Journal of Cleaner Production xxx (xxxx) xxx

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Journal of Cleaner Production

journal homepage: www.elsevier.com/locate/jclepro

Reassessing pollution haven effect in global value chains

Yuwan Duan *, Ting Ji , Tuotuo Yu
School of International Trade and Economics, Central University of Finance and Economics, Beijing, 100081, China

a r t i c l e i n f o a b s t r a c t

Article history: According to the well-known “Pollution Haven Effect”, wealthy countries with strong environmental
Received 23 June 2020 regulations will have a comparative disadvantage in pollution-intensive industries, and will tend to
Received in revised form offshore their polluting industries to poorer countries. We re-test this theory by taking full account of
15 September 2020
global value chains, which the existing literature has failed to do. Using a multi-country inputeoutput
Accepted 15 October 2020
model and structural decomposition analysis, we first calculate the emission intensities using bilateral
Available online xxx
value-added trade data and isolate the effect of trade composition from the effect of technology. We then
Handling editor: Bin Chen investigate the relationship of the trade composition effect with income level for 40 major economies
using econometric models. We find that the larger the per capita income gap between importing and
JEL classifications: exporting countries, the more pollution-intensive the value-added exports. This validates the existence
F640 of the Pollution Haven Effect in value-added trade, which is not found when using traditional gross trade
Q56 data that do not properly account for the global value chains. Our findings suggest that high-income
countries offshore their emissions to low-income countries by outsourcing only the dirty production
Keywords:
Pollution haven effect stages instead of the entire production process, and that global value chains are also “global pollution
Global value chain chains.” Based on our novel methodology, our findings explain previous failures in identifying the
Input-output model Pollution Haven Effect and provide a new perspective on global cooperation within environmental
Structural decomposition analysis governance.
Income gaps © 2020 Elsevier Ltd. All rights reserved.

1. Introduction
Since the 1970s, the rapid expansion of international trade has
led to extensive debates about its environmental effects. Among
these debates, the concept of the “Pollution Haven Effect” (PHE) is
one of the most contentious issues (Copeland and Taylor, 1994;
Antweiler et al., 2001). When industrialized nations seek to set up a
new plant, pollution control costs have an impact at the margins,
where they exert effects on investment decisions and trade flows.
Considering this, the PHE suggests that countries with weak envi-
ronmental regulations will have a comparative advantage in
pollution-intensive industries. Since a country’s per capita income
and the stringency of its environmental regulations are highly
correlated (Cole and Elliott, 2003; Frankel and Rose, 2005), the PHE
implies that developing countries or regions will become pollution
havens, while the developed world will specialize in and export
clean goods. As a result, international trade becomes a mechanism
of re-allocating pollution emissions based on income level. Even
worse, if relatively poor countries fall behind with respect to pro-
ductivity in pollution-intensive industries, the world’s total pollu-
tion emission will increase as a consequence of international trade.
Therefore, investigating the PHE will provide a better under-
standing of countries’ emission responsibilities and help to develop
coordinated policies that promote green and sustainable develop-
ment throughout the world (Wang et al., 2019b; Li and Liu, 2020).
Though the PHE has been extensively investigated in the liter-
ature (Levinson and Taylor, 2008; Cole and Elliott, 2003; Aichele
and Felbermayr, 2015), few studies have fully considered the
impact of the global value chain (GVC.)1. The GVC has become a
distinctive feature of the world economy in recent decades. Ac-
cording to Johnson and Noguera (2012), trade in intermediate in-
puts, as a typical symbol of GVC, accounts for as much as two thirds
of international trade. The GVC is an umbrella term that covers how
factory production can be divided into distinct stages conducted in
different regions around the world. The nature of this complicated

1
This paper uses some abbreviations to make it concise and clearer. “PHE” is
* Corresponding author. abbreviation of “Pollution Heaven Effect.” “GVC” means “Global Value Chain”. “EI”
E-mail address: duanyuwan@cufe.edu.cn (Y. Duan). represents “Emission Intensity.”

https://doi.org/10.1016/j.jclepro.2020.124705
0959-6526/© 2020 Elsevier Ltd. All rights reserved.

Please cite this article as: Y. Duan, T. Ji and T. Yu, Reassessing pollution haven effect in global value chains, Journal of Cleaner Production, https://
doi.org/10.1016/j.jclepro.2020.124705
Y. Duan, T. Ji and T. Yu
web of global production poses several challenges to empirical tests
of the PHE, buttheoretically, ignoring the GVC would greatly
obscure the impacts of the PHE and generate unreliable results.
First, the pollution content embedded in intermediate goods would
be wrongly attributed to the country where downstream produc-
tion occurs, even though that country is neither responsible for
producing the pollution nor actually suffers from it (Cai et al., 2018;
Duan and Yan, 2019; Wang et al., 2019a). However, since most
current trade data are based on gross output, analyses that use this
type of data are impacted by this important shortcoming. Even
worse, any results based on gross output are essentially condi-
tioned on an inputeoutput structure that evolves over time, which
nullifies the validity of any multi-period analysis. Second, the so-
called “dirty” industries are not easily identified in the context of
the GVC. For example, a country may only be responsible for a
“clean” stage of producing a “dirty” product, so an industry tradi-
tionally seen as “dirty” may be not dirty at all for this country.2
These deficiencies imply that studies that do not properly ac-
count for the GVC seriously distort the true environmental conse-
quences of international trade.
Against this background, this study aims to examine the PHE by
uncovering implicit trade flows and related emissions from the
perspective of the GVC. We use an integrated framework to
examine the PHE, combining an inputeoutput model, structural
decomposition analysis, and econometric analysis. Specifically, we
first use an international inputeoutput model to calculate the
emission intensity (EI) in bilateral value-added trade, allowing us to
properly account for the GVC and bilateral gross trade. We then
decompose the EIs into a composition effect and a technical effect
using a structural decomposition analysis. Finally, we examine the
PHE by investigating whether the composition effect is driven by
differences in income levels using panel data regressions, and
compare the results of using these value-added trade statistics to
those based on traditional gross trade statistics.
This study contributes to the literature by making two major
improvements: First, we fully account for the GVC by using value-
added trade instead of gross trade. Our empirical results indicate
that using traditional gross trade data masks the true locations
where polluting activities occur, therefore biasing PHE estimates.
This helps to explain the failure of previous studies to find the PHE.
The GVC creates a new channel for high-income countries to
offshore their emissions to low-income countries, that is, by
outsourcing the dirty stages of production instead of outsourcing
the entire production process.
Second, this study accounts for the pollution content in trade by
using inputeoutput models and taking the GVC into account. Pre-
vious studies in this area have found that low-income countries are
net pollution exporters while high-income countries are net im-
porters, and have interpreted this as direct evidence supporting the
existence of the PHE (Lo pez et al., 2013; Zhang et al., 2017). How-
ever, in those studies emission content is the combined result of
trade composition and production technology, while by definition
the PHE is only related to the composition or structure of economic
2
To make it more intuitive, consider a simplified GVC with three countries,
Japan, China, and the U.S. China produces smart phones using capacitors produced
in Japan as an intermediate input, then exports the phones to the U.S. In this GVC,
Japan exports to the U.S. indirectly and generates emissions for U.S. consumers by
providing intermediate inputs to China. If we only look at gross trade statistics, it
appears that Japan exports nothing and generates zero emissions while satisfying
the needs of U.S. consumers. Moreover, traditional statistics exaggerate the true
value of Chinese trade with, and emission exports to the U.S., since part of the
phone’s value is actually created by Japan. Put together, these facts imply that
studies that do not properly account for the GVC seriously distort the true envi-
ronmental consequence of trade.
2
Journal of Cleaner Production xxx (xxxx) xxx
activities. Therefore, one should isolate the influence of technology
differences between countries from the “pure” PHE. We do this by
using structural decomposition, and prove that ignoring the tech-
nology differences among countries would seriously overestimate
the PHE.
The rest of this paper is organized as follows: Section 2 reviews
the related literature. Section 3 presents the methodology used to
determine the EI and its composition effect in bilateral trade, as
well as our regression equation. Section 4 discusses the results,
while section 5 concludes.
2. Literature Review
This study is strongly related to two strands of literature, namely
studies on testing PHE, and those that account for the emissions
embodied in trade.
A large body of literature has examined the PHE by evaluating the
impact of environmental regulations on trade (Ederington and
Minier, 2003; Levinson and Taylor, 2008) on industry location
(Chung, 2014; Dean et al., 2009; Kellenberg, 2009; Zhao et al., 2020;
Dou and Han, 2019), and on the impact of openness and trade policy
on environmental quality (Cole and Elliott, 2003; Aichele and
Felbermayr, 2015), and the authors of these studies have reached
conflicting conclusions (Brunnermeier and Levinson, 2004). Many
fail to find robust empirical evidence to support the argument that
environmental regulations significantly affect trade flows (Jaffe et al.,
1995; Grossman and Krueger, 1993; Brunnermeier and Levinson,
2004; Levinson and Taylor, 2008). Others find a statistically signifi-
cant PHE but the effect is quite small compared to the effects of other
factors that influence trade patterns, such as factor endowment, c. f.,
Cole and Elliott (2003), Ederington et al. (2005), Levinson and Taylor
(2008), Grether and Mathys (2013), Tang (2015), Hering and Poncet
(2014). For example, Grossman and Krueger (1993) find that the
composition effect created by increased U.S.-Mexico trade was more
likely to be affected by factor endowments than by differences in
pollution abatement costs. Levinson and Taylor (2008) conclude that
for the average industry, increased U.S. environmental regulations
only accounted for about 10% of the total increase in imports from
Canada and Mexico between 1977 and 1986. However, few studies in
this stream have fully considered the GVC, and most, if not all, fail to
capture the true location of pollution activities, which may lead to
biased estimates of the PHE.
The second group of studies seeks to measure the emission
content of trade using inputeoutput tables to assess countries’
emission footprints (Davis and Caldeira, 2010; Ferna ndez-Amador
et al., 2017; Hertwich and Peters, 2009; Wang and Yang, 2020),
emission transfers (Aichele and Felbermayr, 2015; Cai et al., 2018;
Levinson, 2009; Lv et al., 2019; Peng et al., 2016; Peters et al., 2011;
Wang et al., 2020; Zhang et al., 2019), and other aspects of the
emissions aspect of trade flows (Duan and Jiang, 2017; Duan and
Yan, 2019; Duarte et al., 2018; Serrano and Dietzenbacher, 2010;
Zhang et al., 2019). They properly account for trade in intermediate
goods and attribute emissions to final consumers. However, rather
than estimating the PHE directly, these studies investigate the PHE
by calculating the Balanced Embodied Emissions in Trade (BEET),
that is, emissions embodied in exports minus emissions embodied
in imports. They usually find that low-income countries are net
pollution exporters while high-income countries are net importers,
and simply interpret this as evidence in support of the PHE (Lo pez
et al., 2013; Serrano and Dietzenbacher, 2010; Peng et al., 2016;
Zhang et al., 2017; Moran et al., 2013). For example, Zhang et al.
(2019) find the U.S. is a typical net carbon importer, while China
is the largest net carbon exporter. Many other developed countries
such as Canada, Italy, Spain, France, Germany, and the UK are also
shown to be net carbon importers.
Y. Duan, T. Ji and T. Yu
However, the BEET is an aggregate-level statistic, the combined
result of trade composition and production technology, while the
PHE is exclusively concerned with trade composition. Since low-
income countries usually lag far behind high-income countries in
terms of green technology (Douglas and Nishioka, 2012; Duan and
Jiang, 2017; Zhang et al., 2019), the former can still end up as net
pollution exporters even if they specialize in producing clean
goods. Studies have shown that differences in production tech-
nologies across countries are key determinants of the differences in
emission intensities and total emissions in international trade
(Douglas and Nishioka, 2012); therefore, it is necessary to separate
the effects of trade composition and production technology to
analyze the PHE correctly.
Therefore, this study joins the two streams of literature on the
PHE and the GVC. We contribute to the GVC literature by isolating
the effects of technology from the PHE, and we update the PHE
literature by using value-added trade data rather than gross trade
data in a panel data analysis. Without this adjustment, a cross-time
analysis of the PHE is invalid. Essentially, we use an integrated
framework to test for the extent of any PHE by combining an
inputeoutput model, structural decomposition analysis, and an
econometric analysis.
3. Methodology
In this study, we distinguish two types of trade data: direct trade
and value-added trade. Direct trade refers to traditional approach
of measuring exports and imports. value-added trade fully accounts
for the GVC by referring to the value-added in one country to satisfy
final consumption in another country. In this section, we first
calculate EI in both direct and value-added trade measures. We
then remove the influence of heterogonous technologies across
countries to obtain the composition effect, which we use as an
independent variable in further regressions to evaluate the PHE.
3.1. Emission intensity in bilateral trade
The EI in direct trade is calculated as the weighted average of
each sector’s emissions per unit of output, where the weights are
each sector’s share of total trade value. In contrast, the EI in value-
added trade is defined as the emissions embodied in a unit of value-
added exports from country i to country j. More generically, the
content of a factor in value-added trade is defined as the amount of
the factor used within the territory of country i to satisfy the final
demand of country j. It includes the factor contribution from i via
direct exports from i to j, as well as from indirect exports from i to j
via a third country.
To account for EI, a multi-country inputeoutput model is
needed. Consider a world with N countries, indexed by i (or j) and S
sectors indexed by s. Denote the S
S matric Aij as the direct input
requirements per unit of j’s sector-based production on the inter-
mediate inputs produced by i. Then, the NS
NS matrix A ¼
0 1
A11 / A1N
@ « 1 « A gives the inputeoutput coefficient matrix for
AN1 / ANN
the entire world. Each column represents the intermediate inputs
required by the corresponding sector and country from each
0 1
L11 / L1N
@ resents the composition of trade in intermediate goods.
country-sector. Then, L≡ðI  AÞ ¼ 1
« 1 « A gives the
LN1 / LNN
Leontief inverse matrix and I is the identity matrix with dimension
NS
NS. We denote the trade in final products exported from
country i to j by vector f kj (with dimension S
1). The emissions per
sector in country i that result from producing one unit of output is
3
Journal of Cleaner Production xxx (xxxx) xxx
denoted by a vector of emission coefficients pi (with
dimension 1
S ). The vector of value-added coefficients vi (with
dimension 1
S ) is defined as the value-added obtained in i to
produce one unit of output per sector.
The EI in value-added exports from i to j is defined as:
! !
 N 
X   N 
X 
EIij ¼ ecij vaij ¼ pi Lik f kj vi Lik f kj (1)
k¼1 k¼1
where vaij , the value-added trade from country i to j, is the value-
added generated within country i’s territory to satisfy country j’s
final demand, and ecij is the emission content in the value-added
trade from i to j.
The labor and capital contents in the value-added trade measure
can be calculated the same way as the ecij by replacing pi with labor
and capital coefficients.3 Dividing capital content by labor content
yields capital intensity (KLij ), an important covariant variable used
in our later regressions.
By comparison, when measured in a traditional way, the average
EI and capital-to-labor ratios for direct exports from i to j are simply
the export-weighted averages of industrial EI or capital-to-labor
ratios per industry (ki ), that is DEIij ¼ pi eij and DKLij ¼ ki eij ,
where eij gives the export shares for each industry as a percent of
total exports from i to j.
3.2. Decomposition of emission intensity
Existing studies on the environmental effects of trade usually
distinguish between scale, technique, and composition (Antweiler
et al., 2001; Wang et al., 2020). By subtracting the scale effect, EI
is affected only by trade composition and by between-country and
time-dependent differences in production technologies (Su and
Ang, 2012). The composition effect reflects the fact that countries
can choose to export (import) “dirty” or “clean” goods. Our focus in
this study is the EI of final demand-driven trade, where the
composition of that trade reflects each country’s final demand as
well as the composition of inputs required at intermediate steps
prior to the export (import) of the finished product.
Based on equation (1), the EI of value-added trade depends on
the vectors pi and vi for the exporters, the global inputeoutput
0 1
f 1j
matrix A, and the final demand of importers f j ¼ @ « A. pi and
f Nj
vi are closely related to each exporter’s production technology and
therefore represent the technique effect. In contrast, f j is deter-
mined purely by consumers’ preferences for the differentiated
products provided by various countries; therefore, its impact on EI
is part of the composition effect.
The impact of A on EI is a combination of both technology and
composition effects. With respect to the effect of technology, A
provides information about the different intermediate input
structures across countries (e.g., to produce 1 dollar of chemicals,
China may require 0.5 dollars of coal as intermediate input), and
therefore reflects differences in production technologies globally. A
also indicates the sources by country of each intermediate input
(e.g., in order to produce that 1 dollar of chemicals, China may
import 10% of the required 0.5 dollars of coal), and therefore rep-
To disentangle the two effects, we follow Duan and Jiang (2017)
3
The capital coefficient and labor coefficient respectively indicates the capital
stock and labors (measured in hours) used in country i to produce one unit of its
sectoral output.
Y. Duan, T. Ji and T. Yu Journal of Cleaner Production xxx (xxxx) xxx

and split the matrix A into two parts, one that reflects the overall 3.3. Estimation equation
production technology (H) and one that captures the trade
composition of intermediate inputs (T). That is, A ¼ T H, where  Our goal is to investigate whether, all other things equal,
indicates element-wise multiplication. H is defined as H ¼ countries with relatively high incomes tend to import pollution-
0 1
H1 / HN PN intensive products from countries with lower incomes. The esti-
@ « 1 « A with the S
S sub-matrix Hj ¼ Akj . It indicates mation equation is:
H1 / HN k¼1
 
how many units of intermediate inputs from different industries lnmtij ¼ aij þ at þ b lngdpti  lngdptj þ g1 Xit þ g2 Xjt þ g3 Xijt þ εtij
are directly used in producing one unit of output in each sector for
each destination country. T captures the market share for each (5)
source country supplying these intermediate inputs, and is defined
0 1 where mtij is the composition effect of value-added exports from
T11 / T1N
as T ¼ @ « 1 « A with Tij ¼ Aij 0Hj , where0 indicates country i to country j. The higher the value of lnmtij , the dirtier the
TN1 / TNN mixture of goods country i exports to j to satisfy j’s final demand. aij
element-wise division. Then the expressions of EIij is function of
is the country pair fixed effect; at is the year fixed effect; lngdpti is
five matrices:
country i’s log gross domestic product (GDP) per capita in constant
  2005 dollars and measures the real income level of country i in year
EIij ¼ f pi ; vi ; H; T; f j : (2) t. Since high-income countries generally have more stringent
environmental regulations, we use lngdpti as a proxy for the level of
After introducing the element of time using subscript t, one can environmental stringency (Antweiler et al., 2001; Cole and Elliott,
decompose EI in bilateral trade into the following multiplicative 2003; Frankel and Rose, 2005). If PHE exists, this term’s coeffi-
elements: cient should be negative, i.e., the lower income country exports
dirtier goods to the higher income country.
Xit and Xjt control for time varying exporter- and importer-
EIijt ¼ EIus;us
95
mtij ftij (3)
specific attributes that may correlate with lngdpti and lngdptj . The
where the superscript t indicates year t. log of the composition effect in country i’s total exports (lnmti ) and
For example, ¼ 95
EIus;us f ðp95 95 95 95 95
us ; vus ; H ; T ; f us Þ
is the EI of pro- country j’s total imports (lnmtj Þ appear to be good proxies, as they
duction in the U.S. required to satisfy its own final demand (the EI in reflect the overall export and import product compositions of the
the U.S.’s self-trade) in the year 1995, which is taken as the two countries, which could be influenced by lngdpti and lngdptj , and
benchmark. The variables mtij and ftij are defined as mtij ¼ f ðv95 95
us ; pus ; also have an impact on lnmtij , the dependent variable. Xijt is the
H95 ; Tt ; f tj Þ=EIus;us
95 and ftij ¼ EIijt =f ðv95 95 95 t t
us ; pus ; H ; T ; f j Þ. Their product, control variables that varies with importer, exporter and time. One
mtij ftij gives the level of EI for exports from country i to j in year t of the most important control variables to represent is the capital
95 . Note that the numerator and denominator in mt intensity of the value-added exports from i to j, measured by the
relative to EIus;us ij ratio of capital content to labor content embodied in the countries’
are the same except they use different measures for the trade bilateral trade (KLtij ).
composition of intermediate goods (T) and final demand of im-
To highlight the importance of accounting for intermediate in-
porters (f), which both reflect the composition effect as explained
puts to production when investigating the PHE, we run the same
earlier. Therefore, mtij captures the difference between EIijt and EIus;us
95
regression using direct trade instead of value-added trade. Specif-
that is caused by the composition effect. Similarly, ftij represents the ically, the composition effects of EI in bilateral trade (mtij ) and in the
technique effect, and its numerator and denominator differ by us- total exports and total imports (mti and mtj ), as well as the capital
ing different emission coefficients, value-added coefficients, and
intensity in trade (KLtij ) are all re-calculated in terms of traditional
intermediate input structures. The variable mtij serves as the
gross trade and are substituted for the corresponding variables for
dependent variable for value-added trade. The larger the value, the
value-added-based trade shown in equation (5).
more pollution intensive the production of value-added exports
from i to j. Following the same logic, the composition effects for
4. Data
each country’s total value-added exports and value-added imports
(mti and mtj , respectively) are estimated.4
Our main data source is the World Input-Output Database
The EI in direct trade can be also decomposed into a composi- (WIOD).5 It provides multi-regional inputeoutput tables annually
tion effect and a technique effect. Using the EI of U.S. domestic from 1995 to 2011, covering 35 industries, 40 economies and an
95 Þ as the benchmark, we have:
production in 1995 (DEIus;us aggregate economy representing the rest of the world (Timmer
et al., 2015). It also provides data on energy use and air pollutant
t emissions, including CO2, NOX, SOx, CO, and others, at the country-
DEIijt ¼ pti etij ¼ DEIus;us
95
mtij fij (4)
industry level from 1995 to 2009. In this study we focus on SOX,
NOX and CO2 emissions because they are the most heavily regulated
where mtij ¼ p95 t 95
us eij =DEIus;us represents the composition effect, and air pollutants across the world. Energy use is also examined as it
t reflects the overall pressure economic activity places on the envi-
fij ¼ pti etij =p95 t
us eij represents the technique effect.
ronment. The WIOD also provides annual country-industry-specific

4
The EI of country i’s total value-added exports (imports) is the weighted
5
average of its EI in bilateral trade using the value-added content as the weights. The We choose WIOD over alternative MRIO databases (such as Eora, GTAP-MRIO
decomposition procedure is similar to the decomposition of EIijt , and therefore is not and OECD database) because WIOD is the only one that allows us to derive con-
repeated here. stant price variables.

4
Y. Duan, T. Ji and T. Yu Journal of Cleaner Production xxx (xxxx) xxx

fixed capital stock and employment data, which allows us to
calculate the capital-labor ratio in bilateral trade. Real GDP per
capita is obtained from the World Bank’s Word Development In-
dicator dataset.
5. Empirical results
5.1. Descriptive analysis
5.1.1. Pattern of composition effect
Table 1 summarizes the main variables used in the study. We
divide the countries in our sample equally into two groups based on
their GDP per capita in 1995. We then label each trade flow based
on the exporter and importer’s income statuses, namely low-
income to low-income, low-income to high-income, high-income
to low-income, and high-income to high-income. The log compo-
sition effect for the four types of trade flows are summarized in
Table 2.
We first observe that the magnitudes of the dependent variables
differ significantly when using value-added trade (columns 1e3)
compared to direct trade (columns 5e7). When value-added trade
is used, the mean values of these variables are all positive, which
means that average cross-country trade flows contain a larger share
of dirty goods than the U.S.’s self-trade in 1995. However, the mean
values based on direct trade data are negative, which means that
cross-country trade flows measured this way contain a smaller
share of dirty goods than the U.S.’s self-trade in 1995. One possible
explanation for this difference is that the values based on direct
trade distort the real export composition for a given country. With
relatively strict environmental regulations, the U.S. may offshore
some of its pollution-intensive production stages to developing
countries. Since direct trade figures do not completely capture the
environmental effect of this offshoring, they may overestimate the
pollution content in the U.S.’s self-trade. Instead, by fully taking the
GVC into account, the value-added-trade-based composition effect
captures the environmental effects of trade more accurately.
Next, we turn to the composition effect in trade between
different country pairs. When using value-added trade data (col-
umns 2e4), the mean composition effect for each pollutant is
largest when both trading partners are low-income countries, and
smallest when both are high-income countries. This indicates trade
between low-income countries is much “dirtier” than trade be-
tween high-income countries, even after eliminating technology
differences across countries. The difference is mainly driven by the
exporting countries: the value-added exports of low-income
countries are almost twice as dirty as that of high-income coun-
tries, as shown by the composition effect. The order reverses
completely if we use direct trade data (columns 5e7). The mean
composition effect is largest between high-income countries, and
lowest between low-income countries. This again implies that
gross trade data distorts real trade effects, and that it is necessary to
use value-added-trade-based data to test for the PHE.
5.1.2. Temporal changes in composition effect
Due to space limitations we use SOX as an example to explore
changes in our dependent variables over time. Fig. 1 show the
composition effect in value-added exports and in direct exports,
respectively. To reduce the influence of extreme values, we show

Table 1
Summary statistics.

Variable Observation Mean Standard. Deviation. Minimum Maximum

Dependent Variable (value-added trade)

SOX 24,000 0.682 0.522 2.139 3.278
NOX 24,000 0.706 0.436 1.322 3.166
CO2 24,000 0.616 0.405 1.052 2.903
Energy Use 24,000 0.613 0.499 2.920 4.343
Dependent Variable (direct trade)
SOX 22,878a 0.327 0.847 6.476 3.858
NOX 22,878 0.064 0.698 3.365 3.291
CO2 22,878 0.122 0.647 4.484 2.956
Energy Use 22,878 0.087 0.728 3.419 3.539
Independent Variable
log income gap 24,000 0.000 0.989 3.569 3.569
Control Variables (value-added trade)
log K/L ratio 23,440b 0.087 0.116 0.000 1.480
SOX (exporter) 24,000 0.330 0.752 2.323 3.170
NOX (exporter) 24,000 0.181 0.755 2.002 3.266
CO2 (exporter) 24,000 0.327 0.720 4.269 4.595
Energy Use (exporter) 24,000 0.343 0.876 4.423 4.668
SOX (importer) 24,000 1.297 0.650 0.097 3.971
NOX (importer) 24,000 0.751 0.465 1.629 2.090
CO2 (importer) 24,000 0.808 0.536 2.090 2.472
Energy Use (importer) 24,000 0.894 0.583 1.709 2.642
Control Variables (direct trade)
log K/L ratio 23,396 0.083 0.148 0.090 4.896
SOX (exporter) 24,000 0.425 1.116 2.509 4.812
NOX (exporter) 24,000 0.005 1.099 3.067 4.496
CO2 (exporter) 24,000 0.231 0.692 2.393 3.188
Energy Use (exporter) 24,000 0.669 0.937 1.628 3.791
SOX (importer) 23,080 2.390 1.831 6.908 1.112
NOX (importer) 23,080 1.679 1.693 6.908 1.102
CO2 (importer) 23,280 1.341 1.661 6.908 1.187
Energy Use (importer) 23,360 0.944 1.669 6.908 1.914

Note: SOX/NOX/CO2/Energy use means the log composition effect of the corresponding pollutant’s intensity in value-added or direct trade.
a
There are missing values in direct trade because some country pairs do not trade directly. However, they can trade indirectly via a third country, so there is no missing value in
value-added trade.
b
. In 2009, the capital stock value for some countries are missing in WIOD, so there are missing values in the K/L ratio (capital-labor ratio).

5
Y. Duan, T. Ji and T. Yu Journal of Cleaner Production xxx (xxxx) xxx

Table 2
Summary of the dependent variables by group.

Value-added trade Direct trade

Mean Standard. Deviation. Observation Mean Standard. Deviation. Observation

SOX
low to low 0.892 0.533 6000 0.322 0.916 5,438a
low to high 0.855 0.553 6000 0.448 0.917 6000
high to low 0.519 0.441 6000 0.271 0.762 5440
high to high 0.462 0.396 6000 0.259 0.764 6000
NOX
low to low 0.873 0.415 6000 0.0006 0.747 5438
low to high 0.856 0.401 6000 0.074 0.695 6000
high to low 0.559 0.423 6000 0.123 0.677 5440
high to high 0.535 0.384 6000 0.059 0.668 6000
CO2
low to low 0.805 0.414 6000 0.073 0.728 5438
low to high 0.786 0.416 6000 0.131 0.704 6000
high to low 0.448 0.319 6000 0.183 0.589 5440
high to high 0.425 0.284 6000 0.104 0.549 6000
Energy Use
low to low 0.807 0.563 6000 0.009 0.828 5438
low to high 0.741 0.490 6000 0.158 0.751 6000
high to low 0.478 0.440 6000 0.122 0.688 5440
high to high 0.427 0.372 6000 0.073 0.625 6000

Note: The dependent variables are logarithm of the composition effect of SOX/NOX/CO2/energy intensity in value-added and direct trade.
“Low to low” means the exporter and importer are both low-income countries.
“Low-to-high” means the exporter is a low-income country while the importer is a high-income country. “High-to-low” means the exporter is a high-income country while
the importer is a low-income country. “High-to-high” means the exporter and importer are both high-income countries.
a
There are missing values in direct trade because some country pairs do not trade directly. However, they can trade indirectly via a third country, so there is no missing value in
value-added trade.

the median and interquartile range (IQR) rather than the mean and
standard deviation.
Examining the composition effect based on value-added trade
data, the median declined slightly during the 1990s and remained
constant in the 2000s, while the IQR increased substantially over
the entire period. The composition effect using direct trade data
(the right panel) follows a similar pattern over time, although the
IQR is larger. Taken together, the composition effect does not
indicate any global shift toward cleaner or dirtier sectors, but does
show a widening gap across countries, with some countries
increasingly specializing in clean sectors and others in dirty sectors.
This finding is compatible with the existence of the PHE, and may
suggest the PHE has increased over time.
To further support the need to eliminate the technique effect
when testing for the PHE, Fig. 1 illustrates EI in value-added trade
and in direct trade (the lower panel). EI is the sum of the compo-
sition effect and the technique effect, and our analysis reveals a
changing pattern over time with respect to the composition effect.

Fig. 1. Median and interquartile range (IQR) of SOX emission intensity in bilateral trade flows
Note: IQR ¼ interquartile range.

6
Y. Duan, T. Ji and T. Yu Journal of Cleaner Production xxx (xxxx) xxx

Table 3
Benchmark regressions.

Value-added trade Direct trade

(1) (2) (3) (4) (5) (6) (7) (8)

SOX NOX CO2 Energy SOX NOX CO2 Energy

gap_lngdppc 0.074*** 0.009 0.074*** 0.109*** 0.065 0.008 0.031 0.008

(0.018) (0.018) (0.015) (0.023) (0.051) (0.045) (0.039) (0.048)
klratio 0.012*** 0.017*** 0.019*** 0.024*** 0.012 0.015 0.021** 0.021**
(0.005) (0.004) (0.004) (0.006) (0.012) (0.009) (0.008) (0.009)
excon 0.066*** 0.067*** 0.062*** 0.039*** 0.057*** 0.051*** 0.075*** 0.012
(0.007) (0.008) (0.005) (0.005) (0.010) (0.011) (0.013) (0.014)
imcon 0.015* 0.020** 0.000 0.024*** 0.003 0.011** 0.003 0.003
(0.008) (0.008) (0.006) (0.007) (0.006) (0.005) (0.004) (0.005)
Constant 0.611*** 0.635*** 0.544*** 0.515*** 0.329*** 0.002 0.086*** 0.036
(0.018) (0.015) (0.014) (0.019) (0.041) (0.034) (0.029) (0.033)
Observations 22,230 22,230 22,230 22,230 21119a 21,119 21,119 21,119

Note: Dependent variables are winsorized at the top and bottom 1%. Dependent variables of columns 1e4 and columns 5e8 are the composition effect in value-added trade
and in direct trade respectively. Independent variable is the importer’s log real income (GDP per capita in constant US dollars) minus the exporter’s log real income. Control
variables include the capital-labor ratio in bilateral trade, and the composition effect of pollutants’ intensity in the exporter and importer’s unilateral trade flows. Year and
country pair fixed effects are included. Standard errors in parentheses are clustered by country pair. *p < 0.1 **p < 0.05 ***p < 0.01.
a
Regressions using direct trade data (columns 5e8) contain fewer observations than those using value-added trade data (columns 1e4). This is because some country pairs do
not trade directly with each other but have value-added trade that goes through third countries.

The median declines steadily over the sample period, while the IQR
remains largely unchanged. We conclude that the decline in
pollutant concentration in global trade is mainly caused by the
technique effect, which is consistent with other studies that find
the composition effect is small relative to the technique effect
(Antweiler et al., 2001; Cole and Elliott, 2003; Frankel and Rose,
2005; Douglas and Nishioka, 2012; Duan and Jiang, 2017; Duan
and Yan, 2019). Since the PHE is about compositional changes in
trade, it is important to exclude the technique effect from EI.
5.2. Panel data estimation
Table 3 shows the results of the benchmark regressions in
equation (5). The results based on value-added trade data are
shown in the left panel (columns 1e4), while results based on
direct trade data are shown in the right panel (columns 5e8).
We first consider the results using value-added trade. The co-
efficient of the log income gap is positive and significant for SOX,
CO2 and energy use. This suggests that the wealthier the importing
country compared to the exporting country, the more sulfur/
carbon/energy-intensive the composition of the trade between
the two. For NOX, however, the coefficient of log income gap is not
significant. A possible explanation for this is that the major source
of nitrogen oxide emissions caused by human activities is trans-
portation, produced mainly by automobiles and other internal
combustion engines; industrial production makes a relatively small
contribution to this pollutant (Cole and Elliott, 2003; Jena et al.,
2005).6 Since transportation activities are difficult to shift to
developing countries through international trade, the insignificant
effect of income level on NOX emissions in international trade is
reasonable. Taken together, these findings strongly support the
PHE’s view that poor countries have a comparative advantage in
polluting industries. On average, a 1% increase in the log income
gap between the importing and exporting countries would lead to a
roughly 0.1% increase in the composition effect of pollution con-
centration in trade between the two. Although much of the world
has been working cooperatively to protect the environment since
the 1990s, and many international environmental treaties (such as
6
Cole and Elliott (2003) Cole and Elliott (2003) also find an insignificant effect of
openness on NOx emissions. They believe this is due to the role of the transport
sector in determining NOx emissions.
the Kyoto Protocol and the United Nations Framework Convention
on Climate Change) have been signed, developed countries
continue to transfer pollution to developing countries through the
GVCs.
In contrast, when using direct trade data the coefficient of the
independent variable (the log income gap) is no longer significant.
Said differently, the PHE disappears when direct trade data is used.
This supports our assumption that direct trade data obscures the
true locations of polluting activities, and therefore distort the
estimation of PHE. By only focusing on the direct trade data, the
pollution content embedded in intermediate goods would be
wrongly attributed to the country where downstream production
occurs, even though that country is neither responsible for pro-
ducing the pollution nor actually suffers from it.7
By definition, the dependent variable for the regression using
direct trade data reflects the degree of “dirtiness” of the traded
goods without accounting for the emissions embodied throughout
the GVC and therefore fails to capture outsourced emissions at
different production stages. In contrast, the dependent variable
using value-added trade data fully considers this. The regression
coefficients using direct trade data suggest there is no evidence that
high-income countries offshore pollution-intensive goods to low-
income countries. However, using value-added trade data shows
that significant evidence that high-income countries offshore
pollution-intensive production stages to low-income countries.
The results suggest that the GVC is also a global pollution chain.
By outsourcing some dirty production stages abroad, production of
dirty products that originates in high-income countries becomes
cleaner.
These empirical results indicate that GVC trade have created a
new channel whereby high-income countries can offshore their
7
The coefficient of capital labor ratio is negative for value-added trade and
positive for direct trade. Cole and Elliott (2003) find that pollution-intensive goods
are also capital intensive. This is consistent with our findings on direct trade.
However, the results of value-added trade shows that this does not hold at pro-
duction stage level. The other two controls are the composition effects of pollution
intensities in the exporter’s total exports and the importer’s total imports. Their
coefficients are positive as supposed to be. This means the more pollution-intensive
the composition of a country’s total exports (imports), the dirtier of its exports to
(imports from) a specific trade partner. The reason is intuitive: a country’s pro-
duction and consumption structure determine not only the composition of its total
trade but also the composition of its trade with any specific partner.

7
Y. Duan, T. Ji and T. Yu Journal of Cleaner Production xxx (xxxx) xxx

Table 4
Using emission intensities as dependent variables.

Value-added trade Direct trade

(1) (2) (3) (4) (5) (6) (7) (8)

SOX NOX CO2 Energy SOX NOX CO2 Energy

gap_lngdppc 0.476*** 0.245*** 0.306*** 0.219*** 0.466*** 0.264*** 0.182*** 0.082***

(0.046) (0.025) (0.021) (0.024) (0.059) (0.036) (0.029) (0.027)
klratio 0.070*** 0.009 0.009 0.057*** 0.104*** 0.067*** 0.051*** 0.035***
(0.010) (0.006) (0.006) (0.007) (0.012) (0.007) (0.007) (0.007)
excon 0.106*** 0.075*** 0.070*** 0.039*** 0.011*** 0.008** 0.013*** 0.015***
(0.002) (0.003) (0.003) (0.003) (0.003) (0.003) (0.004) (0.004)
imcon 0.043*** 0.035*** 0.017*** 0.033*** 0.004 0.002 0.004 0.005
(0.009) (0.006) (0.007) (0.007) (0.007) (0.004) (0.006) (0.004)
Constant 1.325*** 1.118*** 0.130*** 2.822*** 0.112*** 0.200*** 0.050 0.056**
(0.032) (0.019) (0.020) (0.028) (0.042) (0.026) (0.031) (0.023)
Observations 22,230 22,230 22,230 22,230 21119a 21,119 21,119 21,119

Note: Dependent variables are winsorized at the top and bottom 1%. Dependent variables of columns 1e4 and columns 5e8 are emission intensities in value-added trade and
in direct trade respectively. Independent variable is the importer’s log real income (GDP per capita in constant US dollars) minus the exporter’s log real income. Control
variables include the capital-labor ratio in bilateral trade, and the composition effect of pollutants’ intensity in the exporter and importer’s unilateral trade flows. Year and
country pair fixed effects are included. Standard errors in parentheses are clustered by country pair. *p < 0.1 **p < 0.05 ***p < 0.01.
a
Regressions using direct trade data (columns 5e8) contain fewer observations than those using value-added trade data (columns 1e4). This is because some country pairs do
not trade directly with each other but have value-added trade that goes through third countries.

emissions, by outsourcing dirty production stages instead of the
entire production process of dirty products. Although the GVC has
broadened the international division of labor and has enabled poor
countries to participate in manufacturing high-end products, it has
also made it easier for wealthier countries to transfer pollution and
polluting activities to poorer ones.
We also use EI as a dependent variable and run the regression to
see how the technology differences between countries influence
the PHE tests, since EI is a combination of the composition effect
and the technique effect. Table 4 shows the results of this regres-
sion. The difference between value-added trade and direct trade
disappears, as the coefficient of the log income gap is positive and
significant in all regressions. This means that the richer the
importing country compared to the exporting country, the higher
the EI using both value-added trade data and direct trade data.
Since poorer countries usually have “dirtier” production technol-
ogy, if the technology differences between countries are not
considered, an analysis based on EI tends to find a significant PHE.
However, this conclusion is arbitrary and lacks credibility as the
PHE is only concerned with the compositional change of trade, not
with technology differences. The evidence presented here dem-
onstrates that ignoring technology differences among countries
overestimates the PHE, and that it is important to use a pure
composition effect to test for the PHE.
However, there are limitations with the approach used in this
study. One of these limitations is related to data. All analyses of the
GVC rely on the country-sector level inputeoutput data, which
suffer from a high degree of aggregation and loss of information.
Further investigations should be done in future studies, when more
detailed inputeoutput data are available.
5.3. Robustness test
log income gap is positive and significant for SOX, CO2 and energy
use when value-added trade data is used (columns 1e4), but
insignificant for all pollutants when we use direct trade data (col-
umns 5e8).
Further, to determine whether the estimated coefficients
change over time, we divide the sample period to three 5-year
periods (1995e1999, 2000e2004, 2005e2009). The estimation
results for each 5-year period are summarized in Table 6. To
conserve space, the coefficients of the control variables are not
shown.
When using value-added trade data (columns 1e4), the coeffi-
cient of the log income gap remains positive and significant in most
cases, across the three sub-periods. However, its magnitude does
change over time: for SOX and NOX, the coefficient of the log income
gap levels off in 2000e2004; for CO2, the coefficient rises
throughout the period, and the coefficient for energy use stabilizes
in 2005e2009. These different trends may reflect differences in the
pollutants’ regulatory histories. SOX regulations have the longest
history, starting in the 1970s with the U.S. Clean Air Act. After nearly
30 years, the effects of SOX regulations on trade composition have
stabilized in recent years. The history of CO2 regulation is much
shorter, beginning with the Kyoto Protocol in 1997. Since then,
more CO2 emission intensive production stages have been offsh-
ored from high-income countries to low-income countries, result-
ing in a PHE that has increased in magnitude over time. To our
knowledge, energy use is not governed by any international con-
ventions but may reflect the combined effect of all other
regulations.
As for the results using direct trade data (columns 5e8), the
coefficient of the log income gap remains insignificant in most
cases. While there are a few exceptions, their sign and magnitude
are not stable over time.

In this study, we assume a country’s income level determines
the stringency of its environmental regulations, which in turn de-
termines its export structure. However, the causality could run in
the other direction: a country’s export structure may have an
impact on its economic growth (Hausmann et al., 2007; Jarreau and
Poncet, 2012; Eicher and Kuenzel, 2016). To address the endoge-
neity concern, we use the lag of the independent variable as our
instrument to re-evaluate the equation. The results, reported in
Table 5, are similar to those in Table 3. Specifically, the coefficient of
8
6. Conclusion and policy implication
This study re-examines the PHE by taking full consideration of
the GVC. Relying on a combination of an inputeoutput model,
structural decomposition analysis, and econometric model, we
estimate the composition effect of EI embodied in both bilateral
gross trade and value-added trade, and their relationship with the
income level gaps between exporters and importers across 40
major economies from 1995 to 2009.
Y. Duan, T. Ji and T. Yu Journal of Cleaner Production xxx (xxxx) xxx

Table 5
Using lag income gap as instrument.

Value-added trade Direct trade

(1) (2) (3) (4) (5) (6) (7) (8)

SOX NOX CO2 Energy SOX NOX CO2 Energy

gap_lngdppc 0.056*** 0.008 0.059*** 0.097*** 0.056 0.020 0.007 0.038

(0.020) (0.020) (0.017) (0.026) (0.058) (0.052) (0.044) (0.056)
klratio 0.014*** 0.020*** 0.017*** 0.023*** 0.010 0.016* 0.025*** 0.028***
(0.005) (0.005) (0.004) (0.006) (0.012) (0.010) (0.009) (0.010)
excon 0.061*** 0.058*** 0.059*** 0.032*** 0.045*** 0.041*** 0.060*** 0.009
(0.007) (0.008) (0.005) (0.005) (0.010) (0.011) (0.014) (0.015)
imcon 0.005 0.011 0.011 0.017** 0.001 0.007 0.006 0.008
(0.008) (0.008) (0.007) (0.007) (0.006) (0.005) (0.005) (0.006)
Observations 20,670 20,670 20,670 20,670 19637a 19,637 19,637 19,637

Note: Dependent variables are winsorized at the top and bottom 1%. Dependent variables of columns 1e4 and columns 5e8 are the composition effect in value-added trade
and in direct trade respectively. Independent variable is the importer’s log real income (GDP per capita in constant US dollars) minus the exporter’s log real income,
instrumented by its own lag. Control variables include the capital-labor ratio in bilateral trade, and the composition effect of pollutants’ intensity in the exporter and importer’s
unilateral trade flows. Year and country pair fixed effects are included. Standard errors in parentheses are clustered by country pair. *p < 0.1 **p < 0.05 ***p < 0.01.
a
Regressions using direct trade data (columns 5e8) contain fewer observations than those using value-added trade data (columns 1e4). This is because some country pairs do
not trade directly with each other but have value-added trade that passes through third countries.

Table 6
Regressions by 5-year period.

Value-added trade Direct trade

(1) (2) (3) (4) (5) (6) (7) (8)

SOX NOX CO2 Energy SOX NOX CO2 Energy

Panel A: 1995e1999
gap_lngdppc 0.056*** 0.008 0.059*** 0.097*** 0.056 0.020 0.007 0.038
(0.020) (0.020) (0.017) (0.026) (0.058) (0.052) (0.044) (0.056)
Panel B: 2000e2004
gap_lngdppc 0.117*** 0.123*** 0.111*** 0.171*** 0.109 0.057 0.175** 0.332***
(2000e2004) (0.032) (0.029) (0.032) (0.050) (0.093) (0.076) (0.074) (0.100)
Panel C: 2005e2009
gap_lngdppc 0.027 0.023 0.156*** 0.158*** 0.019 0.150* 0.017 0.150*
(2005e2009) (0.033) (0.028) (0.027) (0.037) (0.104) (0.077) (0.074) (0.080)

Note: Dependent variables are winsorized at the top and bottom 1%. Dependent variables of columns 1e4 and columns 5e8 are the composition effect in value-added trade
and in direct trade respectively. Independent variable is the importer’s log real income (GDP per capita in constant US dollars) minus the exporter’s log real income. Control
variables include the capital-labor ratio in bilateral trade, and the composition effect of pollutants’ intensity in the exporter and importer’s unilateral trade flows. Year and
country pair fixed effects are included. Standard errors in parentheses are clustered by country pair. *p < 0.1 **p < 0.05 ***p < 0.01.

We find strong evidence for the PHE when using value-added
trade data. This means the wealthier the importer relative to the
exporter, the more emission intensive the composition of the im-
ported goods. However, when using traditional gross trade and
emission data that fail to properly account for the emissions
embodied in the GVC, the PHE disappears. This suggests that the
GVC creates a new channel for high-income countries to offshore
their pollution to developing countries; in other words, they out-
source the dirty stages of production instead of the entire pro-
duction process to low-income countries. This demonstrates that
GVCs are evolving into global pollution chains. We also show that
unless technology differences among countries are removed from
the analysis, the PHE is overstated.
Our empirical results have important policy implications for the
global cleaner production. Given the new channel of emission
transfers represented by the GVC, increasingly fragmented interna-
tional production processes imply an upgraded level of emission
transfers between countries. Developed countries now have the
option to selectively outsource the most-polluting production stages
to developing countries. Given that developing countries have rela-
tively low levels of productivity, this suggests total pollution
worldwide will increase along with the development of the GVC.
This calls for new collective action by governments, interna-
tional organizations and businesses. Developing countries need to
carefully consider trade-offs between the positive impact on
economic growth and potential damage to the environment before
accepting outsourced production processes from high-income
countries. Low-income countries should design their economic
and environment policies carefully, to exploit opportunities
brought by the GVC, and should attempt to specialize in production
stages that both match the country’s development needs and have
a limited impact on the environment, to achieve sustainable
development. Meanwhile, developing economies should make
serious efforts to improve their production technology and develop
the clean production, which helps to reduce pollution levels.
Given that high-income countries usually possess much cleaner
production technologies, they could share those technologies when
outsourcing production to developing countries. In addition, trade
and investment treaties that include environmental provisions
should be considered when countries seek economic cooperation.
These treaties, while promoting trade and investment, can create a
level playing field with respect to environmental standards and
prevent a “race to the bottom.”
Finally, considering multinational firms’ importance in the GVC,
they could take additional measures to improve management of the
green supply chain. In the pursuit of profits, they need to balance
gains and losses across countries, and between profit and pollution,
as required by corporate social responsibility. These firms are the
major players in the GVC, and for that reason they could become
major transmitters of green technology and clean production.

9
Y. Duan, T. Ji and T. Yu
CRediT authorship contribution statement
Yuwan Duan: Methodology, Writing - review & editing. Ting Ji:
Writing - review & editing. Tuotuo Yu: Writing - review & editing,
Formal analysis.
Declaration of competing interest
The authors declare that they have no known competing
financial interests or personal relationships that could have
appeared to influence the work reported in this paper.
The authors acknowledge the financial support by the National
Natural Science Foundation of China (NO. 71704195; 71703180;
71733003) and Chinese National Funding of Social Sciences
(15ZDA009).
Appendix A. Supplementary data
Supplementary data to this article can be found online at
https://doi.org/10.1016/j.jclepro.2020.124705.
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