Production Globalization Makes China’s Exports Cleaner

Abstract

•We remap the carbon emissions embodied in China’s exports•China’s processing exports are cleaner than ordinary exports•Production globalization makes China’s exports cleaner•Deglobalization could threaten the international fight against climate change Globalization has enabled the international distribution of production. Although production globalization opens economic opportunities for developing countries, it also raises concerns about increasing emissions embodied in their exports. This study analyzes the impact of production globalization on the carbon intensity of exports in China while taking trade and spatial heterogeneity into account. We find that production globalization can make China’s exports cleaner. If the degree of global value chain participation (which ranges from 0 to 1) increases by 0.1, the gross carbon intensity of China’s exports will decrease by 11.7%. Our results suggest that developing countries could reduce the carbon intensity of their exports by becoming involved in global production networks if they specialize in relatively low-carbon production stages. However, the global economy has recently been in a deglobalization phase, which could make it more difficult to achieve the Paris Agreement target of 1.5°C. Production globalization, which is when firms expand their supply chains across national boundaries, creates an opportunity for developing countries to engage in international production networks via trade. Described as the world's factory, China specializes in assembly manufacturing mainly through processing exports. Firms use imported intermediate inputs for production and, after processing or assembly, re-export the finished products to international markets. Here, we show that the carbon efficiency of China’s processing exports is greater than that of its ordinary exports. If the impact of trade heterogeneity is ignored, then the domestic emissions embodied in China’s exports will be overestimated by 23.4%, and the foreign emissions embodied in China’s exports will be underestimated by 29.3%. If the degree of global value chain participation, which ranges from 0 to 1, increases by 0.1, although foreign emissions embodied in China’s exports would increase, the gross carbon intensity of China’s exports will decrease by 11.7%. Production globalization, which is when firms expand their supply chains across national boundaries, creates an opportunity for developing countries to engage in international production networks via trade. Described as the world's factory, China specializes in assembly manufacturing mainly through processing exports. Firms use imported intermediate inputs for production and, after processing or assembly, re-export the finished products to international markets. Here, we show that the carbon efficiency of China’s processing exports is greater than that of its ordinary exports. If the impact of trade heterogeneity is ignored, then the domestic emissions embodied in China’s exports will be overestimated by 23.4%, and the foreign emissions embodied in China’s exports will be underestimated by 29.3%. If the degree of global value chain participation, which ranges from 0 to 1, increases by 0.1, although foreign emissions embodied in China’s exports would increase, the gross carbon intensity of China’s exports will decrease by 11.7%. Production globalization enables developing countries to participate in global production networks via trade. However, the increasing emissions embodied in their exports1Meng J. Mi Z. Guan D. Li J. Tao S. Li Y. Feng K. Liu J. Liu Z. Wang X. et al.The rise of South-South trade and its effect on global CO2 emissions.Nat. Commun. 2018; 9: 1-7Crossref PubMed Scopus (165) Google Scholar, 2Davis S.J. Caldeira K. 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Econ. 2019; 164: 106340Crossref Scopus (11) Google Scholar This study attempts to analyze the trade-climate dilemma by focusing on the impact of production globalization on the carbon intensity of exports in developing countries. This research question has important policy implications for analyzing the environmental efficiency of international production networks. Over the past few decades, the production system has become fragmented across national borders.9Timmer M. Erumban A. Los B. Stehrer R. de Vries G. Slicing up global value chains.J. Econ. Perspect. 2014; 28: 99-118Crossref Scopus (324) Google Scholar Developing countries specialize in certain production activities in which they have a comparative advantage and outsource other parts of the production process to foreign countries, which could be upstream suppliers or downstream assemblers. However, the recent world economy has been in a phase of deglobalization. The Economic Cycle Research Institute (ECRI) uses the difference between the growth rates of world trade and gross domestic product (GDP) to measure globalization and finds that structural deglobalization has been present (the difference between the growth rates of world trade and GDP is negative) since 2011.10Economic Cycle Research InstituteDe-globalization diagnosis predated trade war.http://m.businesscycle.com/ecri-news-events/news-details/economic-cycle-research-ecri-lakshman-achuthan-business-cycle-ecri-de-globalization-diagnosis-predated-trade-warDate: 2019Google Scholar With the rebuilding of international global networks, global emissions could increase significantly given that developing countries with higher carbon intensity have to rebuild their entire supply chains. The literature has noted the large net carbon flows from developing countries to developed countries.3Peters G.P. Minx J.C. Weber C.L. Edenhofer O. Growth in emission transfers via international trade from 1990 to 2008.Proc. Natl. Acad. Sci. USA. 2011; 108: 8903-8908Crossref PubMed Scopus (890) Google Scholar,11Davis S.J. Peters G.P. Caldeira K. The supply chain of CO2 emissions.Proc. Natl. Acad. Sci. U S A. 2011; 108: 18554-18559Crossref PubMed Scopus (310) Google Scholar China, as the largest carbon emitter,12Guan D. Liu Z. Geng Y. Lindner S. Hubacek K. The gigatonne gap in China’s carbon dioxide inventories.Nat. Clim. Chang. 2012; 2: 1-4Crossref Scopus (365) Google Scholar,13Guan D. Meng J. Reiner D.M. Zhang N. Shan Y. Mi Z. Shao S. Liu Z. Zhang Q. Davis S.J. Structural decline in China’s CO2 emissions through transitions in industry and energy systems.Nat. Geosci. 2018; 11: 551-555Crossref Scopus (157) Google Scholar is also the largest net carbon exporter.3Peters G.P. Minx J.C. Weber C.L. Edenhofer O. Growth in emission transfers via international trade from 1990 to 2008.Proc. Natl. Acad. Sci. USA. 2011; 108: 8903-8908Crossref PubMed Scopus (890) Google Scholar However, this phenomenon could be the result of a large trade deficit and cannot serve as direct evidence that emerging countries specialize in carbon-intensive production.14Jakob M. Marschinski R. Interpreting trade-related CO2 emission transfers.Nat. Clim. Chang. 2012; 3: 19-23Crossref Scopus (128) Google Scholar Described as the world's factory, China specializes in assembly manufacturing mainly through processing exports. Firms use imported intermediate inputs for production and, after processing or assembly, re-export the finished products to international markets.15Yang C. Dietzenbacher E. Pei J. Chen X. Zhu K. Tang Z. Processing trade biases the measurement of vertical specialization in China.Econ. Syst. Res. 2015; 27: 60-76Crossref Scopus (27) Google Scholar For example, foreign intermediate inputs account for more than 95% of the iPhones exported from China.16Xing Y. Detert N. How the iPhone widens the United States trade deficit with the People’s Republic of China. ADBI Working Paper 257. Asian Development Bank Institute, 2010Google Scholar Domestic intermediate inputs account for a greater share in the production of ordinary exports, and the literature has noted that processing exports generate relatively fewer emissions than ordinary exports do.7Su B. Ang B.W. Low M. Input-output analysis of CO2 emissions embodied in trade and the driving forces: processing and normal exports.Ecol. Econ. 2013; 88: 119-125Crossref Scopus (164) Google Scholar,8Zhang Z. Duan Y. Zhang W. Economic gains and environmental costs from China’s exports: regional inequality and trade heterogeneity.Ecol. Econ. 2019; 164: 106340Crossref Scopus (11) Google Scholar,17Jiang X. Guan D. Zhang J. Zhu K. Green C. Firm ownership, China’s export related emissions, and the responsibility issue.Energy Econ. 2015; 51: 466-474Crossref Scopus (31) Google Scholar, 18Xia Y. Fan Y. Yang C. Assessing the impact of foreign content in China’s exports on the carbon outsourcing hypothesis.Appl. Energy. 2015; 150: 296-307Crossref Scopus (50) Google Scholar, 19Dietzenbacher E. Pei J. Yang C. Trade, production fragmentation, and China’s carbon dioxide emissions.J. Environ. Econ. Manage. 2012; 64: 88-101Crossref Scopus (122) Google Scholar This study attempts to enrich the related literature from the following perspectives. First, this study considers both domestic and foreign emissions embodied in exports to measure the environmental impacts of China’s exports. In 2012, processing exports accounted for 42.11%20National Bureau of StatisticsNational Economic and Social Development Statistics Bullet in 2012. China Statistics Press, 2013Google Scholar of China’s gross exports, and the electronic equipment sector corresponds to the largest share. Previous related studies have mainly focused on domestic CO2 emissions embodied in China’s exports;19Dietzenbacher E. Pei J. Yang C. Trade, production fragmentation, and China’s carbon dioxide emissions.J. Environ. Econ. Manage. 2012; 64: 88-101Crossref Scopus (122) Google Scholar to the best of our knowledge, no study has distinguished the foreign emissions embodied in China’s processing exports from those embodied in China’s gross exports. This would leave open the question of the impact of China’s production specialization on gross emissions embodied in China's exports, and this question has important policy implications for optimizing the global production network. In recent years, the increasing uncertainty of international trade has threatened the stability of the global carbon-flow network. As the world’s largest carbon exporter, China plays an essential role in the global carbon-flow network. A change in China’s exports influences not only domestic emissions but also the CO2 emissions emitted by upstream input suppliers. For instance, China-US trade tensions in 2019 affected China’s exports of manufacturing products, hence reducing the country’s imports of upstream materials from foreign countries. This study extends beyond the national border and analyzes the spillover effect of China’s trade decrease through global carbon-flow networks. Second, trade heterogeneity19Dietzenbacher E. Pei J. Yang C. Trade, production fragmentation, and China’s carbon dioxide emissions.J. Environ. Econ. Manage. 2012; 64: 88-101Crossref Scopus (122) Google Scholar has a significant impact on the calculation of the CO2 emissions embodied in China’s exports, as well as spatial heterogeneity.21Su B. Ang B.W. Input-output analysis of CO2 emissions embodied in trade: the effects of spatial aggregation.Ecol. Econ. 2010; 70: 10-18Crossref Scopus (180) Google Scholar China shows a large provincial disparity in trade openness. Coastal provinces are closely involved in global supply chains and contributed to more than 80% of China’s processing exports in 2012. Inland regions rely less on exports, but the exports that these regions do rely on are mainly in the form of ordinary exports. Previous studies noted the significant impact of spatial aggregation21Su B. Ang B.W. Input-output analysis of CO2 emissions embodied in trade: the effects of spatial aggregation.Ecol. Econ. 2010; 70: 10-18Crossref Scopus (180) Google Scholar and trade heterogeneity19Dietzenbacher E. Pei J. Yang C. Trade, production fragmentation, and China’s carbon dioxide emissions.J. Environ. Econ. Manage. 2012; 64: 88-101Crossref Scopus (122) Google Scholar on the calculation of the CO2 emissions embodied in China’s exports. This study attempts to combine these two lines of research and presents the first quantitative analysis of CO2 emissions embodied in China’s ordinary and processing exports at the provincial level. This approach could help in understanding the climate-trade dilemma in China and could assist policymakers in identifying targeted opportunities to address this dilemma. Third, we construct an intercountry input-output database (ICIO) by using 2012 as the study year. This database contains 73 countries or regions based on the World Input-Output Database (WIOD)22Timmer M.P. Dietzenbacher E. Los B. Stehrer R. de Vries G.J. An illustrated user guide to the World Input-Output Database: the case of global automotive production.Rev. Int. Econ. 2015; 23: 575-605Crossref Scopus (907) Google Scholar and a provincial-level input-output table that captures processing exports. This dataset allows us to trace the sources and destinations of CO2 emissions embodied in provincial exports. Methodologically, two main approaches exist for determining the environmental impacts of international trade via multi-regional input-output (MRIO) analysis. The first examines total bilateral trade between regions (the emissions embodied in bilateral trade [EEBT] approach), and the second considers trade to final consumption and endogenously determines trade to intermediate consumption (MRIO approach).23Peters G.P. From production-based to consumption-based national emission inventories.Ecol. Econ. 2008; 65: 13-23Crossref Scopus (693) Google Scholar The MRIO approach has the advantage of reflecting international feedback effects. However, the traditional MRIO approach fails to capture the environmental impact of production globalization. To address this problem, this study adopts an extended MRIO approach that decomposes the Leontief inverse matrix. The extended MRIO approach not only considers inter-regional feedback effects but also allows us to trace the domestic and foreign CO2 emissions embodied in provincial exports from both national and international perspectives. Finally, we simulate the correlation between the degree of global value chain (GVC) participation and the carbon intensity of exports. The domestic and foreign emissions embodied in China’s exports are presented as follows. The results of this study show that the volume of CO2 emissions embodied in China’s exports in 2012 reached 2017.6 million tons. China emitted 1,701.4 million tons of CO2 to produce its export products. Meanwhile, foreign countries emitted 316.2 million tons of CO2 to produce intermediate inputs, which were transferred to China and used for producing the export products (see Tables S5–S7). The volume of foreign CO2 emissions embodied in China’s exports is comparable with the carbon emissions from fuel combustion in France in 2012.24International Energy AgencyCO2 emissions from fuel combustion: 2018 highlights.2018Crossref Google Scholar In 2012, Guangdong Province emitted 206.2 million tons of CO2 to support China’s exports and was the major source of the emissions embodied in China’s exports, followed by Jiangsu (181.5 million tons) and Shandong (153.0 million tons). Korea’s CO2 emissions embodied in China’s exports reached 22.7 million tons, followed by Chinese Taiwan (19.82 million tons) and the US (18.4 million tons). China’s exports of industrial products correspond to the largest volume of embodied CO2 emissions. For instance, the domestic and foreign CO2 emissions embodied in the exports of electronic products reached 232.1 million tons and 93.6 million tons, respectively. This study further calculates the CO2 emissions embodied in China’s exports when trade heterogeneity and regional diversity are not taken into account. The estimation gap is presented in Figure 1. Although previous studies noted that domestic CO2 emissions from China’s exports would be overestimated if trade heterogeneity were not taken into account,19Dietzenbacher E. Pei J. Yang C. Trade, production fragmentation, and China’s carbon dioxide emissions.J. Environ. Econ. Manage. 2012; 64: 88-101Crossref Scopus (122) Google Scholar no study has distinguished between the foreign emissions embodied in China’s ordinary exports and those embodied in China’s processing exports, leaving open the question of the degree to which misestimation is present. Figure 1 shows that if ordinary and processing exports are not distinguished for each province, then the domestic emissions embodied in China’s exports will be overestimated by 8.6%, and the foreign emissions embodied in China’s exports will be underestimated by 15.3%. If both regional diversity and trade heterogeneity are not taken into account, then the domestic emissions embodied in China’s exports will be overestimated by 23.4%, and the foreign emissions embodied in China’s exports will be underestimated by 29.3%. The overestimation of domestic emissions embodied in exports of Jiangsu and Guangdong reached 50.5 and 26.3 million tons, respectively (see Figures S1 and S2). In addition, other provinces’ CO2 emissions embodied in the exports of Jiangsu and Guangdong are overestimated by 19.1 and 9.0 million tons, respectively. Firms involved in processing exports mainly belong to industrial sectors. Domestic CO2 emissions embodied in electronic equipment (sector C10) exports are overestimated by 80.0 million tons, followed by exports from the electrical machinery and equipment (sector C11; 71.4 million tons) and exports of metal products (sector C9; 66.8 million tons) (see Figures S3 and S4). Foreign CO2 emissions embodied in electronic equipment (sector C10) exports are overestimated by 17.0 million tons, followed by exports of chemical products (sector C7; 71.4 million tons) and electrical machinery and equipment (sector C11; 66.8 million tons). The impact of trade heterogeneity on the calculation of carbon transfer from China to other regions is presented in Figure 2. In 2012, the world’s largest carbon flow through international trade was from China to the US, followed by the carbon transfer from China to the European Union (EU). The volume of carbon flows to the US and the EU reached 273.7 and 257.4 million tons, respectively. If trade heterogeneity is not taken into account, the volume of carbon transfer from China to the US and the EU will be overestimated by 27.9% and 20.0%, respectively. Developed countries are the major destinations of China’s processing exports; therefore, the problem of the overestimation of carbon transfer from China to developed countries is serious. For instance, the carbon transfer from China to Japan will be overestimated by 28.6%. Moreover, the impact of trade heterogeneity on the calculation of the carbon transfer from China to developing countries, such as Russia, India, and Brazil, is not serious. The carbon transfer from China to Russia corresponds to the smallest degree of overestimation, which is only 5.6%. China’s involvement in the global production network induces fewer emissions relative to the production taking place for ordinary exports. The traditional input-output model that adopts the homogeneity assumption would overestimate the carbon emissions embodied in China’s processing exports. The impact of China’s trade heterogeneity on the calculation of the carbon transfer related to China’s exports is presented in Figure 3. China plays an important role in the carbon flows that originate from neighboring countries or regions. For instance, the gross carbon flow from Korea to the US is 31.0 million tons, 16.26% (or 5.0 million tons) of which are emitted by Korea to support the production of China’s exports, which are finally absorbed by the US. China is also actively participating in carbon flows that are sourced from Japan, Korea, and Australia. Korea’s gross CO2 emissions embodied in China’s exports reached 22.7 million tons, followed by Chinese Taiwan (19.8 million tons) and the US (18.4 million tons). All these countries or regions are important suppliers of intermediate inputs, which China uses to produce export products. Korea, Chinese Taiwan, and Japan are the key suppliers of intermediate inputs to support China’s processing exports. Therefore, the degree of the underestimation of carbon flows sourced from these three countries is much higher. The degree of the underestimation of Korea’s emissions embodied in China’s exports, which are finally absorbed by Japan, reaches as high as 55.9%. By ignoring trade heterogeneity, we will underestimate the impacts of China’s exports on global carbon flows, especially for Korea, Japan, and Chinese Taiwan. As the economic links among different regions become increasingly closer, China’s economic fluctuation could spread along supply chains and threaten global production networks, at which point it becomes increasingly necessary to consider the spillover effect of a decrease in China’s export on CO2 emissions in foreign countries. In 2012, 79.3% of China’s exported domestic CO2 emissions were embodied in ordinary exports, whereas foreign CO2 emissions embodied in processing exports accounted for 58.8% of China’s exported foreign CO2 emissions. Figure 4 shows the top five provinces and sectors for which ordinary or processing exports embodied the largest volume of domestic CO2 emissions. China shows a large provincial disparity in trade openness. Coastal provinces, relative to other provinces, are involved in the global production network in a more direct form25Feng K. Davis S.J. Sun L. Li X. Guan D. Liu W. Liu Z. Hubacek K. Outsourcing CO2 within China.Proc. Natl. Acad. Sci. U S A. 2013; 110: 11654-11659Crossref PubMed Scopus (411) Google Scholar and contributed to more than 80% of China’s processing exports in 2012. The top five provinces, which account for 66.5% of China’s gross exported domestic emissions, are all located in the coastal region. Guangdong’s ordinary exports correspond to the largest volume of exported domestic CO2 emissions (265.6 Mt). The emissions embodied in ordinary exports are greater than those embodied in processing exports for the top five provinces. In addition, processing exports correspond to a lower ratio of exported domestic CO2 emissions to export volume than ordinary exports do. For instance, the ratio of exported domestic emissions to Jiangsu’s ordinary export volume reached 1.2 kg of CO2 per unit of export, whereas the ratio of exported domestic emissions to Jiangsu’s processing export volume was only 0.4 kg of CO2 per unit of export. The ordinary exports of metal products, which have greater carbon intensity, correspond to the largest volume of exported domestic emissions (258.9 Mt). The ratio of exported domestic CO2 emissions to export volume reached 2.2 kg of CO2 per unit of ordinary export relative to the low ratio for processing exports (0.9 kg of CO2 per unit of export). The processing exports of electronic products, which account for more than half of China’s gross processing exports, correspond to the largest volume (150.0 Mt) of the domestic emissions embodied in processing exports. The ratio of domestic CO2 emissions to the processing export volume of electronic products is only 0.4 kg of CO2 per unit of export, which is even lower than that of the textile sector, which corresponds to the lowest level of domestic CO2 emissions to ordinary export volume. Processing exports, which are the major form in which China is involved in the global production network, induces lower domestic emissions than ordinary exports do. The top five provinces account for 78.5% of the gross foreign emissions embodied in China’s exports. Guangdong’s processing exports correspond to the largest volume (71.0 Mt) of exported foreign CO2 emissions. Figure 5 shows that the ratio of exported foreign CO2 emissions to processing export volume is greater than that of ordinary exports. The ratio of exported foreign emissions to Guangdong’s ordinary export volume was 0.1 kg of CO2 per unit of export, compared with the 0.3 kg of CO2 per unit of export of Guangdong’s processing exports. The processing exports of electronic equipment correspond to the largest volume (78.5 Mt) of exported foreign emissions. The ratio of exported foreign CO2 emissions to export volume is 0.2 kg of CO2 per unit of export, compared with the low ratio of ordinary exports (0.1 kg of CO2 per unit of export). If we measure the ratio of both the domestic and foreign emissions embodied in exports to export volume, the carbon intensity of ordinary exports is still greater than that of processing exports, although the volume of foreign emissions embodied in processing exports is greater than that embodied in ordinary exports. Some studies14Jakob M. Marschinski R. 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