The Economics of International Trade and the Environment

Amitrajeet A Batabyal,Hamid Beladi

• Verlag: CRC Press
• Jahr: 2001
• ISBN:
  9781000738261
• Auflage: 1
• Thema: Economics
• Thema: Environmental Economics

Issues related to environmental protection and trade liberalization have moved to the forefront of international policy agendas. The Economics of International Trade and the Environment explores - from an economic standpoint - many of the questions that are germane in increasing our knowledge of environmental policy in the presence of international

1	Introduction and Overview of the Economics of International Trade and the Environment^1 Amitrajeet A. Batabyal and Hamid Beladi

We describe the theoretical and empirical contributions that rigorous economic analysis can make to improve our understanding of the salient issues relating to environmental protection in the presence of international trade. We do this by analyzing and summarizing the intellectual contributions of nineteen theoretical and empirical papers about the nexuses between environmental and trade policy.

Key words: economic theory, environmental policy, game theory, trade policy

JEL classifications: F10, F13, Q20

A. PRELIMINARIES

There is no gainsaying the fact that the subject of trade, particularly international trade, has been central to economic thinking for well over two centuries. Beginning with the seminal work of Adam Smith (1776) and continuing with the well-known work of David Ricardo (1817), economists have generally considered unfettered international trade to be a source of many gains. For instance, with regard to trade² with more efficient countries, economists have used the notion of comparative advantage to demonstrate that two nations can trade to their mutual advantage even when one of these two nations is more efficient than the other at producing everything. In addition to this, economists have shown that international trade is salutary because it allows nations to export goods whose production makes relatively heavy use of resources that are plentiful nationally while importing goods whose production makes heavy use of resources that are scarce nationally. Finally, economists have pointed out that international trade permits nations to specialize in producing a narrower range of goods, thereby permitting them to enjoy the greater efficiencies of large-scale production.³

Despite this demonstration of the many gains from international trade, in recent times the desirability of free trade has been questioned by several groups of people. Environmentalists in particular, disheartened by the General Agreement on Tariffs and Trade (GATT) ruling in favor of Mexico and free trade and against the United States and the apparent welfare of the dolphin, have been aggressive in pointing out what they believe to be the many problems with free trade.⁴ Some, such as D. Morris (1990), have even referred to free trade as the great destroyer.⁵

Why do environmentalists and other like-minded people object to free trade? To comprehend this, consider three issues that have been raised by the opponents of free trade.⁶ First, there is the specialization issue. It has been pointed out that with free trade, some nations may end up specializing in the production of pollution-intensive goods. Not only will this lead to greater environmental degradation in these nations but it is also likely to lead to substantial welfare losses in the same nations.

Second, it has been claimed that unfettered international trade will encourage trade in hazardous substances, with the developed nations of the world typically exporting such substances to the developing nations of the world. The recipients of such substances are generally ill-prepared to handle them; moreover, it has been said that this kind of trade will only encourage cost-conscious Northern corporations to export environmental problems to the nations of the South.

Finally, there is the interjurisdictional competition issue. Because all governments are interested in attracting mobile factors of production to their own nations and because it is costly to comply with stringent environmental regulations, governments may deliberately lower their environmental regulations in order to attract these mobile factors of production. This is likely to lead to suboptimal levels of environmental regulation throughout the world.

Recognizing the salience of these issues pertaining to international trade and the environment, the chapters in this book explore, from an economic standpoint, many of the questions that are germane to increasing our knowledge of environmental policy in the presence of international trade, and trade policy in the presence of environmental externalities. What can economic theory tell us about the connections between environmental and trade policy? This is the general question that is addressed in Chapters 2 through 11 that comprise Part B of this book. The tools of game and microeconomic theory are used efficaciously by the authors to analyze diverse issues such as the effects of international trade in waste products in the presence of illegal disposal, the nature of environmental policy when market structure and plant locations are endogenous, and ecological dumping.

The authors of Chapters 12 through 20 apply economic theory to practical settings to ascertain, inter alia, the extent to which this theory can inform actual policy decisions about problems at the interface of international trade and the environment. This section of the book focuses on topics such as the impact of industrial pollution abatement on a nation’s balance of trade, the German tax initiative in which carbon taxes with exemptions were used to combat carbon dioxide (CO₂) emissions, and the effects of the North American Free Trade Agreement (NAFTA) on Mexico’s environmental policies.

B. THEORY

Given recent discussions about the desirability of instituting environmental policies to deal with transboundary pollution, it is salient to ascertain how transboundary pollution flows, production, factor prices, and the terms of trade are affected by alternate pollution control policies. This question is addressed comprehensively by John Merrifield in Chapter 2. Merrifield analyzes the effects of production taxes and best available control technology standards in a two-country, static, general equilibrium model. Unsurprisingly, this analysis shows that in an international setting, neither country is able to use policies unilaterally to deal with transboundary pollution effectively. More interestingly, comparing the pros and cons of two pollution control instruments, Merrifield shows that a production tax (a domestic policy instrument) can actually have a perverse effect on pollution. In particular, the use of a production tax to control pollution can actually increase pollution.

If domestic policies cannot always be relied upon to control external diseconomies, then can one rely on trade policies to control externalities? This question is the subject of the interesting Chapter 3 by Brian Copeland. Copeland analyzes this question in the context of international trade in waste products. He shows that there are two circumstances in which the use of trade policies to restrict trade in waste can be welfare improving. First, when the waste disposal sector is not taxed optimally, a policy that restricts foreign waste disposal is optimal in a second-best sense. Second, in the presence of illegal waste disposal, a trade tax, when used to supplement a production tax, can improve welfare. This is because the trade tax reduces both the flow of waste and the fraction of waste that is illegally disposed.

Because Copeland works with a single-country model, his analysis does not account for the strategic aspects of the use of a trade tax to control waste disposal. The strategic aspects of environmental policy are nicely studied by James Markusen et al. in Chapter 4. These authors use a two-country, two-firm, three-good model with increasing returns and pollution to examine the links between environmental policy, plant location, and market structure. Their model permits polluting firms to alter the number and locations of their plants in response to specific environmental policies, and general equilibrium is found as the solution to a two-stage game. In this setting, two key results are obtained. First, it is shown that when firm-specific fixed costs are high (low) and plant-specific fixed costs are low (high), a multi-plant (single-plant) market structure is likely to emerge. Second, the authors convincingly argue that when setting pollution taxes, regulators need to account for the endogeneity of the market structure to environmental policies.⁷

Like Chapter 4, Chapter 5 also focuses on the strategic aspects of environmental policy in an international setting. In this important chapter, Michael Rauscher tells us that two interpretations can be given to the notion of ecological dumping. With these two interpretations in place, Rauscher identifies the economic motives for engaging in ecological dumping. His analysis tells us that ecological dumping can be rationalized by appealing either to strategic trade policy arguments or to lobbying arguments. Rauscher favors the latter argument. As he explains, even though it is not always true, in actual policy settings most exporting producers believe that less stringent environmental regulations will help them. This provides a rationale for employing lobbyists who will press for relaxed environmental regulations. In turn, if these export lobbies are more powerful than other lobbies, then this provides a possible explanation for ecological dumping.

Rauscher’s less favored strategic trade policy arguments are elaborated upon by Scott Barrett in Chapter 6. In particular, Barrett poses and answers the salient question, “When does it make sense for governments to set weak environmental standards?” Using a model that is a stage game involving two governments and their industries that sell their output in a third market, Barrett shows that the domestic government will want to set weak environmental standards when the domestic industry is a monopoly, the foreign industry is imperfectly competitive, and firms engage in Cournot competition. More significantly, Barrett points out that this finding is not robust. Specifically, if the domestic industry is oligopolistic or if firms engage in Bertrand competition, the incentive to weaken environmental standards is itself weakened and may even disappear completely.

From Barrett’s analysis in Chapter 6, it is clear that in order to develop optimal environmental policies, one needs to comprehend the nexuses between markets and the environment. But, what about institutions such as property rights ? In particular, what role do property rights play over environmental resources in encouraging or hindering trade between nations? This question is ably addressed by Graciela Chichilnisky in Chapter 7.⁸ To conduct her analysis, Chichilnisky uses a two-factor, two-good, two-country model in which the environment — which is one of the factors of production — is owned as unregulated common property in one country (the South) and is owned as private property in the second country (the North). In this setting, Chichilnisky establishes two results. First, she shows that differences in the property rights regime in otherwise identical countries is sufficient to create North–South trade. Second, it is shown that this trade will result in excessive use of the environment in the South. To correct this excessive use, Chichilnisky recommends the use of property rights policies rather than taxes in the South.

A North–South world is also the setting of the Chapter 8 analysis of trade and transboundary pollution by Brian Copeland and Scott Taylor. However, here the difference between the Northern and the Southern countries is that the Northern countries are human capital-abundant relative to the Southern countries. In this setting, three significant results are shown to hold. First, in an equilibrium with factor price equalization, Northern countries lose from trade, Southern countries gain from trade, and trade does not affect world pollution. Second, in an equilibrium without factor price equalization, pollution in the North declines with trade, pollution in the South rises with trade, and world pollution is higher in the presence of free trade. These two results are valid when there is a large number of countries. As one would expect, when there is a small number of countries, the possibility that countries will want to use environmental policy strategically, i.e., to improve their terms of trade, must be considered. In this small-numbers case, Copeland and Taylor show that whereas the Southern countries would prefer that environmental policy not be used as an instrument of trade policy, the Northern countries would like to have a regime that permits environmental policy to be used as an instrument of trade policy.

Additional issues relating to this small-numbers case are analyzed by Alistair Ulph in Chapter 9. Specifically, Ulph revisits the subject of Chapter 5, ecological dumping. However, unlike Michael Rauscher in Chapter 5, Ulph favors a strategic trade policy interpretation of ecological dumping. He uses a partial equilibrium model in which there are two producers of a homogeneous good, and each firm is located in a different country. Because Ulph’s focus is on symmetric equilibria, both producers and the relevant countries are identical. This construct is used by Ulph to obtain two interesting results about the nature of strategic policy formulation. First, it is shown that permitting producers to act strategically diminishes, but does not eliminate, the...

Inhaltsverzeichnis

• Cover
• Half Title
• Title Page
• Copyright Page
• Acknowledgement
• Editor
• Contributors
• Table of Contents
• Chapter 1 Introduction and Overview of the Economics of International Trade and the Environment
• Chapter 2 The Impact of Selected Abatement Strategies on Transnational Pollution, the Terms of Trade, and Factor Rewards: A General Equilibrium Approach
• Chapter 3 International Trade in Waste Products in the Presence of Illegal Disposal
• Chapter 4 Environmental Policy When Market Structure and Plant Locations are Endogenous
• Chapter 5 On Ecological Dumping
• Chapter 6 Strategic Environmental Policy and International Trade
• Chapter 7 North–South Trade and the Global Environment
• Chapter 8 Trade and Transboundary Pollution
• Chapter 9 Environmental Policy and International Trade When Governments and Producers Act Strategically
• Chapter 10 Wildlife, Biodiversity, and Trade
• Chapter 11 Games Governments Play: An Analysis of National Environmental Policy in an Open Economy
• Chapter 12 Industrial Pollution Abatement: The Impact on Balance of Trade
• Chapter 13 The Effects of Domestic Environmental Policies on Patterns of World Trade: An Empirical Test
• Chapter 14 Unilateral CO2 Reductions and Carbon Leakage: The Consequences of International Trade in Oil and Basic Materials
• Chapter 15 International Trade and Environmental Quality: How Important Are the Linkages?
• Chapter 16 Environmental and Trade Policies: Some Methodological Lessons
• Chapter 17 Carbon Taxes with Exemptions in an Open Economy: A General Equilibrium Analysis of the German Tax Initiative
• Chapter 18 The Environment and Welfare Implications of Trade and Tax Policy
• Chapter 19 The Impact of NAFTA on Mexico’s Environmental Policy
• Chapter 20 The Empirical Relationship between Trade, Growth, and the Environment
• Index