Master Thesis:
Is China a Pollution Haven? An analysis using input-output data
Yixuan Liu y.liu.62@student.rug.nl
S3336565
University of Groningen Faculty of Economics and Business
Supervisors: Abdul Erumban
Co-assessor: Marcel Timmer
Abstract
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1.Introduction
International trade has connected the world substantially during the last few centuries. It changed the lifestyles of people and facilitated the improvement of per capita income. However, benefits always come with costs. Besides costs related to transportation, tariffs and information searching, environmental costs have gained in significance. Sampson(2000) reported the increasing liberalization of trade across the globe only served to further the dispute about the relationship between trade and environment. One interpretation of this relationship is the ‘pollution heaven hypothesis' according to which some developing countries become pollution havens due to looser regulations. Using China as an example, this thesis analyzes the pollution produced by trade in developing countries.
Since the economic reform in 1978, China progressively opened up to global markets and preceded to become one of the fastest growing nations in the world. In addition to trade liberalization measures, international trade also benefited from the steam and ICT revolutions. In this context, Baldwin (2006) noted that globalization was driven by a steady cost reduction of moving products, people and ideas. As a result, trade is less constricted by geography and the need for proximity, as consumption and production and even individual production stages can be separated. In other words, intermediate and final outputs can be shipped efficiently to any other nation for further production or final consumption. This separation of consumption and production is called the first unbundling.
The participation of China in international trades is facilitated via a number of labor intensive and resource abundant industries. Chow (2001) mentioned China was known as the ‘world’s factory' and became a major player in international trade after joining the World Trade Organization. Consequently, trade volume and income increased in China. From 1995 to 2004 Chinese exports grew by 24% per year on average (World Bank, 2006). Dollar et al.(2004) divided developing countries into two groups, and emphasized that countries like China and India, which had a significant increase in the real trade flows performed better than the rest of the developing world. However, these countries also exhibited large levels of pollution generated by their labor and resource intensive industries.
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used factor endowments to explain trade flows, thus, a nation always exports goods using its abundant factors intensively, and imports goods using its scarce factors intensively. According to these fundamental theories, trade is the result of differences in technology and factor endowments which cause different countries to specialize in different products and production stages. Hence, most of the developing countries export more labor intensive goods. On the contrary, the capital-intensive and high-tech industries are more popular in advanced economies.
1.1 The recent acceleration in international trade: the role of fragmentation
The aforementioned theories go a long way in explaining the underlying fundamentals of international trade. However, when Wassili Leontief used IO analysis to examine US trade he found that the US exports more labor-intensive goods and imports capital-intensive goods. This ‘Leontief paradox’ seemingly contradicts the H-O theory. One explanation for this confounding outcome may be the fragmentation of production which allows countries to focus on specific tasks within the production chain.
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Chart 1: Import of intermediate products(thousand USD) in 1995-2009 (Data source: World Integrated Trade Solution ) Chart 1 shows that the import of intermediate goods (in thousand USD) of the top four importers of intermediate products. Around the world trade of intermediate goods increased fast, especially after 2002. In China, trade of intermediate products increased sharply and almost caught up with the US and Germany in 2008.
China contributed significantly to trade in the second unbundling period. Koopman et al. (2012) researched China’s exports and found that China carries out a significant amount of assembling activities which are based on imported intermediates. Gereffi(1999) found as of the 1990s China has become a world-class exporter, mainly by participating in buyer-driven commodity chains. At the start, global value chain participation in East Asia was primarily based on the assembly activities of imported input. Thus, the level of domestic integration and the value added were relatively low. At the same time pollution generated by the Chinese economy skyrocketed. Undeniably, production processes generate more emission than R&D or sales activities. Developed countries often outsource production activities like assembly to developing countries which also increases the pollution generated by these countries.
1.2 The issue of pollution in trade and global production fragmentation
With the growth of trade, the environmental issue has become popular. Climate change is one of the most outstanding environmental problems. Its consequences range from rising sea levels and flooding to droughts and diseases. Thus, climate scientists argue that the global community should control and reduce their total carbon dioxide emission. Moreover, other gases like sulfur dioxide and nitrogen oxide also harm the ecosystem, inducing acid rain and plant deterioration. Trade is a major contributor
0 50000000 100000000 150000000 200000000 250000000 300000000 350000000
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to pollution as transportation and production processes use large amounts of fossil fuels and combustion of fossil fuels leads to gas emission.
Due to the second unbundling, more emission-intensive production steps are transferred from advanced countries to developing nations. Baldwin (2012) mentioned the production stages previously performed nearby are dispersed across different regions and wage gaps determine the vertical specialization. Some ‘headquarter economies’, such as the US and UK, sent their labor- and emission-intensive activities to nearby neighbors with lower wage costs. The latter are called ‘factory economies’. In the context H-O’s trade theory, researchers Leamer (1980) and Bowen et al. (1987) characterized ‘emission permits' as one of the endowment factors. As developing countries tend to have looser environmental regulations their environmental costs are lower in the absence of such emission trading systems. This constitutes a comparative advantage. As a result, developing countries will specialize in more emission-intensive activities. At the same time, the pollution embodied in these activities are also transferred to the ‘factory countries'.
In general, countries place great importance on environmental issues. Many countries make great efforts to innovate, enhance alternative energy supply and produce cleaner goods. However, there are still some conflicts regarding who should take more responsibility for the production of emissions. Steinber (1997) observed the push for more environmental accountability primarily originates from rich countries who adopt stricter environmental regulation than poor states. In addition, these greener nations may use their power and market size, to impose international trade-environment rules on developing countries and force them to reduce pollution.
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For carbon dioxide emissions China has become a major emission generator and is the number one contributor since 2004. Although emissions per capita are lower than in the US, the sheer magnitude of China's pollution has attracted much attention and some blaming voices. However, as the biggest factory economy, a significant share of emissions is accrued in the production of export. This thesis will focus on China and discusses if China is a net emission exporter in trade and if China is a pollution haven.
The thesis is organized as follows: Section 1 serves as an introduction, in section 2 the relevant literature about economic growth and pollution, and pollution in trade is reviewed, section 3 presents the methodology and data, section 4 illustrates the application and results for China, and section 5 offers the conclusion and some policy advice.
2.Review of literature
This thesis considers the issue of pollution in trade, therefore, existing pieces of literature on economic growth and trade, and how pollution is associated with growth and trade have been reviewed here. This review of literature includes two parts, 'economic growth and pollution', and 'pollution-the cost of trade'. In the first part, I present how several factors contribute to the economic growth and also bring the pollution, while the second part emphatically focuses on the trade-associated pollution.
2.1 economic growth and pollution
There are some studies about emerging markets, which will lead us to have an insight into the relationship between growth and pollution. Firebaugh and Beck (1994) argued the economic growth could bring better lives for masses, its effect on national welfare is robust especially in the third world. Some factors such as investment, foreign direct investment (FDI), structural change, technology, and trade contribute to growth but increase the pollution.
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markets and the accumulation of management skills and technology that all contribute to the growth, so China grew faster than India since the 1990s. However, Grossman and Krueger (1995) investigated the inverted 'U' shape curve relationship between income and pollution. Pollution will start decreasing when income reaches the turning point at the relatively high level. However, the environment always deteriorates at the initial phase of economic development before that turning point.
Structural change contributes to the economic growth as well, but the movement of people and resources from agriculture to manufacturing create many pollutions. McMillan and Rodrik(2011) analyzed the contribution of structural change to the labor productivity and economic growth and found Asia's economy with the dependence of structural change has developed faster and more steady than Africa and Latin American area. Rodrik(2013)found in Vietnam from 1990 to 2008 the GDP per capita tripled and the poverty rate decreased significantly. The labor productivity increased 5.1 percent on average per year and structural change account for 38% of the increase, which provides a reason for the East Asia miracle. Diao, McMillan, and Rodrik (2017) emphasized in these developed countries the labor transferred from agriculture and informal sectors to industries served to industrialization. However, the process of resources moving from agricultural sector to manufacturing embody environmental damage. Hettige et al. (2000) found pollution in manufacturing increase at the initial lower level of income, due to the lack of high technology, efficient equipment and awareness of people.
Technology and skills are the key points to boost the economy. Different from the ‘accumulation theory', Nelson and Pack(1999) came up with the ‘assimilation theory' to explain the success of East Asia. Take Taiwan for example, they did not have the technology to produce electronic products before, but in the 1990s these electronic products account for 21 percent export in Taiwan. Learning knowledge and technology from advanced countries improved productivity in modern sectors. Consequently, the modern sectors expanded, and relative size of less productive sectors contracted, finally the national productivity improved. However, the application of technology at the low-income level may bring the environmental problems. Stokey(1998) observed poor nations prefer the dirtiest and productive technology because when the input level is low, the benefit from additional pollution will offset the cost. So as a result, the pollution increase with income.
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et al. (1995) summarized the followers of Adam Smith argue that trade promotes growth by some channels such as the efficient resources allocation, increased specialization related to comparative advantage and intense competitions.
Dollar et al. (2004) divided developing countries into two groups, and countries like China and India which had great cuts in tariff and increase in the real trade flows performed differently from the rest of developing world. It can be noticed that the average GDP of these globalizers doubled during the 1980s. The increased trade encouraged economic growth, poverty reduction, and even narrowed the gap between advanced and developing countries. Kaplinsky (2006) argued after China entering the global market in the 1980s, the trade-GDP ratio had increased significantly. It reflects the considerable contribution of international trade on GDP. Fu and Vudayagiri(2005) researched the relationship between trade and employment in China and reported the result of their extended model that the influence of export on employment is positive because the trade provides many employment opportunities.
Recently, the new dynamics in trade is fragmentation that the whole production process can be fragmented into slices. Baldwin(2012) emphasized the information and communication technology (ICT) make the second unbundling technically possible to coordinate the complexity at a distance. The information revolution makes advanced technology with firm-specific knowledge in developed nations combining with lower-wage labor in emerging countries. The firms in advanced nations cut the cost by outsourcing some activities to other countries. Consequently, the whole process of production is fragmented and the trade of intermediate goods increased.
The relatively poor countries have become the best choice to be transferred to labor intensive and pollution-intensive activities due to their cheap labor and loose regulations. Dedrick et al. (2009) investigated the profits from innovation in the global value chain(GVC) of iPod and notebook PCs. These innovative products combine technology from the US, Japan, and other advanced countries, but are assembled in China. Athukorala et al. (2006) examined the implication of international production fragmentation on East Asia development miracle and found the degree of dependence on fragmentation in East Asia is significant. The fragmentation of international trade has contributed to economies and increased the economic interdependence.
2.2 pollution -- the cost of trade
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Rongsi Lu (1999) summarized the results of the internalization of environmental cost in trade. The environmental cost influences the comparative advantages in different countries, the country with lower environmental cost has more competitiveness on emission permit. The various levels of environmental regulations in different regions lead to the change of trade flows, and some researchers came up with the ‘pollution haven hypothesis' that some developing countries have become the pollution havens because they have comparativeness on polluting goods. Dietzenbacher and Mukhopadhyay (2007) found the high-income countries always do better than developing countries in environmental protection because the advanced countries enact stricter regulations. People with higher income in advanced countries prefer the higher level of life quality, which related to the clean air and water. However, in developing countries, compared to the better environment they pay more attention to the jobs and earnings. So the pollution permits differ in the developed and developing countries. Walter et al. (1979) thought the pollution-intensive activities always be transferred from developed countries to developing countries by FDI or international trade due to the cost gap, making developing countries ‘pollution havens'.
There are some researches related to 'pollution haven hypothesis'. First, Low and Yearts (1992) found in the 1990s the dirty industries in poor countries like West Asia increased from 9% to 13%, Latin America increased from 17% to 21%, while the share of dirty industries in advanced countries dropped from 1960s. Mani and Wheeler (1998) also analyzed the ratio of pollution in importing and pollution in exporting sectors and observed that developing countries produce more pollution-intensive products than in developed countries. However, some researchers found the different conclusions. Zhang et al. (1999) studied whether the environmental standard influences the comparative advantages for the environmentally sensitive products ("dirty goods"). He used the data for 34 countries and concluded although the developed countries adopt stricter environmental regulations than developing countries, the export performance of dirty products in most countries remains unchanged. Tobey 1990) and Krueger (1993) doubted with the ‘pollution haven hypothesis' as well, they thought the trade flows only depend on the factor endowment considerations like capital and labor, but not the environmental cost.
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Dietzenbacher and Mukhopadhy (2007 ) did an empirical test for India. By IO model they calculated how much carbon, sulfur and nitrogen emissions induced by 1 billion rupees of additional exports, and compared with the emission reduction induced by the same amount of import. In this way, they excluded the influence of the trade balance and tested the pollution haven hypothesis. Also, they presented trade is beneficial regarding the environment in India, and its gains from trade also increased further, so there was no trend to move toward becoming a pollution haven. But the tests are only for two specific years, so it can only prove India is not the pollution haven temporarily in those two years, but cannot show the trend of the pollution balance due to the international trade.
China is always hotly debated on its trade and emission issues. Chow (2001) mentioned China is known as the ‘world factory' and became a significant player in international trade after it joined the World Trade Organization. After 1978 China opened its gate to the world, the international trade and the FDI promoted the growth in any aspect of China. However, on the other side, the pollution situation in China became severe. In the first unbundling period, as a country with abundant natural resources and cheap labor force China developed and exported large quantities of polluting goods like the coal, steel, and textile products. Then in the second unbundling period, China accepted more dirty production activities from developed countries. The sulfur and nitrous emission were also at the top of the list. In the climate change conference in 2009, China was required to reduce the exported emission quantity which reached 2700 hundred million dollars, ranking 6th in the world. Palmer(1998) mentioned China started late in adopting the legal measure for environmental welfare. The water and air pollution and deforestation reflected the inefficiency of its regulatory regime. Although from late 20 century China enacted considerable legislation on environment and joined in many environmental protection international conventions, the environment in China still deteriorated. Researchers found that in the trade between China and other countries, the emissions are always increased in China and has been avoided by its trading partners. Li and Howitt (2008) used IO model to analyze the emission condition in the UK-China trade and found the UK reduced carbon emission by 11% in 2004 due to the trade with China. Shui and Robert (2006) analyzed the carbon emissions in the US-china trade and got the quite similar result that about 7%-14% of China's carbon emissions are generated because of the export for US consumers. These results proved the developed countries always decrease the pollution by trade. However, the developing countries generate more emissions in the trade.
2.3 Questions and hypothesis
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is ‘responsibility sharing'. Some developed countries at the conference put forward that China should take a good deal of responsibility. However, the Chinese government claimed that many emissions in China come from the ‘dirty activities' outsourced from developed countries. And China produces and exports many products to foreign consumers. So it is controversial that how much pollution generated should be blamed for China or the importers. Peters et al. (2008) thought the import countries should also take some responsibility for the emissions in China. Broadman and Sun (1997) and Henley et al. (1999) all referred since 1999, China has always been the largest receiver of FDI in the developing world. So it is hard to evaluate its responsibility for emissions, and to some extent, it is essential to test the ‘pollution haven hypothesis' in China.
Now there are not enough pieces of evidence to show whether China is a pollution haven and the trend of the pollution change in the international trade in China in the recent years. Also, most studies only focus on the carbon emission, but the other emissions like sulfur dioxide and nitrogen oxide are also worth being taken into consideration. So I want to cover these shortages in the thesis.
The main questions I plan to solve are: Is China a net emission exporter in total trade? Is China a pollution haven which exports more polluting goods than other countries do, in other words, is the export structure in China dirtier than other countries? Should China take responsibility for all the emissions it generated in trade?
According to the theory above, I expect China is a net emission exporter in the trade, and it is also a pollution haven. Because according to H-O theory, China has the comparative advantage in labor and resource intensive sectors and activities which consume much fossil fuels. Besides, China has the comparative advantage on ‘emission permit', which promotes China to produce many dirty commodities.
3.Methodology and data
3.1 Calculation of net emissions balance in the total trade volume
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output multiplying the emission intensity. The emission intensity represents how much emissions are generated by one unit of output.
The first step is calculating the output which satisfies export and import final demands whose direct and indirect process would generate emissions. The most basic part is shown below. The output can be expressed as:
X= AX + f (1.1) The target country has n industries. In formula (1.1), X is the output for each industry in a n x 1 matrix. A is input coefficients in a n x n matrix, which can be calculated by Aij = Zij / Xj. Zij represents the domestic intermediate goods produced by industry i for the output of industry j. So the input coefficient is the input in industry i for per million USD of output in industry j. And f is final demand for each industry in a n x 1 metrics, which includes all the domestic consumption and investment and the foreign export so that it can be divided into export final demand fe and domestic final demand fd. Moreover, I will also use the import final demand fi later which can be seen as the domestic demand if China produces what it imports domestically. Because the assumption is based on the technological level of China, and emissions in import can be explained as how many pollutions China avoid in import, but not how many pollutions generated in import by other countries. All figures are expressed in millions USD.
The formula(1.1) can be written as :
X=(I-A)-1 *f = L * f (1.2) Here I denote the identity matrix. (I - A)-1 is called Leontief inverse L. So the output is calculated by Leontief inverse L to multiple final demands. Let fe and fi indicate the vectors of total exports and imports final demand. The output of export and import can be written as:
Xe=(I-A)-1 * fe = L * fe (1.2.1) Xi=(I-A)-1 * fi = L * fi (1.2.2)
The next step is to calculate how much emissions were embodied in export and import in China. The emissions are generated by the direct and indirect combustion, so I include three kinds of fossil fuels combusted for the final product and intermediate goods.
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both harm the people health and environment by damaging the human respiratory system and damaging foliage. Also, nitrogen oxide is the most significant driver of formation of smog and acid rain, as well as tropospheric ozone depletion. These polluting gases can be generated by the burning of fossil fuels, solid waste and wood product during agricultural and industrial activities.
As what is assumed in the Wassily Leontief theory, there is only two countries or regions in the world which can be seen as China and the rest of the world (Row) in this thesis. The process can be divided into three steps:
Firstly calculate the emission intensity r for each sector:
ri = wi / Xi. (2.1) Where wi represents how much emissions are generated by total output in industry i in a nx1 matric. And Xi is the total output in a nx1 matrix. So the emission coefficient/intensity ri is the emission due to per million USD of output in industry i. The emission coefficient/intensity ri should also be a nx1 matric because there are n sectors in total.
Secondly calculate Ee, the emissions generated by total export. Here I assume the emissions are generated in the production process but not the consumption. The export goods are produced domestically so the emission would increase due to the export. As what I mentioned before, the total emissions embodied in export and import are calculated by export and import output Xe and Xi multiplying the emission intensity r.
Ee=r*Xe =r*L* fe (2.2) Then calculate the emission decreased due to the import.
Ei=r*Xi=r * L * fi (2.3) Hence, the Ei can be interpreted as the emissions that would have been generated by import-substituting industries in case these products had been produced domestically instead. Moreover, it is noteworthy that these decreased emissions are based on the domestic technology because they are the emissions that China ‘avoided' by import from the rest of the world.
Finally, I calculate the net balance of these emissions W by:
W=Ee-Ei= r * L * (fe - fi) (2.4) To compare with the emission ratio results in the extra trade, I also calculate the ratio of exported emission and imported emission in total trade volume.
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If the W is more than 0 or the Rt is more than 1, means the emissions due to the export is more than the emissions avoided by import, so the country generates net emissions because of the international trade.
And at the global level, under the assumption that there are two countries in the world, it can be seen as China and Row. W1 and W2 are the emission balances for these two countries. It will be beneficial if the total emissions decrease, W1+W2<0. However, if the technology levels in both two countries or regions are the same, it doesn't matter whether the goods are produced in country 1 or country 2, W1+W2=0. But based on the different technology, it may lead to 4 results. Firstly, W1>0 and W2>0, which is the best results because both country 1 and country 2 gains in the environment term due to the trade. It can be explained by the Ricardian theory that they both produce the products have comparative advantages(lower environment cost). The second is W1<0 and W2<0, which is the worst situation and deviates from the Ricardian theory. Thirdly, W1>0 and W2<0, it means from the environmental perspective the country 1 gains and country 2 loses from the trade. Fourth, W1<0 and W2>0, it means the country 1 loses and country 2 gains from the trade. However, it is not possible to calculate the emission balance for the ROW, so I only analyze the China part.
3.2 Test the hypothesis based on the same amount export/import
China is called ‘world factory', if the total export goods are more than import some years, most likely because China takes too much production activities in the world to satisfy the foreign demand. This trade balance could increase the emissions embodied in export and expand the emission balance/ratio. So I will exclude the influence of trade volume balance on the environment using the extra one unit of trade instead of the total trade volume to test the ‘pollution haven hypothesis'. To test what will happen about the emissions when both the imports and the exports final demand are increased by the same amount of money(one million USD). This idea was proposed by Dietzenbacher and Mukhopadhyay in 2007, and they test whether India can be regarded as a pollution haven.
The vectors of changes in the exports and imports are represented by ∆fe and ∆fi respectively. Moreover, because the model is linear, the formula (∆X)=L*(∆f) gives the additional gross output corresponding to an arbitrary vector ∆f of extra final demand. So the extra emissions ∆E should be r*∆X, equals to r*L*∆f. But in order to calculate and analyze the results, as what Dietzenbacher and Mukhopadhyay(2007) did, I let the multiplication of the emission intensity r and the Leontief inverse L first to give the multiplier vector M. The extra emissions ∆E is calculated by the multiplier M multiplying ∆f. M indicates the (extra) emission that is required to satisfy per million USD of final demand of each commodity. So the formulas can be written in:
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The extra emissions increased for extra one million final export demand is:
∆Ee=M*∆fe=M*(fe/∑fe) (3.2) The extra emissions decreased for the extra one million final import demand is:
∆Ei=M*∆fi=M*(fi/∑fi) (3.3) The ratio of extra export emissions and extra import emissions is as following if the ratio is more than
1, it indicates this country can be regarded as a pollution haven.
Rextra=∆Ee/∆Ei (3.4) The data is from the World Input-Output Database (WIOD), including emissions and national I-O tables(35 x 35 commodities input-output table) from 1995 to 2009(incl 2009).
4.An Empirical Application and result to China
4.1 The calculation of emissions embodied in total trade
At first, I calculated the three kinds of gases emissions embodied in the total export and import for 15 years and acquired the emission balance.
Chart 3: Net emission balance in total volume in the 15-year period
Chart 3 shows the emission balance by emissions increased by export minus emissions decreased by import in China for 15 years. The emissions embodied decreased by imports can be interpreted as the emissions that would have been generated by import-substituting industries in case these products had been produced domestically instead. This assumption is supported by using the technological matrix of China to perform these calculations. Therefore, the imports are not based on the technology levels of the other import countries but based on China's technological level.
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From the emission balance, it can be seen that China is a net emission exporter. The emissions embodied in export is more than the emissions that would have been generated if the imported products had been produced domestically. The net emissions rapidly increased after 2001 then dropped in 2008.
Around 1990, communication and information costs fell, and the new globalization started. Different activities in the "production process"(R&D, marketing, finance, production, logistics, etc.) take place in various regions in the world. Outsourcing made China play an important role in international trade, so it became the "world factory". The lines in graph went up sharply from 2001 when China joined in the World Trade Organization(WTO) and was involved in the multilateral trading system. There was an open letter in New York Times written by a long list of prominent economists in 2000: "By acceding to the WTO, China will open its borders to international competition, lock in and deepen its commitment to economic reform, and promote economic development and freedom. ". Chow (2001) argued the WTO membership opened up China's market with more international trade and investment and opened up the world economy for China's export. In 2008 the financial crisis damaged the world economy and decreased the total demand of consumers around the world, so the export of China went down.
It is summarized that China generates emission in total export more than the emissions avoided by import. And the net emission balance experienced an increasing trend for all kinds of gases before 2008, which shows China was generating more pollution in the trade. But the result is influenced by the trade volume balance that China exports more products than import, so it cannot test the ‘pollution haven hypothesis' and reflect the industry structure in China. Does the industry structure also ‘went dirtier' and lead to the increased net emission balance in the international trade? It is essential to test the emissions embodied in the extra trade instead of in the total trade ,and compare their results.
4.2 The calculation of emissions embodied in per million USD import/export
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Chart 4: the ratio of emissions related to extra export and import
The idea of pollution haven is that with the extra same amount of export and import, the additional pollution increased due to export is more than the extra pollution avoided by the import, which means there will be a net emission increase in pollution in per unit of extra trade. Pollution havens export ‘dirty' products and imports relatively ‘clean' goods. Chart 4 shows the ratio of increased emissions and avoided emissions, so it should be larger than one to prove China is a pollution haven. From the above results, in the 1995-2009 period, China has been a pollution haven for nitrogen and greenhouse emissions, but the ratio of sulfur dioxide always fluctuated around 1. Even the recently dropped ratio of greenhouse gases emissions represents China was getting far away from being a pollution haven.
Chart 5: Sulfur dioxide emission ratio in total trade volume and extra trade
Chart 5 is the results of equation (2.5) and (3.4). On the whole, the ratio of export and import related pollution in extra trade makes a huge difference from the emission ratio of total trade volume. The emission ratio of total trade volume is almost 4 to 8 times larger than the ratio of extra trade for these three kinds of emissions. This chart 5 is the comparison of sulfur dioxide emissions, the greenhouse gases, and nitrogen oxide part can be seen in the appendix.
0.85 0.9 0.95 1 1.05 1.1 1.15 199519961997199819992000200120022003200420052006200720082009 sulfur dioxide nitrogen oxide greenhouse gases
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China is a net emission exporter, but actually, the industry structure is not that dirty. To some extent, the large emission balance/ratio in total trade volume is affected by the total trade balance.
4.3 More detailed results
To see the exact changes of emissions structure among 35 sectors, I pick the first and last year and give two specific tables. They are about the emission conditions in 1995 and 2009, from the comparison the change in emissions in extra trade is represented.
Column1 are 35 sectors in China. Columns 2 and 3 (∆e and ∆i) indicate the extra export and extra import for each sector when the total trade increased by one million dollars. For example, if we denote e1995 is the actual export vectors in 1995 (a 35 x 1 metric), the ∆e should be (1/167973)*e1995, where the 167973 is the total amount of export in 1995 (sum of all the 35 export vectors). The ∆e in column 2 represents when total export increase one million USD, how many export increase in each sector.
18 Table 1: emissions from 1 million USD of extra exports and imports, 1995
19 Table 2: emissions from 1 million USD of extra exports and imports, 2009
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The results in these two tables show the five most essential export commodities in 1995 are Textiles and Textile Products; Electrical and Optical Equipment; Basic Metals and Fabricated Metal; Leather, Leather and Footwear and Food, Beverages and Tobacco, which account 61.7% of export. And the 78.8% imports are concentrated in the top five sectors(Machinery, Nec; Electrical and Optical Equipment; Transport Equipment; Food, Beverages, and Tobacco; Textiles and Textile Products).In 2009 the sectors with the largest export and import shares are still concentrated in these sectors.
Chart 6: Comparison of greenhouse gases multiplier in 1995 and 2009
Besides, comparing these 2 years, it is important to notice the same three largest greenhouse gases multipliers are found in Electricity, Gas and Water Supply, which decreased from 35.270 in 1995 to 11.075 in 2009; Mining and Quarrying, which is 12.466 in 1995 and is 3.891 in 2009; Other Non-Metallic Mineral dropped from 10.374 in 1995 to 4.074 in 2009. With the same trend, the more exaggerate change is shown in the sulfur dioxide multiplier and nitrogen oxide multiplier. And all the specific numbers are represented in appendix.
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Chart 8: Comparison of nitrogen oxide multiplier in 1995 and 2009
As mentioned above, the multiplier indicates the extra emission that is required for per million dollars final demand for each commodity. These charts show the dramatic decrease in the multiplier for most of the sectors, so in 2009 if China produces the same amount of commodities as 1995, the polluting emission would be less than 1995. As a whole, China has improved its resources efficiency and production structure to make most of the sectors clearer. But China was still a pollution haven which can reflect China was exporting more dirty goods and import relatively clean goods.
5.Conclusion and Policy advice
5.1 conclusion
In summary, in this thesis, the relationship between economic growth and pollution was investigated using China as a model country. Few factors contribute to economic growth, but they also bring the pollution issues. Here I focus on trade-related pollution. Using I-O model, the increased emissions by export and avoided emissions by import in total trade and in the same amount of extra trade was compared. And the results suggest that China is a net emission exporter, and also a pollution haven, but China got progress on pollution reduction and the foreign importers also should share the responsibility of emissions with China.
‘Is China a net emission exporter?' Yes. In total trade volume, the increased emissions caused by total export is more than decreased emissions by the total import in terms of three kinds of gases, and this balance experienced an increasing trend. After joining the WTO in 2001, China's export increase sharply to the open world economy, the more outsourcing activities intensify its pollution in export, so the emission balance/rate between export and import is large.
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‘Is China a pollution haven which exports more polluting goods (or technologies) than other countries do, in other words, is the export structure in China dirtier than other countries? ' Yes. To answer this question, it is important to exclude the effect of the trade balance. So I calculated the increased emissions by 1 million USD and decreased emissions by 1 million USD import, and acquired their ratio. If China is pollution haven, the ratio should be larger than 1. From the chart 4 of emission ratio in extra trade, in the 15-year period, China has always been a pollution haven in terms of greenhouse gases and nitrogen oxide, though the greenhouse gases part shows the pollution issue in trade was alleviating because of the declining trend. And regarding to sulfur dioxide, it is hard to judge if China is a pollution haven because the sulfur emissions ratio changed all the time around 1. So in some years, China was even not a pollution haven of sulfur dioxide emissions. In summary, the results are according to my expectation that the international trade influences the Chinese environment. It can be explained by the theory mentioned before. On the one hand, in line with H-O theory, China is good at labor-intensive industry such as textile sector, or labor-intensive activities like assembling from advanced countries. Most of these productions have low value added in GVC and also sacrifice the environment. On the other hand, there is a new interpretation of H-O theory which referred by Leamer(1980) and Bowen et al. (1987). They argued that the ‘emission permit' can be seen as an endowment factor, the countries have comparative advantages on environmental cost and emission permit will export more emission-intensive goods. As for why developing countries like China always have these advantages, it can be summarized as following: in developing countries the cost of monitoring and enforcing pollution standard is higher because they lack sophisticated equipment, technology, and useful skills, so the government makes less effort on the environmental improvement. And higher income in advanced nations make people pursue the higher level of the living standard related to clean air and water, but in developing countries, people think more highly of jobs and income, but less on the environment, so the regulation is relatively lax.
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a long time, so the work of emission reduction needs to be expanded, and the export structure needs to be optimized. The current goal for China is to continue decreasing the emission intensity and to adjust the export structure, which could make its production cleaner.
There are some limitations in this thesis, due to the limited access to data I can only test the pollution condition before 2009. And the environmental issues are not only about the polluting emission, but also the water pollution, solid waste and the ecosystem deterioration which are not included in this thesis.
5.2 policy advice
Though from the empirical results China has some progress on the environment improvement by the reduction of emission multiplier, China is still the net emissions exporter in the world, so the measures need to be continued and improved. To solve the emission issues it is important to pay attention to reduce the emission intensity and adjust the green industry structure.
There are several measures can be taken to control the emission intensity. Zhang et al. (2014) estimated the effect of technical progress on carbon emission intensity nationwide from 1990 to 2011 by panel data model and found technical progress is a valid measure to control the emission intensity. For instance, the technology improve the energy efficiency by improving transportation equipment and optimizing system design to promote the effective disposition of resources. Both the narrow technology innovation and the generalized technology progress such as the management innovation and system innovation play important roles in the emission intensity reduction.
Hostettler(2015) argued that improving renewable energy sources helps with lessening poverty, powering industrialized production and transport, at the same time stimulating sustainability and ecological quality. However, fossil fuels, still overshadow other forms of energy sources and continue to be the most consumed source of energy. It is essential to expand the use of renewable energy instead of fossil fuels to reduce the polluting emissions from the root. To reduce the negative effects of non-renewable sources, governments, business, and non-profit organizations could take actions. For example, governments could provide excise exemptions to companies who use the renewable source of energy.
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to others. Burtraw, Dallas, et al. (2005) proved the emission right trading program to be an effective measure to protect the environment in the US, which generates sizable cost savings. And there is evidence showing the firms in the US have also induced the technological improvement to save emission right. China introduced the pollution trading early in the 1990s to control the acid rain, but it is still not widely implemented. If this method can be widely accepted, the emission issues would be solved much by the market mechanism.
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Appendix:
Chart 9: nitrogen oxide emission rate in total trade volume and in extra trade
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Table 3 : Comparison of emission multiplier in 1995 and 2009
sectors multiplier1995 multiplier2009 sectors multiplier1995 multiplier2009 sectors multiplier1995 multiplier2009
17 35,27 11,08 17 381,28 52,56 17 80,81 15,93 34 12,98 2,01 11 58,13 15,39 11 30,17 11,01 2 12,47 3,89 12 55,95 8,80 23 29,95 7,14 11 10,37 4,07 9 53,22 9,84 9 19,11 4,09 9 8,57 2,38 8 52,88 6,79 12 18,10 3,84 12 8,07 2,57 7 47,66 7,27 8 16,51 2,86 8 8,04 2,45 2 42,50 7,49 25 15,73 9,47 1 6,89 2,27 10 33,61 7,45 2 15,26 3,77 24 6,68 1,88 18 32,72 7,29 24 14,72 7,02 18 5,26 1,90 13 31,26 5,82 18 14,24 4,34 7 5,25 1,61 33 29,37 5,51 7 12,98 3,66 10 5,20 1,71 15 28,13 4,98 10 12,26 3,31 3 5,14 1,52 32 27,79 3,65 13 10,98 2,70 25 5,05 3,04 16 27,20 5,95 16 10,65 2,80 13 4,53 1,54 34 26,61 4,08 33 10,31 2,53 16 4,51 1,18 14 26,22 4,72 15 10,12 2,41 33 4,46 1,34 6 24,13 8,83 34 9,62 2,09 6 4,20 1,47 24 21,60 3,67 32 9,47 1,77 15 4,07 1,29 23 21,24 3,50 14 9,44 2,25 4 3,87 1,39 4 20,89 8,34 6 9,22 3,98 14 3,87 1,21 31 20,86 3,22 4 8,48 3,83 32 3,80 0,85 25 19,57 4,83 3 8,34 5,64 22 3,67 1,22 27 18,91 2,50 31 7,89 1,69 23 3,58 1,25 3 18,29 12,72 26 7,00 2,97 5 3,23 1,19 30 17,66 3,83 1 6,81 10,14 31 3,10 0,79 22 16,25 8,61 30 6,75 1,91 30 2,85 0,91 21 16,05 2,37 21 6,58 1,48 21 2,52 0,60 20 15,48 2,28 5 6,46 3,68 20 2,43 0,56 5 15,33 8,15 22 6,39 3,84 26 2,40 1,24 26 14,25 5,01 20 6,28 1,36 27 2,34 0,60 1 11,80 24,42 27 5,85 1,22 29 1,61 0,23 28 10,49 1,52 29 4,14 0,46 28 1,54 0,35 29 10,18 0,94 28 3,84 0,77 19 0,00 0,00 19 0,00 0,00 19 0,00 0,00 35 0,00 0,00 35 0,00 0,00 35 0,00 0,00
32 Table 4 : 35 sectors with corresponding numbers
