Saturday, December 22, 2007

China Chokes - pollution haven or comparative advantage

The New York Times recently published a lengthy article on China and its environmental problems.

The gist of the story is that a lot of dirty industries from the West have been relocating to China. This has the effect of (1) making China dirtier, (2) making the West cleaner (in terms of local pollutants), (3) increasing global emissions (or no change at best).

The pollution haven hypothesis as used by economists infers that polluters deliberately relocate their production to those countries with less stringent environmental regulations or domestic firms displace Western firms (who close) because they cannot compete on price as a direct result of regulation differentials.

Despite anecdotal evidence such as this article, the evidence is mixed. One reason is that industry relocates for many reasons and regulations are only a small percentage of total costs. Wages and other factors are more likely to be the cause of any shift. This is clear from this article.

China Grabs West’s Smoke-Spewing Factories [NY Times]

Talking about two towns, one in Germany and one in China.

These two steel towns have an unusual kinship, spanning 5,000 miles and a decade of economic upheaval. They have shared the same hulking blast furnace, dismantled and shipped piece by piece from Germany’s old industrial heartland to Hebei Province, China’s new Ruhr Valley.

The transfer, one of dozens since the late 1990s, contributed to a burst in China’s steel production, which now exceeds that of Germany, Japan and the United States combined. It left Germany with lost jobs and a bad case of postindustrial angst.

What we want to know as economists is WHY did this furnace move?
In its rush to re-create the industrial revolution that made the West rich, China has absorbed most of the major industries that once made the West dirty. Spurred by strong state support, Chinese companies have become the dominant makers of steel, coke, aluminum, cement, chemicals, leather, paper and other goods that faced high costs, including tougher environmental rules, in other parts of the world. China has become the world’s factory, but also its smokestack.

Clearly, this is NOT a problem of Germany PUSHING dirty production to China but the Chinese PULLING dirty production into China.
This issue quickly gets to the heart of the climate change debate:
China’s worsening environment has also upended the geopolitics of global warming. It produces and exports so many goods once made in the West that many wealthy countries can boast of declining carbon emissions, even while the world’s overall emissions are rising quickly.

In the following quote we are looking at the environmental cost of production - the issue here is not that Chinese regulations are not strict but that they are not enforced and that corruption is rife.
The Ruhr Valley city of Dortmund, where ThyssenKrupp once made steel, still suffers from high unemployment because of the loss of jobs to lower-cost countries like China. But Germans can buy Chinese-made iPods, washing machines and cargo ships at prices that, because of lax pollution controls, do not reflect the toll on the environment. And the outsourcing of polluting industries has given them cleaner air and water.

The Chinese government is finally seeing the folly of their ways. This has been clear for years and yet only now are they beginning to see that things will need to change.
“Some enterprises are abusing the environment to lower export prices,” Chen Guanglong, a Ministry of Commerce official, said in announcing a crackdown on polluters this fall. “They sell their products abroad, but the pollution is left at home.”

Another important issue is that it is NOT environmental economics that is the problem but the sheer lack of basic economic understanding in China. Steel is not the only sector to have massive over capacity and firms that are kept open by loss making local banks. The bad debt provisions of Chinese banks should NOT be underestimated. The issue is that it is jobs that matter but not profits. Such a situation is unsustainable.
But steel has also proved a curse. China has 77 large steel mills like Hangang, and hundreds of smaller rivals. They have so much excess capacity that production of some basic steel products has become unprofitable at home and abroad. Worse, steel pollutes more than any other industry in China, perhaps in the world.

Clearly there are different ways of looking at this problem and this is what economists need to do:
A study by researchers at Carnegie Mellon University found that if all the goods that the United States imported between 1997 and 2004 had been produced domestically, America’s carbon emissions would have been 30 percent higher.

Good news for the US perhaps and US citizens being able to breath cleaner air. But:
A separate study for the European Parliament examined the transfer of steel production to China from Germany. It found that China’s less efficient steel mills, and its greater reliance on coal, meant that it emitted three times as much carbon dioxide per ton of steel as German steel producers.

Not so good for global emissions.

There is plenty of scope for more research in this area.



Bruce said...

It is perfectly all right with us if our competition miscalculated their true cost of production by excluding environmental costs and social costs of low labour costs. However, we must be ready when they wake up. We must find alternate suppliers who will continue to underestimate their true cost of production.

The interesting part of this story is that China has been complaining about their customers who insist on getting a better price, drove them to pollute. I wonder what would happen if all their customers stop buying from them, and get their supply from someone else. Will they cry "trade barrier" ?

Mark said...

WEll Bruce.... You clearly missed the point. The point is how this is a falsification of the neoliberalist free-market theory and proof, the kyoto-protocoll can't work: Nowadays you could as a corporation with huge carbon footprint do this: Outsource your production to China - claim you've gone green and earn profits for the emissions you "saved" at home and let people praise you. Then you go to your outsourced plant in China(which ist creating 3 times more emissions meanwhile), help it to be more efficient, which is cheap because it's production is even less efficient than the one at home in the US. By that You create cerificates for your 'climate protection project' in China and sell them abroad(you even make extra profit with the cheap labour with your new plant). The winners here: Big corporations, Carbon Trading Brokers, etc. The loosers: The employees in the West, who loose jobs, and have to pay more for the products, (because the corporation will of course internalize their "cost" for doing all this going green for the greater good)and the Climate. Did you know btw, the arctic might be Ice free in 2012 - So if we don't act soon we'll all be doomed. But, joining that Protocoll is no solution(of course for the US would be better than not mitigating climate change at all) but to follow the advice of the head of the UNFCCC, Pachauri: "Don't eat meat, ride a bike, and be a frugal shopper" - We need climate justice, now!

Rob said...

Thanks fpr the comment. You make some interesting points tha deserve closer examination.

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