Growth potential for CO2 emissions transfer by
the United States-China trade battle
Moinul Islam 1*, Keiichiro Kanemoto 2 and Shunsuke Managi 3,4

1

Graduate School of International Development and Cooperation, Hiroshima University, 1-5-1 Kagamiyama,
Higashi-Hiroshima City, Hiroshima, 739-8529, Japan
2

Research Institute for Humanity and Nature, 457-4 Motoyama, Kamigo, Kita-ku, Kyoto 603-8047, Japan

3

Urban Institute, Kyushu University, 744 Motooka, Nishiku, Fukuoka, 819-0395, Japan

4 Department of Urban and Environmental Engineering, School of Engineering, Kyushu University, 744Motooka, Nishiku, Fukuoka, 819- 0395, Japan*Corresponding author email address: moinul@hiroshima-u.ac.jp
Keywords: China-USA trade battle; tariff; embodied CO2 emissions; emission scenario; gravity model1

1. Introduction:
United States-China relations are at a low point. The current list of problems facing the two countries is long.
There are huge discrepancies between the official Chinese and United States estimates of the bilateral tradebalance. From an American perspective, the complaints include allegations of Chinese copywriter rights
violations and spying; and from a Chinese perspective, among the most critical problems are issues related tothe status banning Chinese telecom giant Huawei and imposing tariff barriers on exportable.
A large fraction of Chinese emissions is due to producing manufacturing goods for United States consumption.
The magnitude of global CO2 emissions is directly guided by international trade, which has grown faster than
the growth rate of gross domestic product (GDP) (Peters et al 2011). Therefore, changing the trading condition
between the two largest economies in the world, the United States and China, have a huge impact on CO2emissions. If environmental policies do not account for the emissions embodied in imports, global emissions arelikely to rise (Kanemoto et al 2014).
It is unknown if tariff reform will increase the embodied CO2 by a significant amount or if tariff reform will
benefit the environment due to the trade battle between the United States-China. Furthermore, it is unknown
how much growth of CO2 emissions the tariff reallocation will induce. This issue is critical and if trade battlecauses a significant increase in CO2, then it will be environmentally inefficient and unacceptable. Therefore, thispresent trade battle and its future impacts should take a close look from the environmental point of view.

2. Methodology
2.1 Gravity model
The gravity equation is consistently used to explain different types of flows, for instance, trade, migration,commuting, and tourism (Bergstrand 1985). In our empirical analysis, we consider an adaptable regression
model, based on the popular gravity model of international trade, with which we control sector specific tariff
rates. In the empirical equation, we examine the impacting international trade factors on CO2 emissions. Thegravity model of trade considers the trade volume as a positive function of the “mass” of two economies and thenegative function of the “geographic distance” between the countries. The gravity model of trade is`
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑖𝑖𝑖𝑖 = 𝑓𝑓

�𝐺𝐺𝐺𝐺𝐺𝐺𝑖𝑖 × 𝐺𝐺𝐺𝐺𝐺𝐺𝑗𝑗 �𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖… … … … … … … … … … …(1)The regression equation is commonly specified as

𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑖𝑖𝑖𝑖 = 𝑎𝑎0 + 𝑎𝑎1 �𝐺𝐺𝐺𝐺𝐺𝐺𝑖𝑖 × 𝐺𝐺𝐺𝐺𝐺𝐺𝑗𝑗 � + 𝑎𝑎2 � 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖 � + 𝑢𝑢𝑖𝑖𝑖𝑖 … … … … … … … … … (2)Embodied emissions, such as international trade, are driven by the size of the economy of importing andexporting countries and impeded by the geographic distance of the countries. The joint effect of distance and2

importer also guide the embodied emissions. Most importantly, the tariff rate of trading goods is likely toimpact the embodied emissions with imports. These considerations suggest the gravity equation forenvironmental embodied emissions for trading goods:
𝐶𝐶𝐶𝐶2 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑖𝑖𝑖𝑖𝑖𝑖= 𝛼𝛼0 + 𝛼𝛼1 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑖𝑖𝑖𝑖𝑖𝑖 + 𝛼𝛼2 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 + α3 (𝐺𝐺𝐺𝐺𝐺𝐺𝑖𝑖𝑖𝑖

× 𝐺𝐺𝐺𝐺𝐺𝐺𝑗𝑗𝑗𝑗 ) + 𝛼𝛼4 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 + α5 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖 + 𝑢𝑢𝑖𝑖𝑖𝑖𝑖𝑖 … … … … … … (3)where 𝑢𝑢𝑖𝑖𝑖𝑖𝑖𝑖 = 𝜀𝜀𝑖𝑖𝑖𝑖𝑖𝑖 + 𝑣𝑣𝑖𝑖𝑖𝑖𝑖𝑖

Here, 𝑖𝑖 is the importer country, 𝑗𝑗 is the exporter and 𝑡𝑡 represents the year.

To determine the environmental quality, we consider embodied CO2 emissions. The dependent variable
𝐶𝐶𝐶𝐶2 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑖𝑖𝑖𝑖 is the CO2 footprint of a product. It considers the emissions by the total processes

associated with consumption. 𝐺𝐺𝐺𝐺𝐺𝐺 𝑖𝑖𝑖𝑖 and 𝐺𝐺𝐺𝐺𝐺𝐺𝑗𝑗𝑗𝑗 are the input of the importers and exporters GDP at time t,
respectively. 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖 is the geographic distance between the importing and exporting countries. This variable

is a proxy for the transportation cost of the trade. 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 is the domestic emission intensity inour analysis to identify the carbon leakage effect on embodied emissions. 𝑢𝑢𝑖𝑖𝑖𝑖𝑖𝑖 is an error term, consisting of anindividual country effect 𝜀𝜀𝑖𝑖𝑖𝑖𝑖𝑖 and 𝑣𝑣𝑖𝑖𝑖𝑖𝑖𝑖 , an idiosyncratic measurement error. 𝑢𝑢𝑖𝑖𝑖𝑖𝑖𝑖 represents the omitted impact ofother causes.

In this model, the effect of tariff policy on environmental quality is captured by the use of the MFN appliedweighted mean of tariff rates. The MFN tariff rates are weighted by the import shares of the product groups foreach of these countries. For the hypothesis, we expect to have a negative relationship between overall tariff rateand embodied emissions in international trade. Higher tariff rates cause imported goods to be costlier to thedomestic market, and reduce their demand and hence, emissions. The United Nations Statistical Division
constructs international standard industrial classifications of all economic activities (United Nations StatisticalDivision 2008), and we use the classification for the consistency of industries globally. In a scenario analysis wefocus on the increased tariff, no tariff change and decrease of tariff compared to the existing level of tariff
imposed on sector-specific imports and exports. We predict the possible trend of embodied CO2 emissions fromthe tariff reallocation scenario analysis.

2.2 DataThe analysis uses the disaggregated tariff and embodied CO2 emissions data for panel regression. Embodied
CO2 emissions from imports between United States-China and MFN ad valorem tariff rates related to bilateral
trade are used to conduct econometric analyses. Also, the gross domestic product (GDP), and distance between
the trading countries is also considered, to identify the impact of the economy and geographic location on
embodied CO2 emissions, related to imports.
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Calculating the embodied emissions becomes complex due to the need to enumerate the unique productionsystems in individual countries to a reasonable level of sector detail and to then link these to consumption
systems through international trade data. The most common methodology for this type of analysis is ageneralization of environmental input-output analysis (IOA) to a multiregional setting (Lenzen et al 2004).
Imports of one country are related to production technologies from different regions of the world. The exporting
economy also delivers import demands to other countries simultaneously. Thus, embodied import factors dependon the supply chain in the inter-industry demands. Therefore, different regions need to be considered for thesupply path in the model. A multi-region input-output (MRIO) model can truly determine and distinguish theintermediate and final demand during trade (Wiedmann et al 2007). We use the Eora multiregional input-output(MRIO) table (Lenzen et al 2012, 2013) as a data source for some of the dependent and independent variables.
The Eora MRIO table includes 187 countries, and each country has between 26 and 501 sectors, for a total 15,909
sectors. We followed Kanemoto et al., (2012) to decompose production-based emissions into consumption-based
emissions and embodied emissions in export and import, using the following equation:⎡⎤⎢𝑢𝑢𝑢𝑢
𝑟𝑟𝑟𝑟 𝑢𝑢𝑢𝑢
𝑟𝑟𝑟𝑟 𝑠𝑠𝑠𝑠 ⎥= � 𝑓𝑓𝑖𝑖𝑟𝑟 ⎢ � 𝐿𝐿𝑟𝑟𝑟𝑟
𝑖𝑖𝑖𝑖 𝑦𝑦𝑗𝑗 − � 𝐿𝐿𝑖𝑖𝑖𝑖 𝑦𝑦𝑗𝑗 + � 𝐿𝐿𝑖𝑖𝑖𝑖 𝑦𝑦𝑗𝑗⎥��������� ��������� ⎥⎢ ��𝑖𝑖𝑖𝑖 �����𝑖𝑖𝑖𝑖 ≠𝑠𝑠𝑖𝑖𝑖𝑖 ≠𝑢𝑢
𝑟𝑟
production⎣ consumption⎦
imports
exports𝑠𝑠𝐹𝐹𝑗𝑗�… … … … … … … (4)Where 𝑓𝑓 is factor intensities (i.e., carbon emissions divided by gross output), 𝐿𝐿 is the Leontief inverse, 𝑦𝑦 is finaldemand, and 𝑖𝑖 and 𝑗𝑗 are sector origin and destination. The exports term covers the factor used in region 𝑟𝑟

required to produce final goods in 𝑠𝑠, which are then sold by 𝑠𝑠 to 𝑡𝑡; the imports term covers factor to use in region

𝑟𝑟 required to produce final goods in 𝑡𝑡, which are then sold by 𝑡𝑡 to 𝑠𝑠.

We begin with the TRAINS data on bilateral trade from the United Nations Statistical division. We define
manufacturing sectors as ISIC trade code 3 and mining sectors as ISIC trade code 2. Tariff data are obtained
from the United Nation Conference on Trade and Development (UNCTAD) TRAINS database and completed
when necessary from the World Trade Organization database. We obtain the UNCTAD TRAINS weighted tariff
rate data, which is the average of the most favored nation tariff rates weighted by the product import sharescorresponding to each partner country. We aggregate the MFN tariff to the 2 digit ISIC Revision 2 level bytaking the weighted average of tariff lines within each ISIC code.

3. Result
The embodied CO2 emissions from manufacturing sectors between United States-China trade are the sum ofthe direct and indirect CO2 emissions. Our estimates using Equation (3) are shown in Table 1. The empiricalresults identify the impact of MFN tariffs on embodied CO2 emissions from manufacturing sector trade. Ourgravity model of embodied emissions allows us to identify the impact of the GDP of the trading partners on

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embodied CO2 emissions. We also identify the impact of the distance between trading countries, populationand emission intensity of the importing country on CO2 embodied emissions.
In the following analysis, the statistically significant positive sign indicates that further tariff increase between
United States-China manufacturing sectors trade can increase the CO2 embodied emissions for the sectors. The
amount of CO2 embodied in imports of manufactured goods for the United States and China is also determinedby the size of the economy and by its distance. We identified that the embodied CO2 emissions have a positive
relationship with the GDP size of the importing and exporting countries. The capacity of manufacturing
products and purchasing capability of the imports can be reflected by GDP. The higher the GDP, the greater
the potential of demand and supply of tradable goods.
The embodied emission intensity of the importing country represents the environmental regulation policy
efficiency. We noticed that as an importer of manufacturing goods, emission intensity in the United States andChina have a positive impact on embodied CO2 emissions. Which justify that if trading partners have lessenvironmental regulation, they keep increasing the embodied CO2 emissions by bilateral trade. We also
noticed that the increasing population of the importing country have a positive impact on the embodied CO2emission from manufacturing sectors. This finding support that large population creates additional demand on
importing manufacturing goods which also guided an increasing level of embodied emissions.
Table 1: Impact of MFN tariffs on embodied CO2 emissions for the import of manufacturing goods between
trade in the United States and China.

VARIABLES
Tariff (%)
Embodied Emission intensity
GDPi × GDPj (trillions)
Population (millions)

CO2 embodied emissions (Tons) from manufacturing sector
FERE
3,134***
3,054***(1,205)(1,180)2.308***
2.346***(0.223)(0.222)
1,682***(284.6)926.28***(271.22)

Distance (thousand Km)
Constant
Observations
R Squared
Country fixed effect-688,882***(206,350)
288
0.57
Yes

Standard errors in parentheses*** p<0.01, ** p<0.05, * p<0.1

51,706***(283.8)905.52***(268.49)
1,643,308**(732,050)-1.874e+07**(8246,488)
288
0.68
No

4. Conclusion
The empirical results of our paper are three-fold. First, the trade battle between the United States-China
induced tariff increase in manufacturing sectors significantly increase the CO2 embodied emissions. Second,
the GDP increase of the United States and China significantly impact on embodied CO2 emissions between thebilateral trade. Finally, the emission intensity of the importer significantly affects embodied CO2 emissions.
Additionally, when the distance between the United States and China as well as the large population guidehigher CO2 embodied emissions.
Tariff reform is a popular tool for international trade and the economic welfare of countries. Incorporating theenvironmental impacts for trade liberalization by tariff reduction presents significant challenges forpolicymakers. MFN tariff reduction provides more favorable access and benefits to unlimited trade volumes.
The analysis identifies the impact of tariff increase due to trade battle on the embodiment of CO2 in imports.
The findings would guide policymakers to understand the impact of trade battle on embodied emissions. We
are now doing scenario analysis to identify the impact of trade battle on future embodied emissions.

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