bank, 2019). Furthermore, since the final demand is measured in millions of US dollars, it could be that price changes in Food and Beverages have led to an increase in the absolute numbers. Therefore the final demand, which was already corrected for population growth is again divided by the relative food price changes for the Food and Beverage sector to correct for both population growth and food price changes.

As becomes clear from Figure 2, final demand in the Food and Beverages sector of China has seen a steady increase over the observed period. Up until 2004 this increase is fairly moderate, but after this year a more prominent increase takes place. As becomes clear, population growth only accounts for a relatively small part of the increase in the final demand. Correction for both population growth and food price changes mitigates the increase that took place from 2006 onwards, explaining that food prices did have a rather significant effect on the final demand in US dollars. This also in agreement with data provided by the World Trade Organization (WTO), which suggests that prices of Food and Beverages started to accelerate in 2006 (WTO, 2015).

0 50000 100000 150000 200000 250000 300000 350000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 F in al d em an d in m il li o n s o f US$

Chinese demand for food, beverages and tobacco 1995-2009

Final Demand

Corrected for population growth

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4.2 Regional decomposition of production for Chinese final demand

First, to get an indication whether production to meet Chinese final demand in the Food and Beverages sector has shifted out of China and into other countries, Figure 3 is constructed. This shows what percentage of total production to meet Chinese final demand is produced in China, and what part is produced in all other countries in the world.

Figure 3. Chinese in-house production versus production elsewhere

As is visible from Figure 3, production to meet Chinese final demand has not necessarily shifted out of China itself. In 1995, the percentage of in-house production, 89.83%, was almost similar to the percentage in 2009, namely 89.62%. Although there have been some fluctuations over the whole period, there is no clear consensus that a trend of higher relative production outside China is present, although this was the expected effect. This could imply that it is not the production of Chinese demand that has shifted more towards other countries, but more so the ecological burden that it brings, which will be elaborated on later. To get a clearer overview of the different regions supporting China in its growing absolute demand, the production of final demand for China is aggregated in the way described in Table 1. Where Figure 3 gave us the total production output supplied by all other countries, Figure 4 will break this total down into the different regions. This implicitly means that adding all lines in Figure 4 together will result in to the black line in Figure 3. Note that the Figure 4 shows percentages of total production to meet the final demand of China, and that total production has quintupled, resulting in an absolute increase of production in every region.

87 89 91 93 95 5 7 9 11 13 Ch in ese p ro d u ctio n ( %) A ll o th er co u n tr ies (%)

Chinese production versus production in all other countries

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Figure 4. Regional decomposition of production

As becomes evident when looking at Figure 4, the First World Economies have been responsible for most of the production for Chinese final demand for the Food and Beverages sector in the first half of the observed period. The relative production share of the First World Economies remains relatively stable over the observed time period, only witnessing a slight drop when looking at 1995 and 2008 separately. The share of Western European Countries and Asian Orientated Countries is also relatively steady, showing only minor fluctuations over time. The contribution of Eastern Europe, Brazil & Mexico group stay fairly small over the whole period. The most interesting trend is visible for the Rest of the World group. Namely, it shows a doubling of its relative production share and overtakes the First World Economies in terms of relative production share from 2003 onwards. This result suggests that China has increased its demand from goods which are produced in countries with the least economic data (mostly poorer countries). This would be in line with the matter of land-grabbing. It must be noted however, that we cannot draw any major conclusions from this graph, since we have no disaggregation for this group. Also note that from 2008 till 2009 production for the final demand of China from outside its own country has declined, which is mainly due to the collapse of international trade during the 2008-2009 crisis (Levchenko et al. 2009).

To summarize this section, the final demand from China for products in the Food and Beverages sector has seen an overall increase in the period of 1995-2009. As the increase still remains visible when population growth and food price changes are taken into account, it may suggest that China demands relatively more Food and Beverages for their final demand. Despite the increased demand, China remained fairly self-sufficient, always keeping their in-land production at a minimum of 87%, as was shown in Figure 3. This does not match with hypothesis 2, as a trend towards a larger relative share of production produced elsewhere was expected. The regional decomposition visualized that for most of the period the First World

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 P erc en tag es (% ) o f to tal p ro d u cti o n

Regional decomposition of production for final demand China

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Economies and the Rest of the World were the most notable producers from outside China for the final demand of Food and Beverages, where the Rest of the World has seen the biggest growth. This last observation is partly in line with the hypothesis, as one would expect that imports would have risen from the countries that are considered to be a target of Chinese strategic positioning. This would also suggest that the Asian Orientated Countries would have grown in their share to Chinese final demand, which is then again not the case. A possible reason for this may be the shift in the type of Food and Beverage products that are demanded, as the Asian Orientated Countries share a larger similarity in Food and Beverage products. The next section discusses what the initial observations have meant for the change in emission outputs of carbon-dioxide, methane, nitrous oxide and water usage in China and the other regions.

4.3 Emissions

This section continues by examining how final demand changes of China have affected the emission outputs of CO2, CH4, N2O and water usage (referred to as H2O) Due to the change in consumption pattern, a production of more emissions intensive goods like meat and dairy products is expected to have an effect on the emissions needed to meet final demand. This includes all the emissions for these four indicators in the 41 countries which are necessary to meet the final demand of the Chines Food and Beverage sector. Table 3 shows these indicators for the observed period 1995-2009.

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For CO2, a small increase is observed in the period 1995-1996. After these two years, the emissions outputs of CO2 decreases until the year 2002. After 2002, the CO2 emission output starts to grow significantly up until 2009. The emission outputs of CH4, N2O and water usage show a pattern similar to the one of CO2, where they show an increase in emission outputs in the 1995-1997 period, and thereafter a decrease until 2002. From 2003 onwards, all emissions outputs start to strongly increase again, where the largest increase in emission outputs for all four indicators is observed in the period 2003-2008. The reason that most indicators stagnate or severely fall in 2009 is mainly because of the global economic crisis, which resulted in lower imports and less industry due to uncertainty.

As it is of importance to determine how relative emission outputs to meet Chinese final demand for the Food and Beverage sector have changed, Figure 5 is constructed. This give an overview on how all other countries in the world have provided in emission output for each of the four environmental indicators.

Figure 5. Relative emission outputs, China versus all other countries

As becomes clear from the outcome of Figure 5, a strong trend is observed for each of the four indicators. All emission outputs have shown a steady increase over the observed period, where water usage shows the largest growth. For each of the indicators, there has been a relative growth of at least 2.5 times in emission outputs produced in other countries, indicating a clear shift of the emissions output location. Considering the fact that relatively Chinese out-of-house production has not increased (Figure 3), it can be concluded that the rest of the globe has had an increasingly large share of emission intensive production to meet Chinese final demand. This can be seen as a logic consequence of the change in consumption pattern to more meat and

80 85 90 95 100 0 5 10 15 20 C h in ese em is sio n o u tp u t (%) A ll o th er co u n tr ies (%)

Emissions for final demand, China versus all other countries

CO2 CH4 N2O H2O

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dairy products, which are rather emission intensive. Looking at the outcomes of Figure 5, it is of interest to see the disaggregation of each of the four indicators across the different regions. In this way, an indication can be obtained in to where the Chinese ecological footprint has grown the most to meet its final demands and if this differs across the four given indicators. These results will be discussed in the next paragraphs.

4.3.1 Carbon dioxide emissions (CO2)

Beginning with carbon dioxide emissions, CO2, Figure 6 gives a regional decomposition of CO2 emissions in other regions for the final demand in the Food and Beverages sector in China. The hypotheses here is that the decomposition of CO2 emissions to air has grown in the observed period in every region due to an increased amount of imports of relatively more CO2 intensive goods like meat and dairy products from other regions in the world.

Figure 6. Regional decomposition of CO2 emissions for Chinese final demand As becomes evident from Figure 6, there has been an overall increase in the emission of carbon dioxide to meet final demand for the Chinese Food and Beverage sector. In 1995, CO2 emissions to air originated for 96,25% in China itself, whereas this fell to 90,06% in 2009. The main shift has taken place in three regions, namely Rest of the World, Asian Orientated Countries and First World Economies, which corresponds fairly well with the production aggregation of Figure 3 and with the hypothesis that was made. What is interesting to note, is that the Asian Orientated Countries contribute relatively more CO2 emission to air than they produce in terms of the relative production decomposition. This would imply that the focus of imports from these countries has shifted to more CO2 intensive Food and Beverage products or that the import of these products has become more CO2 intensive. If for instance emission outputs of transport and fueling in this region have grown disproportionally to the amount of

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 P er ce n tag e o f C O2 em is sio n s o f to tal

Regional decomposition of CO₂emissions for final demand of China

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products imported, it would increase the CO2 footprint while leaving the percentage of production at a steady level.

4.3.2 Methane emissions (CH4)

Next, the methane emissions that are related with the final demand for the Food and Beverage sector in China will be observed. The expected finding is that relative methane emissions to meet China’s demand have become larger in all regions where a lot of livestock products are exported. These regions include Rest of the World, the Eastern Europe, Brazil & Mexico and the First World Economies as these three regions include all South-American countries, the United States and Australia, which in turn show the largest exports of meat to China. The results are shown in Figure 7.

Figure 7. Regional decomposition of CH4 emissions for Chinese final demand

Figure 7 clearly indicates that there has been a large shift in the composition of CH4 to meet Chinese final demand. Where CH4 emissions from outside China only accounted for 4.70% in 1995, this tripled to 14.26% in 2008, which is a massive growth. A clear trend can be observed in the increase of CH4 emissions in the three expected regions, indicating the large increase in the demand for livestock to meet Chinese demand. Due to the economic crisis and the uncertainty this crisis brought the percentage dropped in 2009. Most notable here is that the two largest regions in terms of CH4 emissions in 2008 both fell drastically and that the First World Economies kept following their original growth pattern. Reasons for this drop will be explained in the discussion sector, as this pattern is also visible in the rest of the emissions which are elaborated upon. 0 1 2 3 4 5 6 7 8 P er ce n tag e o f C H4 em is sio n s o f to tal

Regional decomposition of CH₄emissions for final demand of China

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4.3.3 Nitrogen dioxide emissions (N2O)

Continuing with the nitrogen dioxide emissions to air, this is expected to show a similar trend as methane emissions, as nitrogen dioxide emissions are also closely related to livestock products. In a report by the European Nitrogen Assessment published in 2015, it is estimated that around 81-87% of total methane emissions in the Food and Beverage sector is related to livestock production. In these values for livestock production the emissions related to feed production are included. The results of the decomposition are shown in Figure 8.

Figure 8. Regional decomposition of N2O emissions for Chinese final demand As expected, Figure 8 is quite similar to the regional decomposition of the methane emissions in Figure 7. In 1995, 95.40% of total N2O emissions to meet Chinese final demand in the Food and Beverage sector was coming from Chinese production, whereas this dropped to 86.44% in 2008. Again, the most prominent changes in the regions of the ecological footprint are visible in the Rest of the World, the Eastern Europe, Brazil & Mexico and the First World Economies, as these have the highest amount of livestock exports to China. As well as for methane, we observe a drop in the total nitrogen dioxide emissions to air in the year 2009 for the Rest of the World and the Eastern Europe, Brazil & Mexico.

4.3.4 Water usage (H2O)

Lastly, we will observe the decomposition of water usage for the final demand in the Chinese Food and Beverage sector. Here, it is expected that the water usage has increased in every region to meet Chinese final demand. This is because of the fact that due to an overall change in the Chinese consumption pattern, all interconnections between different regions and

0 1 2 3 4 5 6 7 8 P er ce n tag e o f N2 O em is sio n s o f to tal

Regional decomposition of N₂O emissions for final demand of China

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countries are expected to have increased to meet this demand. As water is a main source used in almost every part of the value chain, we expect its percentage to have grown in every region other than China. The results are shown in Figure 9.

Figure 9. Regional decomposition of H₂O emissions for Chinese final demand

It becomes visible when looking at Figure 9, that the ecological footprint of water has shifted more and more out of China and in to other regions around the globe. Where China was responsible for around 93-95% of the water usage needed to meet final demand between 1995 and 1999, this dropped to 82% in 2008. Furthermore, notice that all regions have seen a relative increase in the period 1995-2008, which is in line with the hypothesis. Only in 2009, just like with the other three indicators, a decline is observed in most regions.

To conclude this section, it is acceptable to state that the ecological footprint of China has shifted away from its own production to meet their final demand in the Food and Beverages sector. As for all the four indicators, China had an average of 95,17% of emission produced in-house in 1995. When looking at 2008, this number dropped to 86,21%. This all happened while the production percentage of China within the country stayed at roughly the same level, moving from 89,93% to 88,31% between 1995 and 2008. The reason 2008 is picked as a comparison and not 2009, is because of the large impact that the economic crisis had on the imports of China. This would not give us the desired trend line, but would only provide us an unrepresentative snapshot. It is important to note that all the percentages used in the calculations are a percentage of the total amount of emissions output. This would imply that there is a possibility that some results are interlinked, as a large fall of emission output in one region in a certain year could automatically imply a relative increase in a different region. As this could bias the results, a closer look into the absolute numbers was necessary, which showed nearly the same trend as the relative results. Even for the largest deficits between 2008 and 2009,

1 2 3 4 5 6 7 8 9 10 P er ce n tag e o f H2 O em is sio n s o f to tal

Regional decomposition of H₂O emissions for final demand of China

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where a fall of all the regions outputs except the First World Economies was noticed, this remained true. The data still showed an absolute increase in the First World Economies’ emissions output, showing that the relative trends are a good representation of the absolute trends. As stated above, it is interesting to see that where all regions faced a relative downfall in their emission outputs between 2008 and 2009, the First World Economies did not do so. A reason for this could be that the economic crisis had a relatively bigger influence in smaller economies, whereas in larger economies, like the major economies which are part of the First World Economies, this was less noticeable. The overall outcomes clearly show that production from outside China have become increasingly emission intensive, creating an ecological burden on countries which produce intermediate or final goods to meet the final demand of the Chinese population. This burden has been most present in the Rest of the World, were all emissions saw an increase of at least three times its original value. The most intuitive reason behind this would be the increase of imports of livestock products from a lot of South-American countries which are not explicitly represented in the data. Still overall, it could be that the changes have occurred

not due to an increase in for instance livestock imports, but due to the fact that emissions to

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4.4 Effect on agricultural output

This section will demonstrate whether CO2, CH4, N2O and water usage in other countries’ agricultural sectors have increased as a consequence of the changing and growing demand from China. It will do so by investigating how emissions output have changed per million dollar of final demand in the food & beverages sector. Doing so will help us in determining whether the changes in the agricultural sector, which is the largest contributor to the Food and Beverages sector, have seen the same effect as the total emissions. If this is the case, it would imply that it is not only a shift in ecological emission output, but also a shift in the emission output of the most direct link to livestock products in the form of meat and dairy.

Figure 10. Emissions per final demand (in million $)

Examining the results of the emissions in agriculture per million dollar of final demand shown in Figure 8, a few interesting things stand out. First, all four indicators show an increase from 1995 to 2008, again dropping heavily in 2009, implying that there has indeed been an increase in the emission output of the agricultural to meet the final demand in the Food and Beverage sector of China. As stated before, this would give solid reason to believe that a change in consumption pattern has resulted in a shifting of the ecological footprint to countries that produce goods to meet Chinese final demand, confirming the hypothesis. Next, the results show that for CH4, N2O and water usage, the trends are closely related to the growth in absolute terms, confirming that the production of livestock and other emission intensive activities have indeed increased, as these indicators are closely related to agricultural output. For CO2 however, this remained fairly consistent over the years. This can be explained by the fact that CO2 emissions are more related with the transportation, processing, retailing, storage, and preparation of the production process, which has likely become more efficient and therefore shows a less disproportionate growth. 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 E m ss is io n s o f C O2 an d w ater ar e in k ilo to n n es E m is sio n s o f C H4 an d N2 O in to n n es

Emissions in agriculture per million dollar of final demand for China

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5. Discussion

To ensure the demand needs for its changing consumption pattern, China imports increasingly more emission intensive products from outside its own country. In doing so, it shifts the ecological footprint needed for their final demand in the Food and Beverage sector to other countries, relocating the ecological burden needed to meet consumption needs. Although this is an existing phenomenon, this paper only examines the one-way effect of Chinese consumption. It is well possible that China has also become a larger net exporter in Food and Beverage production to other countries, which could imply that the net effect of the ecological footprint location has not changed that significantly.

To ensure their food security, countries like China purchase or lease substantial amounts of arable land from other countries and export the production of food and beverages back to their own country. This issue of so-called land grabbing could be the reason for the increase in the production share of the Rest of the World in the Chinese final demand for Food and Beverages and is something not easily accounted for. Since the effect of the Rest of the World region are of significant importance, a more detailed disaggregation of this region would be necessary in order to create more solid statements about this issue.

Furthermore, inflation could slightly underestimate the results. Inflation would have the consequence that prices of production would be higher, while it would not affect the data on emission effects. This could possibly underestimate the effect of the four environmental indicators, and is something not easily accounted for when working with such an extensive dataset as the one used in this analysis. Moreover, it is arguable that it is not the Chinese final demand for more luxurious and desired goods that has increased, but that the production process of these goods has become more emission intensive, due to increased automation (Alenčikien et al., 2008).

Considering the time period of 1995-2009, notable effects have taken place. For most of the results and conclusions, the years 1995 till 2008 were used, as these saw the most consistent trend. From 2008 till 2009, most production and emission statistics dropped significantly due to the economic crisis. This crisis resulted in a lack of trust, a more closed world economy and thus a drop of trade flows. Although the 2009 results therefore do not show the overall trend that was present, it does show how a financial crisis brings countries back to their original state, in which China is again largely self-relying on its production and thereby shifting the ecological footprint for its production back to its own country. For further research, it could be of interest how this effect developed in the later years and to which extent this drop was just a snapshot of the economic crisis.

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whether the trend of 1995-2008 continued after the observed period. Where China has seen changes in the consumption, production and trade environment in the last era, these are not accounted for in this paper. It would be of great interest to see whether the observed trends have kept moving at the same pace in the period of 2009 until now. Especially considering the current circumstances in China with regard to the swine fever, it will be a great challenge for China to meet its consumption demand. Having to remove already 200 million pigs, equalling 35% of the total pig-industry in China, will have a huge impact on the import and accompanied ecological output needed to meet Chinese demand. It would be of great interest to see what such an event means in terms of the economic and ecological impact.

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6. Conclusion

This research specifically focusses on the increasing demand from China in the Food and Beverages industry, due their changed consumption behaviour. It does so for the period of 1995-2009, using input-output data retrieved from the World Input-Output Database (WIOD). In this way, an extended input-output analysis is conducted. The analysis reveals that final demand from China for goods from the Food and Beverages sector has increased over the period of 1995-2009, even when controlling for population growth and food price changes, confirming hypothesis 1.

Although absolute numbers of final demand have increased, China remained rather self-sufficient in producing to meet their final demand. In 2008, China still held a 88.3% production share of the total production which was needed to meet the total final demand. This invalidates the second hypothesis, as it was hypothesized that the overall share of production had shifted out of China and into other countries. A regional decomposition was constructed in order to assess changes in production patterns of other countries to meet Chinese final demand, determining whether a shift had taken place in the different regions supplying for China. The main takeaway of the regional decomposition emphasized the increased dependency of China on the ‘Rest of the World’ in the production for the Chinese final demand. A possible explanation for this would be the phenomenon of land-grabbing. As China only holds a limited amount of irrigated and arable land, it is suggested that it invests in other countries by leasing or buying agricultural land, of which the products are then again exported back to China. Besides, the First World Economies have given in to their relative share of production, creating the assumption that China has become less reliant on this group opposed to the other groups.

The research continued by estimating how the observed changes in the final demand due to the changed consumption pattern have affected the emission outputs of CO2, CH4, N2O and water usage. For all four environmental indicators, total emission outputs experienced a slight increase in the period 1995-1997 for Chinese final demand in the Food and Beverages sector. Then, from 1997 until 2001, emission outputs saw a decrease in all four indicators. The again emission outputs picked up, with a strong increase in total emission outputs until 2008, confirming hypothesis 3. From 2008 to 2009 a large drop took place, which is explained by the economic crisis which hit China in the last semester of 2008 and only worsened in 2009. This last year is therefore taken out of consideration when assessing the hypotheses, as it would provide results which do not correctly assess the overall trend.

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Rest of the World, Asian Orientated Countries and more increasingly the First World Economies are the main emitters, al showing growth in the observed period. Furthermore, the CH4 and N2O emission outputs show a significant increase when looking at the share of emissions produced elsewhere, both showing increases of three times their initial value. Most prominent effects have taken place in the Rest of the World and the Eastern European Countries, Brazil & Mexico. As Chinese demand focus has shifted to more livestock products, these results confirm the assumption that the ecological footprint has shifted due to the changed demand, as these two groups contain the countries with the largest livestock exports.

Lastly, to more accurately determine that it is the increased demand in livestock products that has caused a shift in the relative emission outputs out of China, it is examined whether emission of CO2, CH4, N2O and water usage in the agricultural sector per million dollar of final demand for China has seen an increase. The obtained results clearly show that four each of the four indicators there has been an increase, with the largest increases being visible for CH4, N2O and water usage, the main emission outputs of livestock production. This confirms hypothesis number 5.

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Environmental impact of the changing Chinese consumption behavior