Environmental Impacts of China’s WTO Accession

1. Environmental Impacts of China’s WTO Accession Haakon Vennemo Based on joint work with Kristin Aunan, He Jianwu, Hu Tao, Li Shantong and Kristin Rypdal

2. Background • A bunch of studies on economic and social impacts of China’s WTO accession (e.g., Bhattasali et al, 2004) • A bunch of studies on impacts of free trade on environment (e.g., Copeland and Taylor, 2004) • But not much on environmental impacts of China’s WTO accession

3. Who cares? • Policy makers in China interested in environmental impacts • To plan countermeasures • To plan new policies in the free trade vein • Donor community interested in encouraging Chinese interest • And worried that environmental impacts of accession are negative • Governments, NGO’s etc interested in environmental impacts of freer trade • China an important developing country case study • Many opinions and qualitative statements, not many facts and quantitative assessments

4. Free trade in developing countries will: • Increase scale of production, which increases pollution (scale hypothesis) • Change composition of industries, or attract dirty industries (composition/pollution haven hypothesis) • Encourage more efficient technology (technique hypothesis)

5. And in symbols • e=ahs • e=emissions/environmental indicator • a=emission factor (per output) in polluting industries • h=share of industry that pollutes • s=scale of gdp or similar • ê=â+ĥ+ŝ • ê=change in emissions • â=change in emission factor/technique • ĥ=change in share of polluting industries • ŝ=change in scale

6. Key aspects of Chinese WTO-accession • Before accession there were • Quotas on imports and exports • High nominal, but often low effective tariffs • Processing and traditional trade • WTO would not make or break the nation • But a single issue seldom does: Among single issues, WTO has big economic impacts • In addition to political impacts

7. After accession we analyse • Tariff reduction and quota elimination on industrial products • Quota elimination on agricultural products • Quota elimination on textile and apparel exports (Multifiber agreement)

8. After accession we don’t analyse • Reduction of barriers in service trade (banks and such) • Increased protection of intellectual property rights (DVDs and such) • Security of market access (bureaucracy and such) • Enforcement of commitment • Cooperation in dispute settlement

9. The model • Time recursive CGE model with neoclassical closure • Developed at DRC by Li Shantong et al • 53 industries, of which 10 agriculture, 29 manufacturing and 6 service • 6 factors of production (3 labour, land, capital, land, material input) (nested CES) • Saving and consumption (ELES) • 7 pollutants to air • 9 health end-points

10. Frictions and distortions • Imperfect labour and capital mobility between Guangdong/ROC. • Imperfect labour mobility between urban and rural occupations • Imperfect mobility between processing and traditional trade • In addition to direct effect of quotas and tariffs the impact of WTO depends on its ability to alleviate above frictions and distortions.

11. Emission block Traditional pollutants: From WB/OECD + calibrated to EDGAR database CH4, N2O: Livestock, fertiliser…

12. Results – significant industry level change

13. Results – Positive composition effect

14. Results – one scenario at a time

15. Other impacts • 1.39 percent increase in GDP • 0.65 percent improvement in public health (monetary equivalent) • But baseline cost to public health is only 2.3 percent of GDP. 0.65% of this is small. • Income distribution deteriorates • Urban households in Guangdong gain 8 percent in income

16. Further studies • Sensitivity analysis: what matters for results • Three-region version of model (He Jianwu will report) • Inclusion of biomass demand • A means of assessing indoor air issues in macroeconomic setting • Trade- and environmental policy • The literature talks about endogenous policy response

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