Tracing CO2 in China-US Trade: A GVC Perspective Feng Dai Nanjing Forestry University, Nanjing, Jiangsu, China, 210037 Nanjing University, Nanjing, Jiangsu, China, 210093 Ruixiang Liu, Dantong Chen, Xuguo Wang Nanjing Audit University, Nanjing, Jiangsu, China, 211815 Abstract: Based on the HEM method and EORA database, this paper traces the global CO2 emissions in 189 countries and 26 sectors generated by China-US trade in the GVC perspective from 1996 to 2015. The results show that, other than China and the US, China's exports to the US mainly generate CO2 emissions in Asian, European and African countries, while US’s exports to China mainly derive CO2 emissions in Asian, European and North American countries. China is a net importer of CO2 in China-US trade, but the statistics by traditional gross trade overestimate China’s BEET surplus. The share of CO2 emissions in China’s intermediate exports to the US is on the rise, while the share in US’s intermediate exports to China is on the decline. At the industrial level, China’s exports to the US cause more manufacturing CO2 emissions but its proportion is decreasing in China and other countries while increasing in the US. The CO2 emissions generated by US's exports to China are mainly in services in the US and other countries, while manufacturing in China, which indicates China’s GVC status as the world manufacturer. CO2 emissions in other countries are mainly in the sectors of electricity, gas and water, petroleum, chemical and non-metallic products, and mining and quarrying, which implies that China and the US are making use of the resource and raw materials of other countries to produce their exports. Keywords: CO2 emissions; Global value chain; China-US trade; Hypothetical Extraction Method Acknowledgement: This work was supported by China National Philosophy and Social Science Fund Project under Grant No.16BJL089; and China National Natural Science Fund Project under Grant No.71573137. 1 1. Introduction Since 2018, China-US trade frictions have been escalating. One of the important excuses is the growing trade imbalance between the US and China. According to US statistics, the US-China trade deficit in goods reached 376 billion dollars in 2017, accounting for nearly 47% of the total US trade deficit in goods. The US believes that the trade deficit reflects the imbalance in the distribution of interests between China and US in bilateral trade, i.e. the US losses while China gains. Therefore, they increased tariffs to restrict imports from China. At the same time, they required China to cut down tariffs and increase imports from the US to reduce the trade deficit. However, the US evaded that China has paid a huge environmental price while meeting the needs of American consumers with a large number of cheap goods. The relationship between international trade and the environment has been concerned by researchers from different countries in the past decade. Machado, Schaeffer and Worrell (2001) apply a hybrid I-O model to study the embodied carbon in Brazil's imports and exports and find that one-dollar export embodied 40% more energy and 56% more carbon than one dollar imports. Christopher et al. (2007) use the multi-regional input-output model (MRIO) to analyze the impact of international trade on the carbon footprint of American households. Peters et al. (2006) use GTAP data and MRIO to calculate the trade implied carbon emissions of 87 countries and regions in 2001. They find that the trade implied carbon emissions accounted for one fourth of the world's total carbon emissions. Qi et al. (2008) estimate the embodied carbon in China's import and export trade from 1997 to 2006 using the Input-Output method. The results show that China bore a large amount of carbon for other countries during 1997-2006. As the world's two largest economies, China and the US are also the world's two largest carbon emitters. According to UNCTAD data, China and the US ranked the first and the second in the world CO2 emissions in 2015, with 9206.713 million tons and 5559.569 million tons of CO2 respectively. Some of the literature focuses specifically on the environment effect of China-US trade. Shui and Harriss (2005) measured carbon emissions in China-US trade. They find that the US avoided 3%-6% CO2 emissions through importing from China, while 7%-14% CO2 emissions in China were due to the production of exports to the US. However, they use US national I-O table to derive CO2 emission factors for the US exports, While CO2 emission factors for Chinese exports were estimated based on the correction for differences in the fuel mix of the manufacturing sector in 2 China and the US. Du et al. (2011) employ a Single Regional I-O model and SDA method to analyze different factors driving the changes in CO2 emissions embodied in China’s exports to the US during 2002–2007. The result shows that China is a net exporter of embodied CO2 emissions in China–US trade and among all the factors driving the increase of CO2 emissions embodied in China’s exports to the US, the total volume of exports was the first while the intermediate input structure the second. Guo et al. (2010) use a Bi-Regional I-O model to quantify the effect of China-US trade on national and global emissions. They find that both China and US reduced CO2 emissions through imports from each other, but imports from China increase global CO2 emissions by 178.62Mt while imports from the US reduce global CO2 emissions by129.93Mt. But they define global impact as the gap of the CO2 emissions caused by the import and export. Dang Yuting (2013) use the input-output tables of China and the US to calculate the embodied pollution and pollution structure of manufacturing import and export between China and the US from 2001 to 2010. The result shows that China is still an environmental deficit country in bilateral trade between China and the US, but the embodied pollution of China has no obvious downward trend. The export structure of the US to China is cleaner than that of China to the US. China's import and export structure needs to be further optimized. Liu et al. (2017) calculate China's CO2 emissions embodied in bilateral trade using a modified, non-competitive import input–output method and find that net CO2 emissions embodied in China's trade in 2007 were much lower than previous estimations. But they only consider the importing and exporting countries with taking other countries into account. It’s not difficult to find that most of the literature focus on the environment effect of trade on exporting countries. However, with world economic integration, production has been fragmented and become a multi-national activity. The international division system presents a global value chain (GVC) division characterized by intermediate trade. From the perspective of GVC, the CO2 embodied in the final products includes not only the carbon emissions directly generated in the producing country, but also those generated in other countries by imported intermediates used in the production process. Therefore, the carbon emission effect of bilateral trade is not only related to exporting countries, but also to all countries participating in the production chain. Countries at the high end of the global value chain are more likely to transfer carbon emissions to exporting countries and other countries by importing final products, while countries at the low end of the global value chain, especially exporters of final products, often become "pollution havens" of 3 developed countries. To trace the CO2 emissions in Global Value Chains, Meng et. al.(2018) combine the value added accounting framework proposed by Koopman, Wang and Wei (2014) and Wang et al. (2013,revised in 2018) with CO2 emissions. They construct a new environmental accounting system, tracing CO2 emissions of a country in the global value chain through eight value link routes. Pan An (2018) follows Meng et al. (2018) and calculates the embodied CO2 emissions of China-US trade from the perspective of Global Value Chain using WIOD data under the Gross trade accounting framework. The results show that embodied carbon in China-US trade is mainly from the domestic CO2 emissions of exporting country，and the importing country should take the main responsibility for CO2 emissions from the principle of consumer responsibility．However, the value-added framework of Wang et al. (2013) is overly complex and difficult to operate. Besides, Meng et al. (2018) and Pan An (2018) didn’t trace the footprint of CO2 emissions caused by China-US bilateral trade in different countries, neither did they separate intermediate exports from final ones. Therefore, in this paper, we will apply a simple and intuitive value-added decomposition framework to trace the carbon footprint of China-US trade, from national level and industrial level, identifying intermediate exports and final exports, to get a more comprehensive understanding of China-US trade. 2. Methodology and Data 2.1 Methodology Hypothesis Extraction Method (HEM) is a simple and intuitive mathematical method first proposed by paelinck et al. (1965) and strassert (1968), which is used to measure the relevance and potential importance of a certain country (sector) in an economic network. The traditional multiplier method is to measure the importance of the research object by the simple average of the technical coefficient, while HEM method measures the "criticality" of the country (Department) by eliminating all the external connections between the research object and the economic network and eliminating its trading relations to all other countries (sectors).