PRODUCTION SHARING, DEMAND SPILLOVERS AND CO2 EMISSIONS: THE CASE OF CHINESE REGIONS IN GLOBAL VALUE CHAINS

Recent trade literature highlights production sharing among economies [Johnson, R and G Noguera (2012). Accounting for intermediates: Production sharing and trade in value added. Journal of International Economics, 86(2), 224-236), and some studies report that 20-25% of CO2 emissions can be attributed to international trade [Peters, G, J Minx, C Weber and O Edenhofer (2011). Growth in emission transfers via international trade from 1990 to 2008.]. Proceedings the National Academy of Sciences USA, 108(21), 8903-89081. However, the mechanism explaining how and to what extent production sharing affects CO2 emissions remains unclear. This study, as an extension of [Meng, B, J Xue, K Feng, D Guan and X Fu (2013a). China's interregional spillover of carbon emissions and domestic supply chains. Energy Policy, 61, 1305-1321.], adopts the perspective of demand spillovers to provide new insights regarding the position of Chinese domestic-regions' production in Global Value Chains (GVCs) and their associated CO2 emissions. To this end, we employed a new type of World Input-Output Database (WIOD) in which China's domestic interregional input-output table for 2007 is endogenously embedded. The pattern of China's regional demand spillovers across both domestic regions and countries is revealed by employing this new database. These results were then connected to endowments theory, which helps to make sense of the empirical results. It is found that China's regions are located relatively upstream in GVCs, and had CO2 emissions in net exports, which were entirely predicted by the environmental extended Heckscher-Ohlin-Vanek (HOV) model. Our study points to micro policy instruments to combat climate change: for example, tax reform for energy inputs that helps to change the production pattern, which then has an impact on trade patterns and so forth.