Commentary: Trade wars destroy the planet

BEIJING: Tariff wars are often justified as necessary to protect or reshore manufacturing jobs and to improve national security. But, according to new research, these conflicts produce another outcome that is largely overlooked: pollution. When global supply chains are forced into inefficient detours, carbon dioxide emissions rise.

In a recent study of the US-China trade conflict’s environmental effects, my co-authors and I found that tariffs have directly increased global CO2 emissions.

Based on our calculations, if both sides were to impose a 60 per cent tariff on imports from the other – a level consistent with the recent escalations in April – this would lead to a one-time increase in global emissions of nearly 410 million tonnes, roughly the same amount produced by 165 million gas-powered cars (with 1.6 litre engines) each travelling 10,000 kilometers.

This may seem counterintuitive. Given that China is the world’s largest emitter and has a high carbon intensity (CO2 emissions per unit of GDP), some assume that shifting production out of the country would reduce global emissions.

But in many manufacturing sectors, China’s carbon intensity is significantly lower than that of numerous developing economies, and in certain industries it is even lower than that of some advanced economies. The Chinese economy’s high overall carbon intensity simply reflects its heavy reliance on manufacturing – a classic example of Simpson’s paradox.

In effect, China bears a disproportionate share of the world’s emission-intensive production. According to the UNCTAD-EORA Global Value Chain database, in 2017 (before the trade war between the United States and China began), 33.9 per cent of the carbon embodied in US imports originated in China. These emissions did not vanish once tariffs disrupted bilateral trade; they have either been re-imported by the US through costlier domestic production or diverted to third countries.

IMPACT WILL BE PRONOUNCED IN THIRD COUNTRIES

If trade tensions reshape industrial structures in China and the US, the shift of production toward more energy-intensive activities will raise the weighted-average carbon intensity of both economies, even without a change in sector-specific intensities. Our research shows that the emissions increase caused by structural shifts vastly exceeds the emissions decline associated with slower economic growth.

But the impact is more pronounced in third countries. The US merchandise-trade deficit has hovered above 4 per cent of GDP for the past decade, implying that the country’s trade war with China has resulted in nearshoring and friendshoring, rather than reshoring.

We find that each percentage-point increase in US-China bilateral tariffs causes a 0.1 to 0.34 per cent rise in carbon flows embodied in trade between third countries. Simulation results confirm that reduced US imports from China are largely replaced by imports from Southeast Asian or Latin American economies, where many industries have higher carbon intensities than in China. The US essentially swaps one supplier for another – only to increase the world’s total CO2 emissions.

This is not to say that Southeast Asia or Latin America should not attract investment or pursue growth. Under normal circumstances, an economy’s carbon intensity follows the environmental Kuznets curve, rising in the early stages of development and then declining in the later stages, as cleaner technologies diffuse.

In a world without trade wars, countries move along this curve from left to right, with rising emissions in developing economies offset by falling emissions in more advanced economies.

But trade conflicts disrupt this balance. High tariffs undermine economic performance in the US and China, pushing them left along the Kuznets curve, toward the phase where emissions rise rather than fall. At the same time, supply-chain diversion leads developing economies to increase their production and advance, as expected, along the curve’s ascending segment.

The result is that emissions increase in economies on both sides of the curve. Taking the environmental Kuznets curve dynamics into consideration, the US-China trade war’s impact significantly exceeds our baseline estimate of a one-off increase of 410 million tonnes in global CO2 emissions.

TOWARDS GREEN TRADE RELATIONSHIPS

The current US-China trade relationship is thus a “high-emissions” one that externalises pollution and erodes the world’s capacity to fight climate change. This is why we advocate a “green” trade relationship, with trade policy and climate goals explicitly aligned – for example, by lowering barriers to low-carbon technologies and recognising that tariff reduction can be a form of climate cooperation when it facilitates cleaner trade flows and discourages carbon-intensive production.

In an age when climate risks are rapidly materialising, the same principle should be applied to all bilateral and multilateral trade relationships.

A more confrontational global trade environment risks locking the world into a vicious cycle of tariff escalation, supply-chain degradation and rising emissions. If major powers continue down this path, ignoring the fact that trade wars damage the planetary systems on which every economy depends, all of us stand to lose.

Qiyuan Xu, a senior fellow at the Chinese Academy of Social Sciences, is the author of many books, including Reshaping the Global Industrial Chain: China’s Choices.