Chinese trade and pollution

You can’t blame trade for Chinese pollution, report Judith Dean and Mary Lovely over at Vox:

In a recent working paper, “Trade Growth, Production Fragmentation and China’s Environment,” we calculate and track the pollution content of China’s export and import bundles from 1995 to 2005… We find that as China’s trade has grown, the pollution intensity of almost all sectors has fallen in terms of water pollution (measured by chemical oxygen demand (COD)) and air pollution (measured by SO2, smoke or dust) in 2004…

Our study also reveals that China’s major exporting industries are not highly polluting, and that the export bundle is shifting toward relatively cleaner sectors over time. In 1995, textiles and apparel accounted for the largest shares of Chinese exports to the world, but these shares fell by about a third over the following decade. Office and computing machinery and communications equipment, in contrast, were the fastest growing exports and accounted for the largest export share in 2005. What is striking is that these growing sectors are cleaner than textiles and apparel; indeed, they are among the cleanest manufacturing sectors by the available measures of air and water pollution. The most polluting sectors, such as paper and non-metallic minerals, have in fact very low and declining shares in China’s manufacturing exports.

Linking industrial pollution intensities to detailed trade statistics from China Customs, we find that, contrary to popular expectations, China’s exports are less water pollution intensive and generally less air pollution intensive than Chinese import-competing industries. Moreover, both Chinese exports and imports are becoming cleaner over time. Part of this trend reflects changes in the composition of the trade bundle, as noted above. However, our evidence suggests that most of the fall in the pollution content of China’s trade is due to changes in industrial pollution intensities (how China produces), rather than in trade patterns (what China exports and imports). This latter finding has important implications as it suggests that the downward trend is not dependent on relationships with particular trade partners…

Finally, we find some evidence that international production fragmentation, the breaking of production into distinct processes, may have played a role in reducing the pollution content of Chinese trade. “Processing trade” alone accounts for about 56% of the growth in China’s exports and 41% of the growth in China’s imports between 1995 and 2005. If investment in processing activities expands the range of the production process performed in China, this investment will tend to make China’s production and trade cleaner. Additionally, if the foreign-invested enterprises responsible for most of this trade bring greener technologies than those used by domestic producers, this will tend to make trade even cleaner. We find strong evidence that Chinese processing exports are cleaner than Chinese ordinary exports. Statistical testing suggests that processing trade has played a key role in explaining the drop in the pollution intensity of Chinese exports over time and that FDI inflows have contributed significantly to this decline, even controlling for the processing trade share.