Reassessing pollution haven effect in global value chains

Abstract

According to the well-known “Pollution Haven Effect”, wealthy countries with strong environmental regulations will have a comparative disadvantage in pollution-intensive industries, and will tend to offshore their polluting industries to poorer countries. We re-test this theory by taking full account of global value chains, which the existing literature has failed to do. Using a multi-country input–output model and structural decomposition analysis, we first calculate the emission intensities using bilateral value-added trade data and isolate the effect of trade composition from the effect of technology. We then investigate the relationship of the trade composition effect with income level for 40 major economies using econometric models. We find that the larger the per capita income gap between importing and exporting countries, the more pollution-intensive the value-added exports. This validates the existence of the Pollution Haven Effect in value-added trade, which is not found when using traditional gross trade data that do not properly account for the global value chains. Our findings suggest that high-income countries offshore their emissions to low-income countries by outsourcing only the dirty production stages instead of the entire production process, and that global value chains are also “global pollution chains.” Based on our novel methodology, our findings explain previous failures in identifying the Pollution Haven Effect and provide a new perspective on global cooperation within environmental governance.