Processing trade, foreign outsourcing and carbon emissions in China

Abstract

China becomes major focus of international society for two factors: the largest trading country and the largest carbon emitter in the world, both of them are associated with China’s processing trade. Processing trade is a sort of foreign outsourcing trade which promoted China’s export as well as partially increased China’s CO2 emissions. However, China is conducting a trade reform aims at upgrade its trade structure by reducing the proportion of processing trade. This paper studies the role of processing trade in China’s export growth and CO2 emissions using an extended World Input Output Database (WIOD) with China’s micro data. In addition, we will assess the impact of China’s trade reform and economic slowdown to the structural change of export and its effect on processing trade and CO2 emissions in the future. We conclude that structural reform of export in China would likely involve other developing economies in global supply chains, and this may lead to a reduction in global emissions as those countries have lower emission intensities than China.