China s Exports: Fragmented, Foreign-Invested, and Environmentally Friendlier?

Transcription

1 China s Exports: Fragmented, Foreign-Invested, and Environmentally Friendlier? Judith M. Dean Brandeis University Mary E. Lovely Syracuse University Preliminary Draft (not for quotation) Prepared for "Foreign Direct Investment and Climate Change: New Research Directions" 7th- 8th October 2011 ICCG, Island of San Giorgio i Maggiore, Venice, Italy Special thanks to research assistants Lara Loewenstein, Danielle Trachtenberg, and Jesse Mora.

2 China s dramatic increase in trade and growth is often linked to its pollution Pollution has made cancer China s leading cause of death... Ambient air pollution alone is blamed for hundreds of thousands of deaths each year. Nearly 500 million people lack access to safe drinking water. J. Kahn and J. Yardley, Choking on Growth: Part I. New York Times, August 26, 2007 Rich countries are partly responsible for pollution from poor ones... because they buy many of the raw materials and goods that produce the waste,... We have exported our industry overseas and yet there's no pollution controls in these places or [they]... are terribly inadequate. T. Gardner, Rich world behind much of global pollution, Reuters, Oct. 21, 2008

3 Yet an examination of China s exports gives a different picture. Table 5. Export Shares and Pollution Intensity by Chinese Industrial Sector Share of Total Mfg COD SO2 Smoke Dust ISIC Rev. 3 Two Digit Sector Exports (kilos per thousand yuan output, 1995 yuan) Communications Equipment Top 5 Mfg Office and Computing Machinery Industries by Textiles Export Shares Wearing Apparel Machinery Non-metallic minerals Top 5 Mfg Paper Industries by Pollution Food products and beverages Intensities Wood Basic metals Pollution and output data from China Environment Yearbooks. Output deflated by the Chinese manufacturing producer price indices, China Statistical Yearbook. Exports from official trade data, China Customs. Industries with a high share of exports have low pollution intensity (PI) Industries that have high PIs are a small share of exports

4 Our Main Question Have production fragmentation and foreign investment contributed to cleaner Chinese exports?

5 1. Evidence: sectoral 12/5/2011 Chinese exports are becoming concentrated in: highly fragmented industries industries i where foreign investors dominate trade industries i with low pollution intensity it (PI)

6 Chinese exports are becoming more concentrated in highly fragmented industries Table 1. Fragmentation in Chinese Exports Processing exports as a share of Share of mfg exports mfg exports ISIC Rev. 3 2-digit sector Food products and beverages Tobacco Textiles Wearing apparel Leather shoes Wood Paper Printing Coke and petroleum Chemicals Rubber and plastics Nonmetallic minerals Basic metals Fabricated metals Machinery Office and computing machinery Electrical machinery Communications equipment Medical, precision, and optical instruments Motor vehicles Transport equipment Furniture and other manufacturing Source: China Customs and author calculations

7 Foreign investors account for a large share of Chinese exports Table 2. FIE Involvement in Chinese Exports FIE Share of Processing Mfg FIE Share of Mfg Exports (%) Exports ISIC Rev. 3 2-digit sector Food products and beverages Tobacco Textiles Wearing apparel Leather shoes Wood Paper Printing Coke and petroleum Chemicals Rubber and plastics Nonmetallic minerals Basic metals Fabricated metals Machinery Office and computing machinery Electrical machinery Communications equipment Medical, precision, and optical instruments Motor vehicles Transport equipment Furniture and other manufacturing Source: China Customs and author calculations

8 Chinese industries are becoming cleaner Table 3. Direct Pollution Intensity of Chinese Industrial Production ISIC Rev. 3 Two Digit Sector COD SO 2 Smoke Dust COD SO 2 Smoke Dust 15 Food products and beverages Tobacco Textiles Wearing apparel Leather shoes Wood Paper Printing Coke and petroleum Chemicals Rubber and plastics Nonmetallic minerals Basic metals Fabricated metals Machinery Office and computing machinery Electrical machinery Communications equipment Medical, precision, i and optical instruments t Motor vehicles Transport equipment Furniture and other manufacturing Electricity, gas, steam, and hot water supply Collection, purification, and distribution of water Source: Chinese Environment Yearbook, China Statistical Yearbook on Environment (various issues), and author calculations Notes: Values are in kilos per thousand yuan output in 1995 yuan. COD = chemical oxygen demand; bold face indicates the three industries with the highest pollution intensity (for each pollutant, 1995 and 2006) data are probably underreported since TVIE pollution was only included from 1998 onwards.

9 What about indirect emissions? Total PI should include indirect emissions i generated by purchasing inputs from other sectors. If China s new main exports generate relatively l more indirect pollution than other sectors, this could reverse the conclusion that China s exports are shifting toward cleaner industries. Using benchmark I-O tables we examined direct and total t PIs for 2002 and 2007 for each pollutant.* t Split official IO tables processing exports and normal exports (Koopman, Wang and Wei, 2008; Dean, Fung and Wang, 2011) Concordance from I-O industries to Chinese industries *We are grateful to Zhi Wang (USITC) for calculating the total PIs by I-O sector.

10 15,00 Comparing Direct and Total Water Pollution Intensity 2002 COD TPIx COD TPI COD Direct PI 12/5/2011 tput os per 1000 cu urrent yuan out Kil 14,00 13,00 12,00 11,00 10,00 9,00 8,00 7,00 6,00 5,00 4,00 3,00 2,00 1, , Chinese Industrial Classification 2002 Total (direct plus indirect) PIs do exceed direct PIs But the relative rankings by direct and total PI are essentially the same The total PI of exports is always cleaner than domestic sales

11 2. Evidence: Aggregate* The trade-weighted average PI of China exports (imports) is decreasing. Exports are generally cleaner than imports. Processing exports are cleaner than ordinary exports. *Dean and Lovely (2010). Trade Growth, Production Fragmentation and China s Environment, in R. Feenstra and S. Wei, eds., China's Growing Role in World Trade. NBER and U. of Chicago Press.

12 The Pollution Intensity of China's Overall Trade and Processing Trade COD SO2 Kilos per 000 Yuan Kilos per 000 Yuan COD Intensity X COD Intensity PX SO2 Intensity X SO2 Intensity PX COD Intensity M COD Intensity PM SO2 Intensity M SO2 Intensity PM Smoke Dust Kilos 0 1 Kilos 0 1 s per 000 Yuan s per 000 Yuan Smoke Intensity X Smoke Intensity PX Dust Intensity X Dust Intensity PX Smoke Intensity M Smoke Intensity PM Dust Intensity M Dust Intensity PM Source: Dean and Lovely y( (2010).

13 3. Have fragmentation, ti liberalization, and foreign investment made trade cleaner? Ordinary Trade Composition effect negative Technique effect positive Net effect deeper integration raises trade s PI Processing Trade Composition effect positive Technique effect positive Net effect deeper integration reduces trade s PI

14 Theory 12/5/2011 Dean and Lovely y( (2010) Integrates processing trade into the country- level trade and environment model of Copeland-Taylor (2003) Details processing trade within a sector using p g g the Feenstra-Hanson (1997) continuum model.

15 Theory No Production Fragmentation Two goods, an export and an import. Exports generate emissions. Pollution tax is endogenously determined, and depends on real per capita income, domestic prices, and population. PI of exports depends d on China s comparative advantage, hence factor endowments.

16 Predictions No Fragmentation Reduced form expression e = e(k, L, τ) = e(k, L, R, p*, t) PI of exports Increases with capital-labor l ratio Decreases with real income May increase or decrease with trade liberalization, improved TOT

17 Theory With Fragmentation ti 12/5/2011 PI of exports (imports) is a weighted sum of the PI of ordinary and processing trade. e S e S e Y Y X X PI of ordinary exports affected by endogenous pollution tax PI of processing exports depends on tax, but also on the range of intermediates (within a sector) produced in China. China produces intermediates for which it has lower costs than partner. China exports the pollution-intensive fragments, which are cleaner than ordinary exports.

18 Theory FDI with Fragmentation 12/5/2011 FDI is skewed toward processing exports. Within a sector, it increases the range of intermediates China exports, thus reducing PI of exports. C Costs of a produc ction A C A 0 z * 1 z 2 * 1 Fragments ordered from dirtiest to cleanest

19 Predictions With Fragmentation 12/5/2011 Reduced form e = e(k d, K f, H, L, p*,t, R, S x ) PI of exports Falls with trade liberalization: 1. shifts resources away from ordinary import-competing industries, into cleaner processing exports. 2. reduces cost of imported intermediates, encouraging processing exports.

20 Predictions With Fragmentation 12/5/2011 Reduced form e = e(k d, K f, H, L, p*,t, R, S x ) PI of exports Falls with FDI 1. is skewed toward processing exports, which are cleaner 2. increases ranges of intermediates produced in China 3. (potentially) ti uses greener technology Falls with increased processing trade Falls with increased processing trade processing share endogenous, but associated with lower PI.

21 Econometric Evidence: PI of Aggregate Exports Δln e γ β Δln K β Δln L βδln p * β Δln t β Δln R η it 1 it 2 it 3 it 4 it 5 it it Where: Δ first difference e PI of exports K capital (split into domestic and foreign) L labor (split into high and low skilled) p* terms of trade t tariff (and dummy for WTO membership) R real per capita GDP Sx processing share of exports Sample: pooled across four pollutants, 10 years ( ) Methods: GLS with panel-specific weights; instrumental variables

22 Data 12/5/2011 Gross capital formation (% GDP), Total labor force, Net barter terms of trade, Real GDP per capita, and FDI inflows (%GDP) Source: WB, WDI 2007 Share of processing exports (imports) in total exports (imports) Source: China Customs Simple average tariff Source: WITS; WTO 2006; Zhang et al., 1998 Educational attainment Source: Cao, 2000; China Statistics Yearbook

23 PI of Aggregate Exports: IV Regressions Table 4. The Change in the Pollution Intensity of China s Exports 1 (3) (4) (5) Equ. (13) IV Equ. (13) IV Equ. (13)IV Coeff. t-stat 4 Coeff. t-stat 4 Coeff. t-stat 4 Gross Capital Formation ** 2.68 Domestic Investment ** 4.34 FDI ** Ratio of FDI to Dom. Inv ** Ratio of Skilled to Unskilled Labor ** Labor Force Real GDP p.c ** Terms of Trade ** ** ** 6.00 Average Tariff ** ** 4.65 WTO Dummy -0.39** ** ** Processing Exports Share * * * Constant -2.25* * 2.67 Obs Weighted Adj. R Weighted F-statistic ** 13.35** 15.73**

24 PI of Industry Exports (in progress) At the industry level, we are looking for evidence that: Industries more involved in processing exports are cleaner Foreign investment increases the number of fragments within an industry produced in China brings cleaner technology to an industry Chinese trade liberalization encourages processing exports

25 PI of Industry Exports (in progress) The Copeland-Taylor model of pollution demand and supply still applies at the sector level As Cole, Elliot, and Wu (2008) show, estimation of sectoral pollution demand d and supply requires: Demand-side Relative factor intensity (including energy intensity) Scale of production Age R&D intensity Supply-side an industry measure of pollution taxes.

26 Industry-level pollution taxes Assembled data on total pollution levies collected (all media), and number of firms paying levies, in each region ( , ) Source: China Environment and Statistics Yearbook Constructed industry level pollution levies per firm regional average levies per firm weighted by share of industry s production in that region

27 0 Average e Fine per Firm ISIC

28 0 2 (sum) ) so2wt06x ISIC SO2 Intensity 1996 SO2 Intensity 2006

29 Key issues Endogeneity of pollution levies Foreign-invested invested firm exports vs. FDI flows

30 Appendix I Definitions Definitions Concordance procedures

31 1. Pollutants Type Measure Definition Water COD The mass concentration of oxygen consumed by the chemical breakdown of organic and inorganic matter. Air SO 2 The volume of sulfur dioxide emission from fuel burning and from the production process on the premises of enterprises. Air Smoke The volume of soot in smoke emitted in the process of fuel burning on the premises of enterprises. Air Dust The volume of dust that is suspended in the air for some time, emitted by production processes of enterprises.

32 2. Pollution intensity of manufacturing trade Definition: The pollution intensity (PI) of exports (imports) is a weighted average of PI across all ISIC mfg exports (imports), using export (import) shares as weights., X xit M mit PIt pi it PIt piit i X t i M t Assumes the PI of Chinese exports is the same as the PI of Chinese goods sold locally. Reflects the PI of Chinese imports, had they been produced in China. Uses emissions data for each year in the sample, thereby incorporating both changes in product composition and production technique.

33 2. Pollution intensity of manufacturing trade PI 2002 Chinese Indus. Classif. PI ISIC revision 3 Chinese Trade Data ISIC rev. 3 Chinese Trade Data HS Weighted Average PI per 000 real Yuan export (import) ISIC rev. 3 Advances over earlier US studies: Walter (1973), Robison (1988): no emissions data. Ederington, Levinson and Minier (2004): 1 year of emissions data; only measure composition effects. Limitation: Does not incorporate inputs outside the 2-digit sector.