Abstract
One of the standard- for some economists, the deepest and most beautiful- results of international trade is that free trade will benefit all participants. That is why trade liberalization is considered to be a very important step towards development by many economists and politicians. Nevertheless, as indicated by Corden (1974), “Theory does not ‘say’ that ‘free trade is best’. It says that given certain assumptions, it is ‘best’.” As environmental problems were not a big concern at the time when Samuelson’s gains from trade arguments were introduced (see, for example, Samuelson 1962), one such (implicit) assumption was that the environmental impact of trade liberalization policies could be neglected. With the recent emergence of environmental consciousness, the gains from trade argument is being questioned deeply from an environmental perspective by taking the environmental impact of freer trade into consideration. As Dean (1992) puts it, at the center of debate is whether or not the trade reforms will lead to depletion of non-renewable resources and increased environmental degradation, i.e. a type of development which can not be sustained. Thus, it is essential to identify the environmental consequences of trade liberalization. This is a quite demanding task.
A complex web of interactions between trade liberalization and environmental quality makes it difficult to draw clear-cut conclusions. One needs to consider following set of issues: (i) whether as a matter of positive economic analysis one can predict whether a move to trade liberalization, all else constant, will degrade the environment; (ii) how such a prediction might be affected if trade liberalization is accompanied by endogenously determined environmental policies; (iii) whether environmental policies are affected by strategic trade considerations; (iv) whether empirical evidence supports the predictions of economic analysis; and finally, (v) how all these concerns are affected in case of an environmental problem with international dimension, that is to say, transboundary (or transnational) pollution. The level of environmental degradation is determined by (i) the level of economic activities (consumption–production) and (ii) the presence, stringency and implementation of national environmental policies. Some environmental problems are consumption-based, and pollutants are generated during or after consumption, such as waste packages, bottles etc. Most other environmental problems are generated during the production process. Obviously, international trade by itself is not a direct source of environmental degradation or improvement. It may be considered as an indirect source due to its potential impact on consumption and production, and on national environmental policies. This potential impact depends on many country-specific factors, and thus, can be sometimes positive and sometimes negative. As a general guideline, the impact of trade liberalization on the environment can be decomposed into three parts: the scale effect, which represents changes in the size of economic activities; the composition effect, showing changes in the bundle of goods being produced; and the technique effect, representing changes in the production technology, mainly adoption of cleaner technology. In general, scale effect tends to increase the amount of environmental degradation, technique effect lowers it; the sign of composition effect depends on the comparative advantages of the countries, and thus, may be positive in some cases and negative in others. Thus, trade liberalization will generate positive environmental consequences if technique effect outweighs the scale and composition effects (in case of a country with comparative advantage in dirty industries) or if technique effect together with composition effect outweighs the scale effect (in case of a country with comparative advantage in clean industries). Thus, a universal conclusion related to the environmental impact of trade liberalization will be dubious. Rather, interactions between trade liberalization and environmental quality depend on country-specific factors, and the existing institutional structures, especially related to the environment. We may list following set of factors as the key determinants of this interaction: (i) whether the country in consideration is a developed or developing one (demand for environmental quality is a positive function of income); (ii) the comparative advantage of the country implementing liberalization policies; (iii) resource intensity of the traded product and the property-rights structure associated with the use of the resource; (iv) existence and implementation of environmental policies during trade liberalization; (v) whether environmental policies are affected by strategic trade considerations; (vi) whether environmental externality is consumption or production-based; and (vii) type of the pollution, transnational or local. In fact, all these issues can be considered as the points of departure among the studies in this literature, and naturally, they may be seen as the main constituents of the contrasting results in different theoretical and empirical studies. Due to differences in the environmental policy stringency levels between developed and developing countries, most developing countries will have comparative advantage in pollution intensive goods; thus, production of these goods may easily shift to the developing countries following trade liberalization policies, and consequently, will result in increased pollution both locally and globally. It has been shown strongly that the differences in pollution policies would generate incentives to trade, and one should seriously consider further environmental deterioration in countries with lax regulations following trade liberalization. Therefore, from an environmental perspective, it is important that trade liberalization policies should be accompanied by some kind of “harmonization” of environmental policies across countries; however, given the disagreements between developing and developed countries on the process towards “harmonization”, this seems to be not very plausible at this point. We should also note that “harmonization” of policies should not be understood as one-to-one matching of policies across countries. Differences in country characteristics such as assimilative capacity, have to be taken into consideration. Removal of tariffs in highly protected polluting industries in developing countries or removal of export subsidies in those sectors will open ways for improved environmental quality; however, this kind of trade liberalization policies can not be easily implemented by the governments of developing countries as it implies loss of competitiveness, and so, of jobs in these industries in developing countries. To make this shift possible, some kind of trade adjustment programs between developed and developing world seems to be required.
Environmental quality is a normal good and demand for higher environmental quality will rise with increases in income. The current environmental awareness in developed countries is mainly due to increased income levels. For developing countries, the policies generating higher economic growth (including trade liberalization) are therefore important from an environmental perspective; however, developing countries do not need to repeat the “environmental mistakes” of developed countries. It is wrong to assume that trade liberalization can only be achieved in the framework drawn by the current GATT rules. It will be much better if free trade targeting of the GATT is changed to sustainable free trade. Short term expansion of GATT articles for the protection of the environment and the transformation of GATT into GATE (General Agreement on Trade and the Environment) over the long term emerge as an important policy. The key factors in the design of GATE will be to generate a consensus for treating trade and the environment equally, and to allow for a functional trade system with utmost environmental quality. Our paper will try to highlight important aspects of trade and environment literature in order to identify the guiding principles and the institutional framework for a potential transformation in the conventional regulations related to international trade.
Studies on trade and environment are very valuable as both trade and environment are essential components of modern life. As stated very nicely in Ekins et al. (1994), “If the world’s trading system were to collapse, doubtless much hardship and suffering would result. But, if the global environment were to collapse, the result would be much worse.” Thus, we need policies that will not sacrifice environment for trade and trade for environment. It is very vital to develop the institutions and the framework for environmentally sustainable trade, and research towards this goal should be given priority and support.
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