Climate Tariffs Could Reshape Who Wins and Loses Across Global Value Chains

Carbon border measures are being designed as climate tools, but their effects may reach far beyond emissions policy. By changing the cost of imported carbon-intensive goods, they can alter sourcing decisions, redirect industrial output and reshape where value is created across global production networks.

A study titled "The Impact of Carbon Tariffs on the Division of Labor in Global Value Chains," by Zhuihui Yi and Wurong Li of Xiangtan University and published in Sustainability, examines those wider consequences. Using a dynamic global economic model linked with value-added trade analysis, the authors track how carbon tariffs could change welfare, industrial production, value-chain participation and supply-chain resilience.

The findings point to a highly uneven transition. Policy-implementing economies can improve their relative position as production and value added move inward, while China and other emerging markets face weaker upstream participation, lower welfare and greater pressure on carbon-intensive exports. Stronger tariff regimes also appear to make production networks more regionally concentrated and less diversified.

Climate Policy Is Becoming Industrial Policy at the Border

Carbon border adjustments are intended to address a genuine policy problem. Firms operating under strict carbon pricing can face higher production costs than competitors in countries with weaker climate regimes, creating concerns over carbon leakage and the relocation of emissions-intensive production.

The study argues that border measures cannot be understood only as environmental charges. Once they affect intermediate goods such as steel, chemicals, energy and non-metallic minerals, the shock moves through manufacturing chains, changes relative prices and alters the competitiveness of firms far beyond the sectors directly taxed.

Four scenarios are modelled between 2026 and 2034. They range from unilateral EU implementation to combined EU-US action, wider coverage of downstream manufacturing and a dual-expansion case combining more policy implementers with broader sectoral coverage.

The strongest simulated effects appear when both geography and sectoral reach expand. Under that setting in 2034, China records an estimated social-welfare loss of about USD 27.4 billion, while emerging markets lose about USD 43.5 billion relative to the no-policy baseline. The United States, by comparison, gains roughly USD 22.9 billion, while EU welfare rises by about USD 4.3 billion.

These shifts emerge because carbon tariffs change terms of trade as well as production costs. Implementing economies initially face higher prices for imported intermediates, but broader tariff coverage and coordinated implementation can strengthen domestic producers enough for protection and terms-of-trade gains to outweigh those efficiency losses.

Production Moves Inward as Exporters Lose Ground

The industrial results show how quickly a climate instrument can become a production-location shock. As imported high-carbon goods become more expensive, firms in tariff-imposing economies substitute toward domestic suppliers, supporting output in protected sectors while reducing demand for foreign upstream producers.

Under the dual-expansion scenario, EU steel output rises by 8.39% relative to baseline, while US steel production increases by 6.95% and non-metallic mineral output by 7.31%. Emerging-market steel output falls by 4.90%, while energy production declines by 3.90%.

The pattern does not imply a simple contraction in global high-carbon production. Part of the effect is relocation. Some production shifts toward economies behind the carbon border rather than disappearing from the system, meaning the industrial geography of decarbonisation becomes as important as the headline tariff itself.

China experiences smaller percentage declines in several sectors because its large domestic market and broader export base absorb part of the shock. Even so, the study stresses that smaller percentage movements can still represent substantial absolute reductions given the scale of Chinese production.

Trade flows also begin to reroute. China's high-carbon value-added outflows fall from about USD 121.2 billion under baseline conditions to roughly USD 107.6 billion in the dual-expansion scenario. Some blocked trade shifts toward economies outside the tariff regime, while intra-regional flows inside implementing markets become stronger.

The emerging picture is one of regionalisation rather than complete deglobalisation. Production does not stop crossing borders, but supply chains become more clustered around policy blocs, alternative markets and jurisdictions with lower exposure to carbon-border charges.

Developing Economies Risk Losing Position, Not Just Export Volume

The study's strongest development-policy finding concerns the structure of global value chains. Carbon tariffs do not merely reduce trade at the margin; they can change which economies occupy upstream or downstream roles and how much domestic value added they contribute to international production.

China's forward participation in global value chains falls from −0.68% under unilateral EU implementation to −1.63% under the most expansive scenario. Emerging markets also record declining forward participation as their role as suppliers of intermediate goods weakens.

Implementing economies move in the opposite direction. EU forward participation remains positive across all simulated settings, while the United States turns positive once it becomes a tariff implementer. The shift reflects greater reliance on domestic inputs and a larger share of domestic value added circulating through their own export systems.

For developing economies, the concern is strategic because manufacturing upgrading often depends on climbing from lower-value production toward more valuable positions within international supply networks. If carbon tariffs weaken upstream supply advantages before firms can decarbonise, existing industrial-development pathways may become harder to sustain.

The study also suggests that the burden will not fall evenly across the Global South. Economies with stronger carbon-pricing systems, cleaner industrial processes, greater financing capacity and more diversified markets may be better positioned to adapt. Countries reliant on a narrow range of carbon-intensive exports could face much larger adjustment pressures.

Domestic carbon pricing becomes more than an environmental instrument. The authors argue that stronger national carbon markets can reduce the gap between domestic and foreign carbon costs, retain more carbon-pricing revenue at home and reduce exposure to border charges imposed elsewhere.

A Greener Trade System Could Also Become a More Fragile One

Supply-chain resilience weakens across much of the modelled system as firms reorganise procurement. The study measures resilience through the geographic diversification of foreign value-added sources and changes in production length relative to the baseline.

Under the dual-expansion scenario, source diversification declines by 0.335% in China, 0.606% across emerging markets and 0.768% in the rest of the world. Production networks also move further away from their original configurations, indicating deeper restructuring as firms react to tariff exposure.

A more regional production system may reduce reliance on particular foreign suppliers, but it can also leave firms dependent on fewer remaining sources. Concentration creates vulnerability when another disruption hits the same suppliers, transport routes or policy blocs.

The results, hence, complicate the assumption that shorter or more domestic supply chains are automatically safer. Resilience depends on the availability of substitutes, diversity of sourcing and the ability to reconfigure production when conditions change, not simply on geographic proximity.

For emerging economies, the authors recommend deeper regional industrial cooperation, more diversified trade routes and greater participation in green-technology and low-carbon infrastructure partnerships. Such measures could reduce dependence on individual export markets while supporting industrial adjustment.

Policy-implementing economies also face trade-offs. The study warns that tariff protection can strengthen domestic high-carbon industries, meaning border measures should be paired with genuine technological upgrading rather than used primarily as shields against foreign competition.

Greater international coordination could reduce some of these tensions. Transparent carbon-accounting standards, recognition of carbon prices already paid abroad and differentiated transition periods could make border measures less disruptive while preserving incentives to decarbonise.

The study has important limits. Its results come from model simulations and depend on assumptions about economic growth, trade substitution, policy expansion and future carbon prices. Sector aggregation also means some regulated products are represented through broader industry categories rather than exact commodity-level data.

The model does not calculate changes in total physical carbon emissions or directly estimate carbon leakage. Its findings show how economic structures may respond to carbon tariffs, not whether those tariffs ultimately deliver the intended global emissions reductions.

That said, the key policy message is still relevant. Carbon border measures are becoming part of the architecture of climate governance, but they are simultaneously reshaping industrial competitiveness and the distribution of value across countries.