International Trade and the Environment Essay Example

International Trade and the Environment Paper Theworlds economies are Integrated through trade and capital mobility. Should environmental regulations be made more uniform in response to such global Integration ? Economists say not always, asserting that time and resources may be better spent defining and carrying out sound domestic environ mental policy. Environmentalists caution that free trade can be synonymous with sustainable development only if, inthe case of natural resources, environmental costs are internalized through such mechanisms as taxes and tradable pollution permits. The debate covers a wide range of issues-from pollution havens to the politi cal economy of trade in the west to the role of investment and technological change. To shed light on these issues, the World Bank hosted an international conference. Here are the main points emerging from the proceedings : The effects of growth and trade li beralization on environmental quality are ambiguous. But where appropriate envi ronmental policies are in place, where growth is associated with environmentally friendly technological change, or where trade liberalization reduces environmen tally destructive economic distortions or increases productive efficiency, the effects of increased growth on the environment are likely to be positive. Pollution intensity per capita appears to fall as income rises, but evidence of the relationship presented at the conference was based on industrial toxic emissions data, which reflect changes in economic structure (compositional effects) and not  the toxic intensity of manufacturing output. Toxic emissions continue to rise world wide. Fast-growing economies with liberal trade policies (such as Chile) have experi enced less pollution-intensive growth than closed economies (such as Bolivia and El Salvador). Again, this is a compositional effect. But the contrast between open and closed economies may be even more pro nounced if the relative toxic intensities within industry were taken Into account. There Is some evidence from the United States that when interest groups link demands for protection from import competition to environmental arguments, they enjoy a higher success rate in secur ing trade restrictions. The economic con sequences of this kind of strategy are gen erally unfavorable and the environmental effects at best uncertain. One example is a proposed amendment to the Clean AirAct that would have banned imports of elec tricity from Canadian power plants that did not meet new U.S. environmental stand ards (and that would have protected U.S. plants subject to less stringent rules). Pollution abatement and control ex penditures by firms do not appear to have had a significant effect on competitiveness in most industries, since these expendi tures represent a modest share of total costs. This suggests that national differ ences in environmental regulations have not been a major explanatory factor in the changing International location patterns of dirty industries. Moreever, rising costs of compliance with environmental standards tend to affect most countries. Dirty industries have expanded faster in developing countries than the av erage rate for all industries pber the past two decades and faster than in industrial countries. It is uncertain, however, whether this International pattern merely reflects growth or industrial migration as well.. It seems that firms have good rea son not to transfer dirtier technologies to lower-income countries when they invest in these countries. Evidence from the wood pulp industry shows that the rate of clean technology adoption and diffusion is higher in open economies than in closed ones. Trade Policy and Environmental Objec tives. We will write a custom essay sample on International Trade and the Environment specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on International Trade and the Environment specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on International Trade and the Environment specifically for you FOR ONLY $16.38 $13.9/page Hire Writer A key issues in environmental eco nomics is how best to protect the environ ment. Through command-and-control in terventions, such as trade restrictions and the use of pollution abatement funds ? Or through market-based solutions, such as industrial recycling and the diffusion of clean technology ? The tradition of direct control has dominated environmental policy in indus trial countries. Governments prefer direct commahd-and-control measures for sev eral reasons, according to Patrik Low and Raed Safadi. Regulation generally ensures more predictable outcomes. It assums the public of the governments commitment to environmental quality. And it provides public authorities with discretionary au thority over polluters. For these reasons, the shift to more more economically effi cient market interventions Is likely to be gradual, even in countries with the highest environmental standards. (Such marketbased policy alternatives have been re garded as an option only quite recently.) In comparing environmental and trade regulations across countries, most economists assume that the capacities to absorb emissions and other concentrations of pollutants vary and that social priorities differ. Differences in absorptive capacities give rise to a different structure of costs and benefits from pollution abatement and control activities and probably influence ^optimal resource depletion rates. Different social priorities (or discount rates) simply reflect the fact that not all societies em brace Identical environmental objectives. These two propositions may seem obvious and unexceptionable to econo mists,who thinkinterms ofscarcity, choice, and opportunity cost. But they are not so obvious to those who are tempted to assign an, infinite value to the environment. Differences in absorptive capacities and social preferences, allow the environ ment to be treated as an endowment or as a factor of production that is part of a country;s comparative advantage. Accord ing to Low and Safadi, it follows that envi ronmental standards and pollution abate ment and control activities will differ across countries, and there Is no valid, presump tion infavor of uniformityor harmonization. Harmonization ? Wide support exists in the environ mental community for unified action on the environment by all countries. The harmo nization of environmental standards would permitdirectcontrolof environmentalpolicy internationally, and as Nemat Shafik puts it, Harmony in environmental standards allows the imposition of extemal prefer ences without the disharmony of gunboat diplomacy. As already noted, differing absorptive capacities and social discount rates argue against uniformity as an inter national environmental pollicy goal. In considering such a goal, a distrinction must be made between prod uct standard and process standards. Product standars (relating to externalities in consumption) need to be enforced in the consuming jurisdiction irrespective of the source of the product. This means that harmonization occurs, at least for goods from all sources in a given market, al though not necessarily for those goods in all markets. Process standards (externali ties in production), however, should generally be specific to the location of pro duction. While calls for the harmonization of process standards are sometimes seen by economists as intrinsically protectionist, environmentalists disagree. Stewart Hud son asserts that such standards are In creasingly important, since they account for the life cycle of a product, beginning, with the extraction of natural resources and including the environmental ramifica tions of transport, marketing, packaging, consumption, and disposal. In sum, differences in environmen tal policy whether in standards or in en forcement capacities may not significantly affect a countrys advantage over a com peting trade partner. However, more re search is required. Even ifthe cost advan tages from these national differences are significant, this is no clear case for equaliz ing costs-or for the harmonization of standards. Growth, Trade, and Environmental Quality An important question, clearly in need of research, relates to the more dy namic aspects of the relationship between growth and trade liberalization on the one hand and environmental quality on the other. Discussing the links between growth and the environment in general terms, Marian Radetzki argues that increasing levels of economic activity are linked to improved environmental conditions. Ex plaining this relationship, he identifies as key factors the high income elasticity of demand for environmental quality, compositional shifts toward cleaner envi ronmental activities at higher income lev els, and the extension of property rights combined with the development of policies to deal with common global externalities in industrial countries. From a policy perspective, evidence that the pollutiori internsity/growth rela tionship goes the right way argues strongly  agains the adoption of antigrowth policies. Policies that factor in environmental exter nalities may well raise costs and reduce output clearly preferable to an uncritical pursuit of growth at any price. But adopting such an approach should be a matter of adjusting relative prices to reflect social costs and benefits, not of inveighing against increased economic activity because it carries environmental costs and consumes scarce resources. And once environmen tal policy interventions are contemplated, making the choice between more and less efficient alternatives becomes important from a welfare perspective, particularly when absolute pollution continues to rise and environmental crises occur. Ramon Lopez is less sanguine than many other economists about the extent to which technical progress can^ mitigate the environmental costs of increasing ,eco nomic activity, including that from trade liberalization. He presents a formal model that distingushes between growth with feedback effects (where pollution or re source depletion affects future production) and growth based simply on factor expan sion (where todays polluting activities do not affect tomorrows output). In the first case, there is an incentive to invest in the resource stock to protect its future value and so resource degradation or pollution may decrease with growth, particularly if appropriate ownership incentives are present. Where growth results simply from factor expansion with no allowance for technological change, the only way pollu tion can be reduced is through a reduction in output. Whither dirty Industries ? The intensity of pullution is beginr ning to level off In industrialcountries and is increasing in developing countries. Robert Lucas and others relate data on toxic emissions from the United States to cross-country manufacturing output and find that the intensity of emissions grew rapidly In developing countries during the  1970s and 1980s. So, dirty industries have certainly moved into developing countries, but have they migrated form industrial countries ? Increased toxic Intensity In de veloping countries may merely reflect dis persion, or industrial expansion, ratherthan migration. The toxic intensity of output declines as incomes rise only because the share of manufacturing in total output declines be yond a certain level of income. This is a compositional effect. There is no evidence that industry has left industrial countries. Neither is it apparent whether industries have chosen to locate in developing coun tries, rather than industrial countries, be cause of more lenient environmental regu lation. Patrick Low and Alexander Yeats use trade flow data as a proxy for shifts in the pattern of international industrial loca tion to examine how much dirty industries have migrated to developing countries over the past two decades. They identify 43 dirty industries based on the assumption that the higher the expenditures on pollu tion abatement and control, the dirtier an Industry. Trade data show that the share of dirty industry trade in total trade declined between 1965 and 1988, largely as a result of trends in industrial countries in the ex ports of many developing countries in creased. Low and Yeats supplemented that analysis with an examination of the re vealed comparative advantage (RCA) of 109 countries in the dirty industries. The RCA index measures whether the. share on a product in a countrys manufactured exports is proportionately larger than the share of that product in world trade in manufactures. If it is, the country is said to have a revealed comparative advantage in that product. Applying this Index to dirty industries showed a disproportionately large increase in the number of develop ing, countries with RCAs In most of the polluting industries. The rate at which de veloping countries acquired RCAs in dirty  industries in the period under study was four times greater than that of industrial countries and faster than the developing country average for all Industries. The faster, growth of dirty industries in lower-income countries may relate to such considerations as relative labor costs or natural resource endowments. Another possible explanation isthat particular kinds of industries, which happen to be relatively dirty, predominate in early stages of indus trial development. An issue in need of further research is whether firms that locate in low-income countries are dirtier than they would be If they located in industrial countries. Firms may wish to eschew this strategy even in it appeared that differences in environmen tal regulation offered a competitive advan tage. Reasons include fearof liabilityin the event of an environmental accident, the risk to a firms reputation from an environ mental scandal, the demends of consum ers (green consumerism) in export mar kets, anticipation of more stringent local environmental standards, and the relatively high costs of retrofitting aging capital equipment rather than starting out with top-of-the-line technology. Another is the cost of unbundling technology, such as the expense of shifting from cleaner produc tion processes to older, dirtier ones. processes to older, dirtier ones. Nancy Birdsall and David Wheeler show that dirtier industries tend to be lo cated in less open economies in Latin America. If economies with open trade re gimes attract more foreign investment than closed ones, these technological factors †¢are likely to be at work to a greater degree in the open economies. So, there may be an even stronger casse from an environ mental perspective for promoting liberal trading arrangements in developing coun tries than suggested by the industry compositon data alone. Birdsall and Wheeler presentsome anecdotal evidence from Chile of the positive link between openness and the transfer of environmen tally clean technology. International cooperation and the envi ronment. Looking at various aspects of inter national cooperation, Low and Safadi ar gue that trying to coerce countries into adopting particular environmental policies on the basis of unilateral objectives is un likely to raise environmental quality. Where punitive trade vestriction are involved, the costs of inefficiency associated with inap propriate interventions must also be con sidered. Environmental targets are more likely to be attained through cooperative arrangements that involve Incentives than through those that involve threats. Analyzing alternative policy ap proaches to dealing with international en vironmental externalities,. Ishac Diwanand Nemat Shafik demonstrate how, in a situa tion of less than perfectly functioning mar kets for capital and emissions, the opening of one market and not the other may lead to a harmful environmental outcome. This is an application ofthe theory ofthe second best. Diwan and Safik also establish the case for compensation, especially where industrial and developing country environ mental priorities differ, and where devel oping countries are expected to respond to industrial country concerns. While in dustrial countries worry about such issues as climate change and biodiversity, deve loping countries are much more preoccu pied with domestic problems such as health and local pollution. Making a careful analysis of alterna tive compensatory mechanisms, Diwan and Shafik look at current cash transfers, debtfornature swaps, technology transfers, and sanctions for nature (this is retaliatory or conditional ratherthan compensatory). The  only one of these mechanisms that is not accompanted by adverse side effects Is the transfer of clean or pollution-reducing technology. Under the assumptions of the model developed by Diwan and Shafik, the negative effects of inappropriate com pensatory menchanisms can be significant. This analysis stresses the importance of making efficient choice one a policy course has beeen decided on. Piritta Sorsa examines howthe rules of the General Agreement on Tariffs and Trade (GATT) deal with environmental Is sues. She explores the GAIT rules on border adjustments (nondiscrimlnation and national treatment), public policy excep tions, the standards codes, and rules on dumping, subsidies, .and countervailing duties. Sorsa concludes that, since trade itself is rarely the source of an environ mental problem, there Is little sense in using trade policy to address such prob lems. It seems that the GATT poses little threat to the pursuit of legitimate environmetnal objectives (in contrast to hidden protection). At most, the GATT may be in need of a little clarification, as with the rules on border adjustments, where an Incentive is provided for the suboptimal use of envi ronmental taxes. According to Stewart Hudson, one approach would be for the GATTand other international agreements and protocols to make reforms in anticipation of the trrend among nations to adopt process standards and trade measures that affect both natu ral resources and. manufactured goods. Rather than fight the tide, GATT and trade negotiators should work on how to avoid the use of process standards as protec tionist devices.