Judith Dean

The growth of global value chain (GVC) trade and the opportunities it can bring to developing countries have become well known. Yet some argue this trade allows industrial countries to offshore the dirtier parts of their production process to poorer countries. China's growth, heavily reliant on export production, FDI, and GVC trade, suggests a link between these and high pollution levels. Yet direct evidence of the effect of GVCs on the environment is limited. This paper proposes that GVCs can reduce pollution intensity through changing production technologies, expanding the range of productive activities, and transferring knowledge to domestic firms. Drawing on the Feenstra-Hanson (1996) outsourcing model, we develop a theoretical framework demonstrating the possibility that GVCs could reduce pollution intensity through these channels. We then test these hypotheses using Chinese industrial SO2 and chemical oxygen demand emissions data from 1998-2006. We develop two new approaches to capture the range of GVC activities: a variant of the extensive margin of exports, and an adaptation of the upstreamness of firm exports and imports. Results suggest that GVC participation has reduced emissions intensity through all three channels.