Regional Research Institute West Virginia University

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1 Regional Research Institute West Virginia University Working Paper Series China's Inter-regional Trade of Virtual Water: a Multi-regional Inputoutput Modeling Xueting Zhao Working Paper Key Words: Virtual water, Multi-regional input-output (MRIO) model, China JEL Codes: C67, Q25, R11 1

2 China's Inter-regional Trade of Virtual Water: a Multi-regional Input-output Modeling Xueting Zhao* 1 Abstract This study focuses on the measure of inter-regional trade of virtual water, defined as the freshwater consumed for producing traded goods and services, to explain the relationship between China s regional virtual water and the increasing water demand. By using the multi-regional input-output (MRIO) tables of 2002 and 2007 with the regional sectoral water use, this study analyzes virtual water in trade, domestic trade in virtual water, and the regional trade balance of virtual water. The results show that: (1) water use efficiency has increased in China; (2) the major source of the regional virtual water in trade is domestic inter-regional trade; and (3) a region s virtual water depends on its water resources availability, economic structure, as well as the region s position in domestic supply chain. Acknowledgements: I would like to thank Dr. Randall Jackson for the constructive comments and Caigan McKenzie for the copy-editing assistance. 1 Post-Doctoral Research Fellow, Regional Research Institute, West Virginia University, Morgantown, WV , Xueting.Zhao@mail.wvu.edu,

3 1. Introduction China s rapid economic development has caused increased pressures on its water resources. China is ranked number four in the world for total water resources, with access to approximately 6% of the world s fresh water resources, yet the per capita water availability is about 2200 cubic meters (cu.m), which is only a quarter of the global average. Moreover, China s water resources are unevenly distributed. According to the international standard (WWAP), when annual water supplies drop below 1,000 cu.m per person, the population faces water scarcity and below 500 cu.m absolute scarcity. Figure 1 shows the per capita water resource distribution in China for 2002 and In 2002, the per capita water resources in twelve provinces were below 1,000 cu.m, ten of which were below 500 cu.m; and in 2007, eleven provinces were below 1,000 cu.m, eight of which were below 500 cu.m. The main characteristics of these water scarcity provinces include population concentration, such as Beijing, Shanghai; highly developed industry, such as Shandong, Shanxi, Jiangsu; and low water resource availability, such as Ningxia, Gansu. Figure 1. Per capita Water Resource Distribution in China (2002, 2007) Because of the great variation in water resources, economic size, and industrial structure within China, water scarcity in some of regions has become an important problem. Northern China is characterized by water scarcity in quantity while southern China is characterized by water scarcity in quality. At the same time, China is experiencing ever-increasing water demand driven by rapid industrialization and urbanization. To balance the water scarcity and increasing water demand, China needs to look inward to determine the appropriate water policies for the water distribution and water uses. 3

4 Although many large water projects, such as South-to-North Water Diversion Project (SNWDP), were launched to fulfill the water demands in water scarce regions, these direct water conservation approaches are unsustainable, thus do not play a sufficiently important role in production and consumption decisions. However, revealing how water is distributed across regions via domestic and global production networks can help policy makers to identify and rethink local water problems. By definition, virtual water is the freshwater consumed for producing traded goods and services (Allan, 1994). Linking water use to consuming behavior is evidenced when water withdrawal from one region may be virtually consumed by other regions through water embodied in the products, thus decreasing the region s own water resources. On the contrary, the region consumes the products with other regions embodied water will probably gain the region s own water resource safety. Therefore, importing and exporting goods and services is virtually equivalent to importing and exporting water. Virtual water trade (VWT) can help an economic region relieve its water crisis by importing virtual water from water abounding regions. Optimizing the virtual water trade nexus is a more appropriate measure to increase water efficiency than the direct water conservation. Therefore, it is worthwhile to give an analysis of virtual water trade nexus to further constitute regional water policy in China. The aim of this study is to investigate China s regional virtual water embodied in export, outflow (of both intermediate products and final products), and inter-regional trade by applying the recently available multi-regional input-output (MRIO) tables of 2002 and The MRIO modeling can trace the places where the water uses accurately occur and reveal the linkages between regional direct water use and embodied water requirements. The results of this study show that water use efficiency has increased in China; the major source of the regional virtual water in trade is domestic inter-regional trade; and a region s virtual water depends on its water resources availability, economic structure, and the region s position in domestic supply chain. The rest of this study is organized as follows. Section 2 gives a brief review of the previous works. Section 3 introduces the methodology and data. Section 4 presents the results, and section 5 provides the conclusions. 2. Literature Review Virtual water trade (VWT) is one of the powerful accounting tools mapping the linkages among consumption behavior, trade activities, and water use. The traditional approach to assessing 4

5 VWT embodied in the product is to multiply the trade volume by the product s water intensity, which is defined as water use per unit output. Many studies have revealed the relationship between the local economic patterns and the virtual water trade in specific countries, e.g. United Kingdom (Yu et al. 2010), Netherlands (Oel et al. 2009), France (Ercin et al. 2013) and China (Hubacek et al. 2009). In terms of China, important works have been done focusing on the virtual water at the level of the entire nation, provinces, cities, or the river basins. Zhao et al. (2009) calculated China s national water footprint in 2002 using the Input-output method. Dong et al. (2013) studied the regional water footprint of Liaoning province. Wang et al. (2013) evaluated the water footprint and VWT of Beijing. Zhao et al. (2010) estimated the water footprint and virtual water trade of Haihe River basin. Okadera et al. (2014) evaluated the water footprint of the Yangtze River basin. Input-output analysis (IOA) was first proposed by Leontief in the 1930s and provides a technique to quantitatively study the interconnections and interdependencies of different sectors in an economic system. IOA uses straight forward mathematic routines to track all direct and indirect resource use embodied within consumption (Leontief, 1970). IOA framework has been widely applied to the studies of various resources embodied in the products, such as embodied land with ecological footprint (Bicknell et al., 1998, Wiedmann et al., 2006), embodied carbon dioxide emissions concerning global warming (Gale, 1995; Meng et al., 2013), embodied energy use (Zhang et al., 2013), and embodied water use with water footprint (Zhang and Anadon, 2014). Multi-regional input-output (MRIO) model is the extension of single region input-output (SRIO) model. In a MRIO framework, different regions are connected through inter-regional trade. Only a few studies have used multi-regional input-output (MRIO) tables and considered the embodied water in trade in China. Zhang et al. (2011) constructed a 30 region, 33 sector MRIO table of China for 2002 to quantify the water footprint of Beijing. Zhang et al. (2014) used the MRIO model to quantify the scale and structure of VWT and consumption-based water footprints at the provincial level in China. There are two shortcomings to the existing studies on China: (1) studies focuses on the entire nation and based on single region input-output (SRIO) tables, fail to include the full supply chain of China s domestic inter-regional trade; and (2) studies focused on data covering only a single period (a year), failing to paint a dynamic picture of virtual water trade results. This is primarily due to data constraints, therefore, there is a need for regional and time period studies to improve the understanding of water use and trade patterns in China. 5

6 This study differs in the way in which it focuses on clarifying the inter-regional spillover of water and the regional trade balances. The inter-regional spillover of water and its change pattern not only depends on the regional economic level and regional industrial structure but also on the region s position and participation level in the domestic and global supply chain. This study applies both the traditional I/O based measure of regional water in trade and the newly developed measure of inter-regional trade in water to measure China s inter-regional frameworks for both 2002 and Methodology and Data 3.1 Multi-regional I-O Model (MRIO) Assume that there are R regions and each region includes N sectors in the model. The basic row balance of the MRIO table could be expressed as x r i = R N rs r z ij + y i s=1 j=1 (1) where x i r stands for the total economic output of sector i in region r; z ij rs represents the inter-sector monetary flow from sector i in region r to sector j in region s and y i r is the total final use supplied by sector i in region r. The technical coefficient matrix A rs = [a rs ij ] is given by a rs ij = z rs ij /x s j, then Equation (1) could be reformulated as rs x r i = R N s=1 j=1 a ij x s r j + y i (2) Further, Equation (2) can be expressed in matrix form as X = AX + Y (3) x 1 A 11 A 12 A 1R where X = [ x 2 ] is the aggregate output for all regions, A = [ A 21 A 22 A 2R ] is the x R A R1 A R2 A RR Y 11 Y 12 Y 1R aggregate cross-regional direct technical coefficient matrix, and Y = [ Y 21 Y 22 Y 2R ] is Y R1 Y R2 Y RR the aggregate final demand, which is the sum of consumption (rural household, urban household 6

7 and government consumption), investment (fixed capital formation and stock consumption), the international exports and the other balanced items. The Leontief inverse matrix L = (I A) 1 is obtained when solving Equation (3) for sectoral output as a function of final demand X = (I A) 1 Y (4) 3.2 Indicators of Water Use in I-O Framework The direct water use coefficient vector α could be calculated by incorporating water use quantity W as follow α = W/X = [α j ] (5) where W = [w j ], α j is the amount of water directly used by sector j to increase one monetary unit output and w j is the water use of sector j. According to Equation (5), Equation (4) could be rewritten as W = α(i A) 1 Y (6) The accumulative water use coefficient β could be defined from the above equation β = α(i A) 1 = [β j ] (7) where β j represents the accumulative water used (includes both direct and indirect water use) to generate one monetary unit of output in sector j. The water multiplier γ is defined as accumulative water use coefficient divided by direct water use coefficient γ j = β j /α j (8) where γ j measures the water intensity of final use relative to production for sector j. The larger γ j indicates the larger indirect water use of sector j. 7

8 3.3 Virtual Water Trade Products consumed by a region include those produced locally through local water resources as well as those produced in another region through that region s water resources. The water used in other regions to produce goods and services that are consumed by the local region could be calculated by the trade difference. The trade volume of virtual water could be calculated through both the regional virtual water in trade (VWiT) and the inter-regional trade in virtual water (TiVW). VWiT is the traditional I-O based measure, which measures the embodied water in trade, including both the inter-national trade and inter-regional trade in goods and services. TiVW is the newly developed measure, which measures a region s water used by other regions total final demand and export through inter-regional supply chains Regional Virtual Water in Trade (VWiT) The VWiT includes the water embodied in a region s export (international trade with the rest of the world) and the water embodied in a region s outflow (domestic trade with the rest of the nation). The outflow could be separated into outflow of intermediate products and outflow of final products. Water embodied in the exports of region r can be derived as WE r = β r ex r = α r (I A r ) 1 ex r (9) where β r is region r s accumulative water use coefficients, α r is region r s direct water use coefficients, A s is the intra-regional coefficient matrix of region r, and ex r is region r s exports. Water embodied in the outflow of region r can be expressed as WO r = β r ou r = α r (I A r ) 1 ou r (10) where ou r is region r s outflow. Water embodied in the outflow of intermediate products of region r can be written as WI r = β r imd r = α r (I A r ) 1 imd r (11) Water embodied in the outflow of final products of region r can be written as 8

9 WF r = β r fd r = α r (I A r ) 1 fd r (12) where imd r is region r s outflow in intermediate products, and fd r is region r s outflow in final products Inter-regional Trade in Virtual Water (TiVW) The TiVW includes the water use caused by the other region s final demand and the water use caused by the other region s exports. In this study, I apply the formula that is used in Meng et al. (2014) to measure the inter-regional trade of virtual water. Water use in region r caused by the other regions final demand can be expressed as WFD r. = (u, u)diag(α r, 0) ( Lrr L.r L r... ) (fdr. L fd.. ) (13) where u is the unity vector, L r. is the total input in region r to satisfy one unit increase of final demand in any other region, and ( Lrr L r. L.r L.. ) = [I A r. 1 (Arr A.r A.. )], A r. is the inter-regional input coefficients from region r to any other regions, fd r. is region r s final demand for goods and services produced in any other regions. Water use in region r caused by the other regions exports can be expressed as where ex. is any other region s exports. WEX r. = (u, u)diag(α r, 0) ( Lrr L.r L.. ) ( 0 ) (14) ex. L r. 3.4 Data Sources In this study, the main data sources include the 2002 and 2007 Chinese MRIO tables and the database of China s provincial water use by sectors. The MRIO tables of 2002 and 2007 are constructed by China s State Information Center (SIC, 2011), which include eight regions, reflecting the similarity of economic structure and spatial location of provinces in China. The region classification is displayed in Appendix A. SIC has published the MRIO tables for both 9

10 eight sectors and seventeen sectors for eight regions. In this study, the 17 sectors MRIO tables will be applied. The water use data of 30 provinces are collected from China Environmental Statistical Yearbook (CESY, 2003, 2008), including the water use of agriculture sector, industrial sector and household and service sector. The water use of the agriculture sector of each region in the MRIO tables is equal to the summation of the agriculture sector water use of the corresponding provinces. In this study, only the blue water (surface and ground water) use is included, not the green water (rainwater and the water stored in soil). Due to the lack of detailed specific water use information of the 13 industrial sectors and the 3 service sectors of each province, I assume a uniform water intensity across all the industrial sectors and a uniform water intensity across household and service sectors, respectively. Then I disaggregate the water use of the general industry sector, household and service sector to the detailed corresponding sectors in the provincial I-O table, according to the proportion of the intermediate input from the water production and supply sector to different sectors. The provincial sectoral water use could be converted from monetary value to physical value according to the provincial input-output tables for each province, enabling me me to calculate the regional sectoral water use. The sector comparison table between the MRIO tables and the provincial I-O tables is displayed in Appendix B. 4. Results 4.1 China s Regional Water Use The national total amount of water use in China are 5, and 5, hundred million cu.m for 2002 and 2007, respectively (CESY, 2003, 2008). In these five years, the total amount of water use has only increased about 5.85%. However, the national GDP has doubled in China from 2002 to 2007, which are 12, and 27, billion Chinese Yuan for 2002 and 2007, respectively. The water use intensity (water use divided by GDP) in 2007 (2.08 cu.m/yuan) is less than half of the water intensity in 2002 (4.57 cu.m/yuan). This result indicates that the water use efficiency has highly increased from 2002 to Similar to the national water use, the regional water use didn t change much as well. The results of the sectoral per capita water use (PW) structure of each region for 2002 and 2007 are 10

11 shown in Figure 2. For both 2002 and 2007, northwest region has the largest per capita direct water use, and the east coast is the second per capita direct water use region in China. The water use is highly correlated with the factors such as population, economic development and economic structure. Among the economic sectors, agriculture is the largest water intensive sector, requiring the largest water use; however, it contributes less to the gross regional products (GRP). For all the eight regions, the water uses of agriculture sector account for over 50% of their total water use. In particular, the water use of agriculture sector in the northwest region accounts for more than 90%. Therefore, even though northwest ranks No.1 at both per capita water resources and per capita water uses, it ranks only No.6 at the per capita GRP (See Appendix A). Figure 2. Sector Structure of Per Capita Water Use by Regions (2002, 2007) Industry sectors and service sectors are relatively less water intensive than the agriculture sector. However, they contribute much more than the agriculture sector. The east coast ranks the second largest per capita water use region. However, it has the lowest percentage of agriculture sector water use among the eight regions (55.78% in 2002 and 47.33% in 2007); most of the water is used by the industry sectors and service sectors. Therefore, the east coast ranks No.2 at per capita GRP. Similar to the east coast, north municipalities have a relative low percentage of agriculture sector water use. It also has the largest percentage of service sector water use, accounting for about 20% for both 2002 and Therefore, even though north municipalities have the lowest per capita water resource and the lowest per capita water use, it ranks No.1 at the per capita GRP. 11

12 Figure 3. Regional Water Multiplier by Sectors (2002, 2007) Water use coefficient represents the water that is used to generate one unit monetary output. The results of the regional direct water use coefficient is shown in Table 1. From 2002 to 2007, the direct water use coefficient has decreased for most of the sectors, which indicates less water is used to generate the same unit monetary output. Water multiplier implies the indirect effects on the local water use in the production process. Figure 3 gives the regional water multiplier by sectors for both 2002 and From the table and figures, I find that the upstream sectors such as agriculture, mining and quarrying, electricity, gas and water supply in the supply chain have relatively larger water use coefficients and smaller water multipliers. Conversely, the bottom stream sectors, such as food products and tobacco, textile and garment, wood products and furniture in the supply chain have much higher water multipliers than the upstream sectors, but lower water use coefficients. This indicates that the upstream sectors in the supply chain highly depend on the direct water use and have less indirect effects of water use on the other sectors. The bottom stream sectors in the supply chain have less direct water use, but highly depend on consuming the other sectors goods and services to satisfy their water demand. The water use coefficients of most sectors have decreased from 2002 to However, the coefficient of construction sector has increased, especially in the south coast and north coast regions. The common characteristic of these regions is that they are highly developed regions providing more jobs. With much more job opportunities than the other regions, more and more people immigrate from the inland to these coastal regions. Therefore, these regions face more and more pressure on land use, which promotes constructions, and to some extent, increases the water use of the construction sector. The water multiplier of construction sector has largely decreased, 12

13 which indicates the water use of the construction sector largely depends on direct water use in Regional Virtual Water in Trade Figure 4 shows China s regional virtual water in trade for both 2002 and In 2002, the three coastal regions (north coast, east coast and south coast) have the highest embodied water use in regional export among the eight regions. They are basically the manufacture-oriented export economies. In 2007, the east coast and south coast are still the top two regions with VWiT in regional export, and the north coast has slight increase. Compared to the other regions, northwest shows a significant increase of VWiT in regional export from 2002 to The main reason for the increase is the large increase in exports of the sectors such as electricity, gas and water supply. Compared to 2002, the export of this sector has increased about two hundred times in North municipalities have the lowest VWiT in regional export in both 2002 and 2007, largely resulting from the region s service-oriented economy. The export of service sector accounts for more than 20% of the total export in this region. The embodied water use in regional outflow is much larger than the embodied water use in regional export for all the regions in both 2002 and 2007, which indicates that the major source of the regional VWiT is the domestic inter-regional trade, especially the intermediate products trade. The east coast and central regions have the largest embodied water use in regional outflow, and the largest embodied water use in regional outflow in intermediate products. The main reason is that these regions are located in the upstream of domestic supply chain, which require more water input for production. Northeast has the largest change rate of the embodied water use in regional outflow of intermediate products, which indicates the position of this region changed from the bottom stream to the upstream in the inter-regional trade from 2002 to The regions of central, northwest and southwest rank as the top three largest embodied water use in regional outflow of final products, which is largely a result of the large population in the central region and the large water intensive products in the northwest and southwest regions. 13

14 Figure 4. China s Regional Virtual Water in Trade (2002, 2007) 4.3 Inter-regional Trade in Virtual Water TiVW could explain how the water is used and distributed across the regions through the inter-regional supply chain. The results of China s inter-regional trade in virtual water use by final demand and the trade balance are displayed in Table 2. From 2002 to 2007, there is a dramatic increase of the total TiVW. The total national inter-regional trade increased from to hundred million cu.m. In 2002, central region was the largest exporter of water, which accounts for 26.14% of the total water trade, followed by northwest region (18.36%). Central region was also the largest importer of water, which accounts for 18.09%, followed by the coastal regions (north coast 16.14%, and east coast 16.10%). These results indicate that the central region plays the important role of water transmission, importing it from the northwest and southwest and exporting it to the eastern regions. Although the coastal regions have relatively abundant water resource availability, they still largely depend on water imported from other regions. 14

15 In 2007, the largest exporter has changed from central China to northwest (36.56%), the trade balance of which has increased from to hundred million cu.m. Northeast has changed from net virtual water importer to the second largest exporter in the inter-regional TiVW framework, changing the trade balance from to hundred million cu.m. The coastal regions are still the largest importers (east coast 24.47%, north coast 17.17%, and south coast 14.08%). Unlike the northeast, the central region has changed from net virtual water exporter to the importer, changing the trade balance from to hundred million cu.m. Figure 5 and Figure 6 further confirm the results and show the detail inflow and outflow of virtual water by regions for both 2002 and In 2002, north municipalities and north coast had the largest trade deficit, and southwest and central had the largest trade surplus. In 2007, the east coast and north coast had the largest trade deficit while northwest and northeast had the largest trade surplus. Among the eight regions, the central, east coast and northeast have changed their position in the TiVW chain from 2002 to This highly relate to the structural changes. Central and east coast regions have tended to purchase more final goods from other regions other than produce them locally. On the contrary, northeast, as the important heavy industry base region, has been able to provide more highly processed water-intensive intermediate goods to support other regions supply chains. Figure 5. China s Inter-regional Trade in Virtual Water (2002, 2007) 15

16 Figure 6. Inflow and Outflow of Virtual Water by Regions (2002, 2007) There are several reasons for the change pattern in the regional TiVW. The first one is water resources availability, which is one of the most important drivers for inter-regional trade. Among the eight regions, northwest region has the largest water resources, which caused it became the largest exporter. However, water resources availability is not the only driver; the other important factors, such as availability of arable lands and fossil fuel resources play an important role in shaping the spatial distribution of virtual water use as well. Southwest is the second largest water resource region, however, water exported from this region is relatively lower because most of the lands in this region are covered by mountains, making it unsuitable to use. Therefore, water resources availability is the one driver, but not the only one, for the spatial distribution pattern of inter-regional trade. The second reason is economic structure. The economic structure of a region includes the dominant economic sectors and the import-export structure. The dominant sectors of the northwest region are agriculture and energy sectors, which are the more water-intensive sectors. Since most of the output of these sectors export to the other regions, there is a large volume of virtual water export to the other regions as well. On the contrary, the dominant sectors of coastal regions are less water-intensive sectors, such as equipment and machinery industries and service sectors. These regions export less water-intensive products to the other regions, on the other hand, import the more water-intensive products from the other regions, especially the northwest region. Therefore, the general direction of the virtual water trade is from the inland to the coastal regions in China. 16

17 The third reason is the position of the region in the supply chain. The bottom stream region represents the region with less water use but it gains a large value-added output while the upstream region represents the region with large water use but gains only a small value-added output. North municipalities and the coastal regions are the bottom stream regions. These regions are the relatively developed and more populous regions in China. They are highly dependent on raw materials for production, food and necessities for consumption through the domestic supply chain. They export less water-intensive and high value-added products and services to the other regions. On the other hand, northwest and northeast are the typical upstream regions. More than 50% of the agricultural output in northwest region and a large amount of the industry output in northeast are exported to the other regions as either intermediate inputs or final products. Therefore, the virtual water trade definitely depends on the region s position in the supply chain. Figure 7. Give-out Potential of Virtual Water Use by Regional Exports (2002, 2007) Figure 8. Gain Potential of Virtual Water Use by Regional Exports (2002, 2007) 17

18 The results of the inter-regional TiVW by regional exports are shown in Table 3. The giveout and gain potential of water use by regional exports for both 2002 and 2007 are shown in Figure 7 and Figure 8. For both 2002 and 2007, the east coast and south coast regions are the largest importers of virtual water use, which indicates they have the largest spillover effects on the other regions. The export market in China is mainly located in the coastal regions. Therefore, it is not surprising that the coastal regions give out the largest virtual water use by regional exports. The main provider of this give-out potential is from the central region in 2002; and in 2007, the northwest became the other main provider. The centralized location and the large economy of the central region have caused it to be the primary transmission region through which it gains the most virtual water by regional exports. The large increase of the gain potential of the northwest indicates that this region provided more and more water-intensive intermediate products to be involved in the coastal regions export products supply chain. 5. Conclusions While the virtual water embodied in the international trade has received much attention, domestic virtual water trade embodied in inter-regional trade for all products has not been widely studied. Revealing the relative importance of international and domestic trade on local water use can help policy makers identify and rethink prior areas of local water problems. To explain the relationship between China s regional virtual water and the increasing water demand, this paper focuses on the measure of inter-regional trade of virtual water. Using the MRIO tables of 2002 and 2007 with the regional sectoral water use, this study analyzed virtual water in trade and domestic trade in virtual water, and the regional trade balance of virtual water use. Major conclusions of this paper are as follows: (1) water use coefficients of most sectors have decreased from 2002 to 2007, which indicates less water is used to generate the same unit monetary output. This is mainly due to the improvement of water use efficiency in the important water-intensive sectors, such as agriculture, mining and quarrying, electricity, gas and water; (2) The major source of the regional virtual water in trade is domestic inter-regional trade, especially the intermediate products trade. The inter-regional trade in virtual water at the national level approximately doubled between 2002 and The northwest became the largest exporter of domestic water use; the coastal regions became the largest importer of domestic water use; the central region changed from the net exporter to net importer ; and (3) a region s virtual water 18

19 depends on its water resource availability, economic structure, as well as its position in domestic supply chain. The northwest and northeast are located in the upstream of domestic supply chain. Northwest has the largest water resource availability with more than 50% of the main waterintensive sectors production being exported to the other regions; the northeast is the heavy industry based region, with a large amount of industry products being exported to the other regions. Coastal regions are located in the bottom stream of domestic supply chains, and they import high water-intensive products from other regions and export less water-intensive, yet high value-added, products to other regions. The central region plays a leading role as transmission channel of water use from inland regions to coastal regions. Limiting water use while concurrently increasing water efficiency have been the foci of the new water policy framework in China. However, re-shaping China s water-trade nexus, particularly in water-scarce regions, can provide alternative opportunities to address local water scarcity problems. Optimizing the water trade nexus may have more wide-spread socio-economic consequences than direct water conservation measures. The virtual water trade pattern may be strengthened in the future as China s economy continues to grow rapidly and more people immigrate from inland regions to east and south coastal regions for job opportunities. Therefore, shifting export-oriented sectors from the large water-intensive sectors to the less water-intensive industries and services could contribute to water conservation in China. 19

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23 Table 1. China Regional Direct Water Use Coefficient (2002, 2007) Direct Water Use Coefficient (CU.M/10^3 Yuan) Growth Rate NE NM NC EC SC CE NW SW NE NM NC EC SC CE NW SW NE NM NC EC SC CE NW SW Agriculture Mining and Quarrying Food Products and Tobacco Textile and Garment Wood Products and Furniture Pulp, Paper and Printing Chemical Non-metallic mineral products Metal Products General Machinery Transport Equipment Electric Appliances and Electronic Other Manufacturing Products Electricity, Gas and Water Construction Supply Trade and Transportation % % % % % % % % % % % % % % % % -7.51% % % % % % % % % % % % 27.89% % % -8.25% % % % % % % % % % % % % % % % % % % % % % 18.00% % % 28.55% % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % 15.48% % % % % % % % % 4.19% % % % % % % 36.98% % % % % % % % % % -3.00% % % % % % % % % % % % % % % % % % % % Other Services 23

24 Table 2. Inter-regional Trade in Virtual Water Use by Final Demand and the Trade Balance (2002, 2007) (100 MILLION CU.M) NE NM NC EC SC CE NW SW Total NE NM NC EC SC CE NW SW Total NE NM NC Inter-regional Trade EC SC CE NW SW Total NE 1.30% 1.40% 0.39% 0.35% 0.83% 1.54% 0.47% 6.28% 0.74% 3.04% 2.32% 1.40% 2.49% 0.69% 1.29% 11.97% NM 0.07% 0.40% 0.03% 0.02% 0.05% 0.07% 0.03% 0.67% 0.11% 0.94% 0.15% 0.07% 0.23% 0.08% 0.10% 1.68% Share in Total Interregional Trade in Water NC 0.86% 2.86% 0.81% 0.31% 1.48% 1.24% 0.20% 7.76% 0.35% 1.00% 1.22% 0.73% 3.24% 0.62% 0.54% 7.69% EC 0.50% 0.84% 2.40% 1.51% 6.00% 1.19% 0.98% 13.42% 0.19% 0.12% 0.68% 1.59% 2.44% 0.33% 0.48% 5.84% SC 0.83% 0.73% 1.51% 2.03% 2.83% 1.89% 2.07% 11.90% 0.56% 0.17% 0.53% 0.97% 2.16% 0.69% 2.48% 7.55% CE 1.74% 2.18% 5.36% 8.44% 3.11% 3.61% 1.70% 26.14% 0.38% 0.31% 2.97% 8.84% 2.79% 0.80% 1.05% 17.14% NW 3.49% 2.18% 3.21% 2.76% 1.00% 4.34% 1.39% 18.36% 1.20% 0.90% 8.35% 9.16% 3.74% 8.45% 4.77% 36.56% SW 1.49% 0.94% 1.87% 1.63% 2.61% 2.56% 4.38% 15.47% 0.51% 0.17% 1.21% 1.82% 3.76% 2.96% 1.15% 11.58% Total 8.99% 11.03% 16.14% 16.10% 8.90% 18.09% 13.91% 6.84% % 3.30% 3.42% 17.71% 24.47% 14.08% 21.95% 4.36% 10.71% % NE NM NC Trade Balance EC SC CE NW SW Total

25 Table 3. Inter-regional Trade in Virtual Water Use by Regional Exports and Trade Balance (2002, 2007) (100 MILLION CU.M) NE NM NC EC SC CE NW SW Total NE NM NC EC SC CE NW SW Total NE NM NC Inter-regional Trade EC SC CE NW SW Total NE 1.40% 1.35% 0.78% 1.04% 0.18% 0.33% 0.11% 5.19% 1.25% 2.43% 3.40% 2.19% 0.40% 0.46% 0.16% 10.29% NM 0.04% 0.25% 0.07% 0.10% 0.01% 0.02% 0.00% 0.49% 0.04% 0.38% 0.17% 0.08% 0.02% 0.04% 0.01% 0.73% Share in Total Interregional Trade in Water NC 0.55% 3.35% 1.92% 1.28% 0.37% 0.37% 0.07% 7.91% 0.35% 1.94% 1.83% 0.99% 0.41% 0.49% 0.05% 6.05% EC 0.37% 1.12% 1.87% 7.07% 1.71% 0.33% 0.24% 12.72% 0.16% 0.39% 0.67% 5.02% 0.72% 0.26% 0.12% 7.34% SC 0.54% 0.89% 1.14% 5.29% 0.63% 0.43% 0.55% 9.46% 0.29% 0.47% 0.57% 3.49% 0.37% 0.36% 0.44% 6.01% CE 1.05% 2.38% 5.64% 16.06% 10.15% 0.96% 0.47% 36.70% 0.31% 0.65% 3.71% 17.83% 7.07% 0.74% 0.24% 30.56% NW 1.47% 1.21% 2.78% 3.77% 2.24% 0.76% 0.30% 12.53% 1.07% 1.59% 7.34% 10.96% 4.39% 0.91% 0.41% 26.67% SW 0.64% 0.74% 1.22% 2.49% 8.69% 0.39% 0.82% 14.99% 0.24% 0.23% 1.29% 3.58% 5.99% 0.33% 0.71% 12.36% Total 4.66% 11.09% 14.25% 30.38% 30.57% 4.05% 3.26% 1.75% % 2.46% 6.52% 16.39% 41.26% 25.73% 3.15% 3.06% 1.42% % NE NM NC Trade Balance EC SC CE NW SW Total

26 Appendix A. Region Classification and Basic Regional Dataset MRIO TABLES Provincial IO TABLES Per Capita Water Per Capita Water Use Per Capita GRP Resources (CU.M) (CU.M) (Yuan) 8 Regions 30 Provinces Northeast (NE) Heilongjiang, Jilin, Liaoning North Municipalities (NM) Beijing, Tianjin North Coast (NC) Hebei, Shandong East Coast (EC) Jiangsu, Shanghai, Zhejiang South Coast (SC) Fujian, Guangdong, Hainan Central (CE) Shanxi, Henan, Anhui, Hubei, Hunan, Jiangxi Northwest (NW) Inner Mongolia, Shaanxi, Ningxia, Gansu, Qinghai, Xinjiang Southwest (SW) Sichuan, Chongqing, Guangxi, Yunnan, Guizhou Note: Water Resources include the Surface Water, Ground Water and the Rain Fall. Only consdier the direct water use here. 26

27 Appendix B. Sector Comparison MRIO TABLES Provincial IO TABLES 17 Sectors 42 Sectors 1 Agriculture 1 Agriculture 2 Mining and Washing of Coal 3 Extraction of Petroleum and Natural Gas 2 Mining and Quarrying 4 Mining and Processing of Ferrous Metal Ores 5 Mining and Processing of Non-Ferrous Metal Ores 3 Food Products and Tobacco 6 Manufacture of Foods, Beverages, and Tobacco 7 Manufacture of Textile 4 Textile and Garment 8 Manufacture of Textile Wearing Apparel, Leather, Fur, Feather and Related Products 5 Wood Products and Furniture 9 Processing of Timber, Manufacture of Wood, and Manufacture of Furniture 6 Pulp, Paper and Printing 10 Manufacture of Paper and Paper Products, Printing,Reproduction of Recording Media and Manufacture of Articles For Culture, Education and Sport Activity 7 Chemical 8 Non-metallic mineral products 13 Manufacture of Non-metallic Mineral Products 9 Metal Products 10 General Machinery 16 Manufacture of General Purpose Machinery and Special Purpose Machinery 11 Transport Equipment 17 Manufacture of Transport Equipment 12 Electric Appliances and Electronic 20 Manufacture of Measuring Instruments and Machinery for Cultural Activity and Office Work 13 Other Manufacturing Products 21 Other Manufacturing 22 Recycling and Disposal of Waste 23 Production and Distribution of Electric Power and Heat Power 14 Electricity, Gas and Water Supply 24 Production and Distribution of Gas 25 Production and Distribution of Water 15 Construction 26 Construction 16 Trade and Transportation 29 Postal Service 30 Telecommunication, Computer Services and Software 31 Accommodation and Food Services 32 Finance and Insurance 33 Real Estate 34 Rental and Leasing and Business Services 17 Other Services 37 Professional and Technical Services 38 Other Services 39 Education 40 Health Care and Social Assistance 41 Arts, Sports and Entertainment 42 Government Services and Social Organization Processing of Petroleum, Coking, Processing of Nuclear Fuel Smelting and Pressing of Ferrous Metals and Non-ferrous Metals Manufacture of Electrical Machinery and Equipment Transportation and Warehousing and Storage Tourism Manufacture of Raw Chemical Materials and Chemical Products Manufacture of Metal Products Manufacture of Communication Equipment, Computers and Other Electronic Equipment Wholesale and Retail Trade Scientific Research 27