Timea Grego_Env Econ Term Paper 1st Draft

RUNNING HEAD: CHINA’S TARIFF REDUCTION IN HEAVY INDUSTRIES AND CO2 EMISSIONS
THE LINK BETWEEN
CHINA’S TARIFF REDUCTION IN HEAVY INDUSTRIES AND
ITS IMPACT ON THE CO2 EMISSIONS
TIMEA GREGO
UNIVERSITY OF NEVADA, RENO
AUTHOR NOTE:
THIS TERM PAPER WAS PREPARED FOR ECONOMICS – INDEPENDENT STUDY 790,
THOUGHT BY PROF KIMBERLY ROLLINS

CHINA’S TARIFF REDUCTION IN HEAVY INDUSTRIES AND CO2 EMISSIONS 1
CONTENTS
I. INTRODUCTION ......................................................................................................................... 2
II. TRADE AND TRANSBOUNDARY AIR POLLUTION: CO2 ............................................................... 3
A. WORLD’S TRADE DEVELOPMENT...................................................................................... 4
III. IMPACTS OF WTO ACCESSION ON CHINA ............................................................................. 5
A. HEAVY INDUSTRIES ................................................................................................................. 6
1. IRON AND STEEL ................................................................................................................... 7
2. CHEMICALS........................................................................................................................... 8
B. CHINA’S COMMITMENT ........................................................................................................... 9
IV. CONCLUSION....................................................................................................................... 10

I. Introduction
This term paper examines the environmental effects associated with China’s accession to
the World Trade Organisation (WTO). I intend to show that trade liberalization has had a
dramatic effect on the CO2 emission in China which generates global concerns among
environmentalist. I will look at the impacts of China’s commitments on tariff reduction in the
dirtiest manufacturing industries on the country’s ever increasing CO 2 emission. On the other
hand, China’s open market approach has contributed to the country’s rapid economic growth and
output.
There is a continuous debate on the link between trade liberalization and the environmental
degradation. Several theoretical and empirical studies on trade and the environment argued that
environmental regulations affect the pattern of trade. As a result of this, developing countries
with laxer environmental policy will specialize in the production of pollution, intensive
merchandised goods, and services (Baumol and Oates, 1998). According to this theory,
developing countries’ comparative advantage is based on the specialization in pollution intensive
production. The objective of this research paper is to examine how China’s WTO Commitment
on tariff reductions made the country specialize in the production of pollution intensive products.
The organization of the research paper is as followings: after the introduction, Section 2
describes the link between trade and transboundary pollution focusing on carbon dioxide (CO2).
Section 3 explains the impacts of China’s accession into WTO on heavy industry. Thereafter, the
evidence of the increasing CO2 emissions will be discussed. Finally Section 4 gives the summary
and conclusion of the term paper.

II. Trade and Transboundary air pollution: CO2
One of the main driving forces of the world economy is international trade. Since the
mid-20th century, there has been a continuous debate over trade liberalization and its
environmental consequences. Thereby, the interrelationship between economic growth and
environmental quality are significant aspects in the global economy. As stated by the
international trade theory, comparative advantage is one of the reasons for trade among
countries; as a result of it, countries can gain or lose from trade. The idea behind comparative
advantage is that a country opens up to trade and investment when it has better advantage in
producing goods and services compared with other goods production among its trading partners.
In addition to this, comparative advantage determines the pattern of trade. It is said that
liberalized trade significantly contributes to a country’s economic performance (Copland, et al.,
2004).
There are numerous published works on a current hot debate about international relations,
free trade and environmental protectionism. The argument is that developed countries may shifts
their pollution intensive productions to developing countries with weaker environmental
regulations. This hypothesis is cited as pollution haven. Copland and Taylor (2004) analyzed the
impacts of international trade on the environment on a small open country with fixed world
prices. They underlined three major factors of free trade on the environment such as trading
opportunity (comparative advantage), the level of environmental policy, and the welfare effects.
This paper assumes there is at least one more effect of trade liberalization on the environment
which is a country’s WTO membership and its commitments to accession. Taking China’s
obligations as an example, this effect is discussed in Section 3.

Scientific evidence shows that humans altered the natural environment by the burning of
excessive amounts of fossil fuels in a way that it releases dangerous amounts of greenhouse
gases (e.g. CO2) into the atmosphere. These air pollutants migrate by the natural carbon cycle
and causes regional or worldwide impacts on pure public goods. Atmospheric air pollutants are
defined as transboundary pollutants which create negative externalities or public bad. From the
economic point of view, public bad is the side effect of unsuitably managed actions that can
destabilize economic efficiency and lead to market failure (Krugman et. al, 2008). For that
reason, stabilising the amount of greenhouse gases in the atmosphere is every nation’s desire.
According to the Stern Report, in the absence of multilateral actions the socio-economic
and political risk and impacts associated with climate change will decrease the global GDP by
5%. The worst case scenario predicts more than 20% loss in GDP (The Stern Report, 2006).
Unfortunately, the broad range of multidisciplinary literature has analysed only the correlation
between weak environmental regulations, the spatial distribution of foreign direct investments in
China, and the ever increasing CO2 emissions associated with its international trade. There is not
any precedent work on the linkage between China’s WTO commitment on tariff reduction in
heavy industries and its impacts on the global environment.
A. World’s Trade Development
In 2010, the global flow of merchandise export through intra- and interregional trade
increased by 14% in volume terms due to a 3.5% raise in the world GDP. In addition to this,
manufacturing goods export grew by 18%. The USA has kept its leading trader position in
merchandise goods with import and export accounted for US$ 3,247 billion in 2010. China and
Germany the other two dominant players in international trade ranked second and third in

merchandised trade in 2010. China has become not only the world primary exporter but also the
second largest importer in 2010.
China’s share in global exports of commercial services was 6.1% whereas US contribution was
18.5%. There was a sharp increase in the trade of ores and other minerals, which grew by 54.1%
in 2010 and non-ferrous metals by 42.7%. In 2010, China came as the third largest exporter in
chemical products after the European Union and United States. China has achieved another
leading position as the biggest exporter of telecom equipment in 2010; gross sales accounted for
US$ 180 billion. In addition to the above mentioned, China also become principle exporter of
textiles in 2010. As can be seen, international trade plays a dominant role in the global economic
growth. Therefore, it would be important to examine the interrelationship between the countries
commitments to WTO accession and its impacts on the overall welfare of the global environment
(WTO, 2011).
III. Impacts of WTO Accession on China
China has significantly contributed to the world trade output and growth since the
country achieved accession to the World Trade Organisation in December 2001. WTO
membership is the main factor to China’s dynamic economic development, and I presume as a
result of this, the CO2 emissions are continuously increasing in China. Although trade
liberalisation is one of the core driving forces of global economy it also contributes to the decline
of the environment (Baumol, W. J. And Oates, and 1998, W. E Yand, H. Y., 2000). As can be
seen from Table 3.1., China is heavily relay on solid fuel source for energy generation.
Combustion of coal generates large amounts of greenhouse gases especially carbon dioxide.
Table 3.2. shows China’s CO2 emissions by sources between 1950 and 2005. It can be seen that
CO2 emission is steadily increased and sometimes declined between 1950 and 2000.

Since the country become member of the international trading system, the CO2 emission is
increasing rapidly. China made three major commitments on accession to the WTO. The first
commitment is accomplish with the WTO trade regime such as open market, non-discrimination
against foreign enterprises and transparency, obey the Most Favoured Nation principle and
protection on trade related intellectual property rights (Cheong, C. and Hung Yee, C., 2003). The
second commitment is in relation to tariff and non-tariff barriers. In accordance with WTO
accession package, China committed to further reduction or elimination of tariff and non-tariff
barriers in specific trade sectors. For instance in agricultural and textile, automobile, and heavy
industry. The third commitment was made in the bilateral trading agreements among the
country’s leading trading partners (Cheong, C. and Hung Yee, C., 2003).
A. Heavy Industries
The world hard coal production was 6,186 Mt in 2009 and China’s share accounted for 51.1%. In
2009, the share of global coal consumption was dominated by industry sector and accounted for
77.4%. As a result of this, the global CO2 emission from the consumption of coal/peat was 43%
and China’s share of global CO2 emission was 23.7% (IEA, 2011). China’s coal consumption
unexpectedly increased and still increasing since the country is member of the WTO (see Table
4.). The coal consumption in 2010 over 2002 rose by 86.5%. Therefore, I presume that this rapid
change in the coal consumption and especially in the industrial sector is result of the trade
liberalisation. China’s industrial sector is highly energy intensive relies on mainly coal and
accounted for 78% of the total coal/peat consumption.
Energy consumption to power manufacturing processes was 77% of industrial energy
consumption between 1990 and 2008 in industrialised and in developing countries. The industry

sector is the largest energy consumer and the most important end-use sector and consumed 31%
of the global final energy consumption in 2008 (UNIDO, 2011). According to decomposition of
the industrial sector, the most energy consumer is the metal industry, followed by chemicals and
non-metallic minerals (Figure 1.). The industrial sector is divided into two subsectors namely
light- and heavy industry. According to Hoffman, W. (Lin, Y, 2003) heavy industries are the
production merchandised goods industries and about 80% of the energy supplied in the industrial
sector is utilised by the heavy industry (Price, L. et al., 2000). Mani, M. and Wheeler, D. (1997)
defined dirty industries accordance with their pollution intensity that have higher levels of
emissions per unit of output; the dirtiest or pollution-intensive industries are ranked in Table 4.
This research paper presents evidences of production levels and energy use in those energy
intensive subcategories in which China committed to reduce tariffs as part of its WTO accession
package.
1. Iron and Steel
Iron and steel one of the highest energy consuming industrial sectors in the world, accounted for
around 0.5Gtoe in 2008 of the annual world primary energy demand. Steel industry is the
moving vehicle in infrastructure and economic development and it is used as an indicator in
economic progress (Steel Industry, BBE 2012). China is the leader of crude steel production,
producing 489.2 Mt in 2007 and shares 36.4% of globally (Table 5.). As can be seen from Table
5., has steady growth in production from 34.5 Mt in 1979 to 127.2 Mt in 2000. There is sharp
upward increase in the production since the country join to WTO from 150.9 Mt in 2001 to 489.2
Mt in 2007, resulting in an average annual growth rate of 5.8%.

Emissions of all greenhouse gasses in the steel sector are the consequence of burning fossil fuel
during the production of iron and steel making. Figure 2. shows CO2 direct emissions by end-use
sectors, region and country. As can be seen, the total CO2 emission was 7.2 Gt of CO2
equivalents from which iron and steel industry accounted for 30%, cement 26%, and chemicals
17% CO2 emissions. The biggest direct industrial CO2 emitter was China with a 34% global
share, followed by OECD North America (13%) and OECD Europe (12%).
China made several commitments on tariff reduction in heavy industries as part of its accession
to the WTO. First commitment was in the automobile sector, followed by iron and steel,
chemicals, machinery, and civil aircraft (Chong, C. et al., 2003). Steel is being utilised in a broad
range of applications, for instance automobile industry, construction, appliances, industrial
equipments, high-grade alloys for oil and gas production rigs, and packaging (Price, L., 2000).
Therefore, the next section covers the tariff reduction in the automobile and steel sector made by
China in accordance with the country accession package.
2. Chemicals
Ammonia
According to a recently published International Fertilizer Association report (IFA, 2008/2009),
fertilizer production accounted for 1.2% of the global annual total energy requirement. In
addition to this, ammonia production demands 87% of the industrial sector total energy
consumption. In the production of ammonia the main energy dependent are the fuel and
feedstock. As a result of this, the dominant energy supply is natural gas (67%) for ammonia
production (Climate Change, IFA). Another main feedstock is coal in the production of ammonia
which is just over a quarter of the global total feedstock resources (Figure 3). Therefore, the CO2

emissions from burning of natural gas are less than it would be from coal. The World total
ammonia production was 150.57 Mt in 2006 from which China has produced 47.36 Mt. Table 6
shows ammonia production in selected countries between 1979 and 2007. As can be seen from
the table, ammonia production in industrialised countries (USA and Russia) slightly stabilising
or declining but it is growing in developing countries. It is assumed that ammonia production is
constantly increasing in China since it became member of WTO. This assumption is based on the
fact that ammonia production was fluctuating between 1979 and 2001 and it is slightly rising
since 2001.
B. China’s Commitment
Tariff on Autos
The pre-WTO accession tariffs on autos were 100% and 80% which is decreased to 25% by 1st
July 2006. China also committed to cut tariffs on auto parts from an average 23.4% to an average
of 10% by 1st July 2006 (Cheong, C. et al., 2003).
Tariffs on Iron and Steel
China will reduce its tariffs on steel and steel products from the base rate of 10.3% to the final
rate of 6.1%. These reductions began upon accession and completed by 2004 (Cheong, C. et al.,
2003).

Tariffs and quotas on Chemicals
As part of the China’s WTO accession package, the country promised more than 50% tariff
reduction on chemicals by 1st January 2005. The pre-WTO based rate of 14.74% was reduced to
a final average rate of 7%. In additional to this, quotas were eliminated on all chemicals upon
accession (Cheong, C. et al., 2003).
Tariffs on Machinery
China reduced its average base tariff of 13.6% by to 5-10% on most machinery equipments. The
reduction come into force in December 2001 and was fully put into practice by 1st January 2004
Cheong, C. et al., 2003).
IV. Conclusion
In this paper, a possible link has been presented between China’s tariff reduction in heavy
industries and its consequence on CO2 emission using trade growth indicators. It is assumed that
trade related CO2 emission has been risen since the country become member of the WTO and
made its strict commitments. Also, this paper argues that developing countries with laxer
environmental policy will specialise in the production of pollution intensive merchandised goods
and services. The new hypothesis is China’s WTO Commitment on tariff reductions made the
country to specialize in the production of pollution intensive products. To prove this hypothesis
further research is required, which should answer the following questions;
Whether China’s entry to WTO and its commitments made the country a pollution heaven?
Whether China WTO membership has negative effect on the CO2 emissions in the heavy
industries? Whether China’s increasing export is attracted to the industrial sectors that energy
supply depends on non-renewable natural resources? Whether these industries are heavy energy-intensive
sectors?

APPENDICES

Table 1. Primary Energy Production by energy type, 1989-2005 (Mtoe)
(1) Hard coal, lignite, peat and oil shale.
(2) Crude oil, natural gas liquids and feedstocks.
(3) Primary electricity: nuclear, hydro, geothermal and solar/wind
(Source after Carbon Dioxide Information Analysis Center 2008 on China Energy Databook CD Oct 2008.
Lawrence Berkeley National Laboratory)

Table 2. CO2 emissions by sources in China, 1950-2005 (Mt of Carbon)
(Source after Carbon Dioxide Information Analysis Center 2008 on China Energy Databook CD Oct 2008.
Lawrence Berkeley National Laboratory)

Table 3. Coal Consumption
Coal Consumpt ion
(Mtoe)
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Changes
2010 over
2009
2010 share
of total
China
(exc. Hong-Kong) 731.0 737.1 751.9 794.9 936.3 1084.3 1218.7 1343.9 1438.4 1479.3 1556.8 1713.5 10.1% 48.2%
Total World 2316.0 2399.7 2412.4 2476.7 2677.3 2858.4 3012.9 3164.5 3305.6 3341.7 3305.6 3555.8 7.6% 100.0%
Of which: OECD 1083.3 1133.6 1124.9 1130.7 1161.4 1170.5 1179.7 1179.8 1200.2 1171.5 1049.5 1103.6 5.2% 31.0%
Non-OECD 1232.6 1266.1 1287.5 1345.9 1515.9 1687.9 1833.2 1984.7 2105.4 2170.2 2256.1 2452.2 8.7% 69.0%
EU 305.7 314.9 315.7 314.0 324.3 319.1 310.4 317.7 316.7 294.4 259.9 269.7 3.8% 7.6%
Former Soviet
Union 161.3 169.1 166.1 166.0 170.3 167.6 161.1 166.8 166.4 177.2 161.1 169.1 5.0% 4.8%
Mtoe = Million tonnes oil equivalent
Coal Consumption: Commercial solid fuels only, i.e. bituminous coal and anthracite (hard coal), and lignite and brown (sub-bituminous) coal.
EU Excludes Estonia, Latvia and Lithuania prior to 1985 and Slovenia prior to 1991.
China become member of the WTO in December 2001.
Source: BP historical statistical data from 1965-2010

Table 4. Ranking of Pollution Intensive Industries
ENVIRONMENTAL POLLUTION
RANK AIR WATER METALS OVERALL
1 Iron and Steel Iron and Steel Non-Ferrous Metals Iron and Steel
2 Non-Ferrous Metals Non-Ferrous Metals Iron and Steel Non-Ferrous Metals
3 Non-Metallic Min. Prd. Pulp and Paper Industrial Chemicals Industrial Chemicals
4 Misc. Petroleum, Coal
Prd.
Miscellaneous
Manufacturing
Leather products Petroleum Refiners
5 Pulp and Paper Industrial Chemicals Pottery Non-Metallic Min.
Prd.
6 Petroleum Refineries Other Chemicals Metal Products Pulp and Paper
7 Industrial Chemicals Beverages Rubber Products Other Chemicals
8 Other Chemicals Food Products Electrical Products Rubber Products
9 Wood Products Rubber Products Machinery Leather products
10 Glass Products Petroleum Refiners Non-Metallic Min.
Prd.
Metal Products

TABLE 5. CRUDE STEEL PRODUCTION (MT) IN SELECTED COUNTRIES, 1979-2007
Source China Energy Databook CD Oct 2008. Lawrence Berkeley National Laboratory

TABLE 6. AMMONIA PRODUCTION (MT) IN SELECTED COUNTRIES, 1979-2007
Source China Energy Databook CD Oct 2008. Lawrence Berkeley National Laboratory

FIGURE 1. INDUSTRIAL ENERGY CONSUMPTION BY SECTORAL DECOMPOSITION, 990-2008
Source after: UNIDO, 2011

FIGURE 2. DIRECT INDUSTRIAL CO2 EMISSIONS FROM FOSSIL FUEL COMBUSTION AND INDUSTRIAL
PROCESSES, DECOMPOSITION BY SECTOR, REGION OR COUNTRY, 2008
Source after: UNIDO, 2011

FIGURE 3. GLOBAL AMMONIA CAPACITY BY FEEDSTOCK, 2008
Source International Fertilizer Association (IFA); Climate change: Greenhouse gas emissions
and fertilizer production
http://www.fertilizer.org/ifa/HomePage/SUSTAINABILITY/Climate-change/Emissions-from-production.
html (viewed on 27th April 2012)

REFERENCES
Baumol, W. J. And Oates, W. E. (1998) “Ch 10. International Environmental Issue.” in The
Theory of Environmental Policy. Cambridge. Cambridge University Press. pp. 265.
British Petroleum (BP) historical statistical data from 1965-2010
(Downloaded on 26th April 2012
http://www.bp.com/sectiongenericarticle800.do?categoryId=9037130&contentId=7068669)
Chong, C. and Hung Yee, C. (2003) Handbook on China’s WTO Accession and its Impacts.
World Scientific Publishing Co. Pte. Ltd.
Copland, B. R. and Taylor, M. S. (Mar, 2004). Trade, Growth, and the Environment. Journal of
Economic Literature, Vol. 42, No. 1. Pp 7-71.
International Energy Agency (IEA), 2011. Key World Energy Statistics, Paris.
International Fertilizer Industry Association (IFA) Energy Efficiency and CO2 Emissions in
Ammonia Production 2008-2009 Summary Report
International Fertilizer Association (IFA); Climate change: Greenhouse gas emissions and
fertilizer production.
http://www.fertilizer.org/ifa/HomePage/SUSTAINABILITY/Climate-change/Emissions-from-production.
html (viewed on 27th April 2012)
Krugman, P. and Wells, R. (2008) ‘Chapter 17: Externalities’ in Microeconomics 2nd Edition.
pp. 433-455. World Publishers. ISBN-10:0716771594
Lin, Y. J., Cai, F., and Li, Z. (2003) “Chapter 2. The Leap-forward Strategy and the Formation of
the Traditional Economic System” in The China Miracle: Development Strategy and Economic
Reform. Revised edition. The Chinese University of Hong Kong.

Mani, M. and Wheeler, D. (1997) “In search of pollution havens? Dirty industry in the world
economy, 1960-1995”. The document presented to the OECD Conference on FDI and the
Environment (The Hague, 28-29 January 1999).
(http://www.oecd.org/dataoecd/25/4/2076285.pdf downloaded 21st April 2012)
Price, L., Worrell, E., Martin, N., Lehman, B., and Sinton, J. (May 2000) China’s Industrial
Sector in an International Context. Energy Analysis Department, Environmental Energy
Technologies Division, Lawrence Berkeley National Laboratory.
Steel Industry:News from Bloomberg Business Exchange (BBE)
http://bx.businessweek.com/steel-industry/news/ (viewed on 27th April 2012)
The Stern Report: on the Economics of Climate Change: the key points
http://www.guardian.co.uk/politics/2006/oct/30/economy.uk (viewed on 29th April 2012)
United Nations Industrial Development Organization (UNIDO), Industrial Development Report
(2011) Industrial energy efficiency for sustainable wealth creation. Capturing environmental,
economic and social dividends.
(http://www.unido.org/fileadmin/user_media/Publications/IDR/2011/UNIDO_FULL_REPORT_EBOOK.pdf
downloaded on 27th April)
Yang, H.Y. (2000) “Trade liberalisation and pollution: a general equilibrium analysis of carbon
dioxide emissions in Taiwan”. Economic Modelling 18 (2001): 435-454.
World Trade Organisation: International Trade Statistics 2011
http://www.wto.org/english/res_e/statis_e/its2011_e/its2011_e.pdf
(downloaded on 26th April 2012)

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