Technical gap, trade partners and product mix evolution: how trading with China affects global CO2 emissions

Based on a highly disaggregated database (1033 products, 181 partners) that we have built in physical terms, we investigate the drivers of China’s environmental trade cost (measured by CO2 emissions) from 1995 to 2014. To do this, we first used the “material balance” method to estimate China’s environmental trade cost. Then, we applied a new procedure to identify the drivers of China’s environmental trade cost that contributes to a better understanding of the trade’s role in environmental issues. Finally, we employed additive index decomposition analysis to estimate the contribution of each driver and their statistical accuracy. The results show that China faces a significant environmental cost as a result of its trade integration. Over the period, China’s environmental trade cost first was constant and relatively low from 1995 to 2001, then increased sharply from 2001 to 2008 before falling in 2009 and restarting unstable growth between 2010 and 2014. The decomposition results show that the increase in China’s environmental trade cost is explained by the fact that China’s technical catch-up is no longer able to offset the foreign demand effect and the product mix effect of exports. This is mainly due to the sharp increase in foreign demand for Chinese products and the fact that China’s export structure is becoming dirty mainly due to China-North trade patterns. There are some evidences that dirty production has slowly shifted from rich countries (especially North) to China, and clean production has moved in the opposite way. This has become more important after China’s entry into the World Trade Organization (WTO) in 2001, more specifically since 2004. Therefore, our results are better explained by the pollution haven hypothesis.