Carbon leakage in China's manufacturing trade: An empirical analysis based on the carbon embodied in trade

Abstract

In this paper, we use a 16 manufacturing-sector single-country linked input–output model to calculate the balance of emissions (carbon) embodied in trade (BEET) and pollution terms of trade (PTT) for China's international trade with the entire world and with its principal trade partners (Japan, the US, and the European Union) for the period from 1996–2004. Our results confirm that China is a net carbon exporter, but also reveal that China's exports are relatively less polluting than China's imports: the big carbon surplus embodied in trade is due to China's large scale of exports and its high carbon emission intensity compared to its trade partners. In a second step, we directly study the determinants of the comparative advantage of China's international trade with the purpose of verifying whether the increase of the carbon burden in China is due to the transfer of the comparative advantage of the polluting sectors from Annex I countries to China, according to the hypothesis of ‘carbon leakage’. Our analyses confirm that China's comparative advantages are more concentrated in the less polluting, labor-intensive sectors, although, dynamically speaking, this economy also experienced a tendency of comparative advantage increases in carbon-intensive sectors for its trade with European countries owing to their increase (decrease) of carbon intensity, but not for the trade with the carbon club countries such as the US and Japan. This finding seems to provide a first piece of supportive evidence for the existence of ‘carbon leakage’ phenomenon. Our conclusion also reveals that current international production division is organized with little consideration for the environmental performance of the producers in different countries; this organizational issue might be the principal reason for the current, often-observed BEET surplus in international trade of the non-Annex I country, while the transfer of a comparative advantage in the carbon-intensive sectors plays only a marginal role.