Identifying the key factors to China's unsustainable external circulation through the accounting of the flow of embodied energy and virtual water

Abstract

In 2020, China launched the Dual Circulation Strategy to tackle difficult international trade situations and COVID-19. To examine the environmental pressure induced by China's domestic and international trade from the perspective of dual circulation, this study quantifies the flows of embodied energy and virtual water in China's domestic and international trade and analyzes the driving factors to the net outflow, using the multi-regional input-output model and spatial structural decomposition method. The main findings of this study are: (1) Domestic trade of China alleviated the pressures of both energy and water shortage through the flow of embodied energy from Northern to Southern and Eastern regions and the flow of virtual water from Southern to Northern regions. In contrast, international trade yet increased China's environmental burden and tends to be unsustainable. (2) Production structure effect was the key factor to the net outflow of embodied energy (contribution degree: 58%) and virtual water (contribution degree: 46%) to major economies. For China, the export scale effect and export structure effect played an important role in increasing the net outflow of China's embodied energy, with contribution degrees of 17% and 23%, respectively, while the export structure effect and water efficiency effect reduced the net outflow of virtual water, with contribution degrees of −23% and −19%, respectively. Multidimensional Policies, including industrial structure transition, renewable energy deployment, resource efficiencies improvement, trade pattern upgrade, and regional free trade promotion, are suggested for implementing the Dual Circulation Strategy, considering environmental sustainability and industrial competition advantages.