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International International Trade and the Trade and the Environment Environment Jeffrey Frankel Jeffrey Frankel Harpel Professor, Harvard University Harpel Professor, Harvard University A Report for the Swedish A Report for the Swedish Globalisation Council, Globalisation Council, Government of Sweden Government of Sweden January 20, 2009, Stockholm January 20, 2009, Stockholm

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Page 1: Environmental Effects of International Trade - · PPT file · Web viewMutual respect Drafters in Kyoto and Geneva showed more consideration for each other than the ... 0.29 -4.00

International Trade and International Trade and the Environmentthe Environment

Jeffrey FrankelJeffrey FrankelHarpel Professor, Harvard UniversityHarpel Professor, Harvard University

A Report for the Swedish Globalisation Council,A Report for the Swedish Globalisation Council,Government of SwedenGovernment of Sweden

January 20, 2009, StockholmJanuary 20, 2009, Stockholm

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The anti-globalization movementThe anti-globalization movement• Ten years ago some protestors at the Seattle WTO

Ministerial meeting, launching the first of the big anti-globalization demonstrations, wore turtle costumes.

• They felt that a WTO panel had, in the name of free trade, negated the ability of the US to protect sea turtles,– simultaneously undermining

national sovereignty &– the international environment.

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Central questionsCentral questions• Is trade good or bad for the environment?• Does globalization help or hurt in achieving

the best tradeoff between environmental and economic goals?– Do international trade & investment allow

countries to achieve more economic growth for any given level of environmental quality?

– Or do they damage environmental quality for any given rate of economic growth?

• Do the WTO & environment conflict?• How can globalization best be harnessed?

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Symmetric fearsSymmetric fears

• Free traders fear that talk about environmental protection will be used as an excuse by some economic sectors to gain protection for themselves against competition from abroad.

• Environmentalists fear that talk about free trade will be used as an excuse to give inadequate weight to environmental goals and excessive weight to maximization of GDP.

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Is trade itself good or badIs trade itself good or badfor the environment?for the environment?

• There are many possible effects of trade.• They can be categorized according to

– whether they operate • via GDP, just like investment, technology,

& other sources of economic growth, • or whether they are peculiar to trade alone,

and hold for a given level of GDP. – Within each category, there are effects both

• beneficial for the environment, • and detrimental.

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Is trade itself good or badIs trade itself good or badfor the environment, in theory?for the environment, in theory?

Environmental effects of trade

via growth in income:

for a given level of income :

Harmful effects larger scale of economic activity

“Race to the bottom” in national regulation

Beneficial effects

shifts to cleaner techniques and composition of economic activity

“Gains from trade”: ratcheting up standards, consumer power innovation,

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Globalization

Protectionism

THE IMPOSSIBLE TRINITY OF GLOBAL ENVIRONMENTAL REGULATION

Environmental standards

National sovereignty

Unregulated emissions

Multilateral governance

RACE TO THE BOTTOM

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SOSO22 concentrations tend to fall with openness concentrations tend to fall with openness,,especially after controlling for democracyespecially after controlling for democracy,, cross-country cross-country

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COCO22 emissions/cap tend, if anything, to rise emissions/cap tend, if anything, to rise with opennesswith openness

CO2 Emissions vs. Trade Openness (ave data 1991 and 1992)

0

5

10

15

20

25

30

0 100 200 300 400Trade Openness

CO

2 Em

issi

ons

per

Cap

ita

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But these rough correlations tell us little.But these rough correlations tell us little.

• To isolate the effect of trade on a country’s environment, we need to control for other determinants, such as– income– democracy– population density.

• Econometric analysis – Frankel and Rose, 2004Frankel and Rose, 2004

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Is trade itself good or badIs trade itself good or badfor the environment, statistically?for the environment, statistically?

Source: Frankel and Rose, Source: Frankel and Rose, R.Ec.& StatsR.Ec.& Stats., 2004., 2004

Environmental effects of trade (1990)

via growth in income:

for a given level of income:

for SO2concentrations

EKC: after an income of about $5,700/cap., further growth tends to reduce pollution (via national regulation)

The favorable effects of trade seem to dominate

for CO2emissions / capita

No sign that total emissions ever turn down. (CO2 is a global externality: little regulation is possible at the national level)

Trade may also increase emissions even for a given level of income

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Do harmful or beneficial effects of trade dominate Do harmful or beneficial effects of trade dominate for environmental goals? Bottom lines:for environmental goals? Bottom lines:

• For SO2 – at low incomes, harmful effects (EKC) work

against beneficial effects – at high levels of income, trade helps through

both channels. • For CO2

– Even at high levels of income, trade continues to hurt. <= Absent an effective multilateral treaty, the popular will cannot be enacted.

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I have now updated this I have now updated this econometric analysiseconometric analysis

• for my Swedish Globalisation Council paper --• putting together data from 1990-2004,• for 158 countries.

• EKC (inverted U) shows up for PM10 & CO2 emissions, and water pollution.

• Trade still appears to worsen CO2.

• Again, the obvious explanation is the lack of a comprehensive global climate agreement.

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We now have the Kyoto ProtocolWe now have the Kyoto Protocol

But it lacks: • Provisions for targets in future years• Targets for US, China & other developing countries• An enforcement mechanism

– including an incentive for holdouts to join, and– enforcement of the agreement.– Could trade sanctions be the mechanism?

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Possible application of trade barriersPossible application of trade barriers by US climate change legislation:by US climate change legislation:

• The serious Climate Change bills introduced in the 110th Congress called for some border adjustment: – tax applied to fossil fuel imports or – energy-intensive imports require permits.

• Washington may not realize that the US is likely to be the victim of legal sanctions before it is the wielder of them.

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Possible application of trade barriersPossible application of trade barriers by EUby EU::

Directive of the European Parliament Directive of the European Parliament & of the Council, & of the Council, Paragraph 13,Paragraph 13, amending Directive 2003/87/EC so as to improve and extend amending Directive 2003/87/EC so as to improve and extend the EU greenhouse gas emissions allowance trading system; Brussels, Jan. 2008:the EU greenhouse gas emissions allowance trading system; Brussels, Jan. 2008:

• “Energy-intensive industries which are determined to be exposed to significant risk of carbon leakage could receive a higher amount of free allocation, or

• an effective carbon equalization system could be introduced with a view to putting EU and non-EU producers on a comparable footing. Such a system could apply to importers of goods requirements similar to those applicable to installations within the EU, by requiring the surrender of allowances.”

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Would carbon-import penalties be Would carbon-import penalties be compatible with the WTO?compatible with the WTO?

Question (1):GHG emissions are generated by so-called

Processes and Production Methods (PPMs). Does that rule out trade measures against them?

Question (2):What specifics of trade control design are

appropriate?

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Precedent (1): Montreal Protocol on Precedent (1): Montreal Protocol on stratospheric ozone depletionstratospheric ozone depletion

• Trade controls had two motivations: – (1) to encourage countries to join, and – (2) if major countries had remained outside,

would have minimized leakage, the migration of production of banned substances to nonparticipating countries .

– In the event (1) worked, so (2) not needed.

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Precedent (2): The true meaning of the Precedent (2): The true meaning of the 1998 WTO panel shrimp-turtle decision1998 WTO panel shrimp-turtle decision

• New ruling: environmental measures can target, not only exported products (Article XX), but also partners’ Processes & Production Methods (PPMs),

• subject, as always, to non-discrimination (Articles I & III).

• US was able to proceed to protect turtles, without discrimination against Asian fishermen.

• Environmentalists failed to notice or consolidate the PPM precedent.

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Precedent (3): In case there is any doubt that Precedent (3): In case there is any doubt that Article XX, which uses the phrase “health and Article XX, which uses the phrase “health and conservation,” applies to climate change, …conservation,” applies to climate change, …

• A 3rd precedent is relevant:• In 2007, a WTO Appellate Body decision regarding

Brazilian restrictions on imports of retreaded tires confirmed the applicability of Article XX(b):

• Rulings “accord considerable flexibility to WTO Member governments when they take trade-restrictive measures to protect life or health… [and] apply equally to … measures taken to combat global warming.”

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• Central message: border measures to address leakage need not necessarily violate sensible trade principles or the WTO,– but there is a great danger that they will in practice.

• The danger: If each country imposes border measures in whatever way suits national politics, – they will be poorly targeted, discriminatory, and often

disguisedly protectionist.– they will run afoul of the WTO, and will deserve to.

• We need a multilateral regime to guide such measures.

• Some subjective judgments as to principles that should guide design of border measures…

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Appropriate border adjustments could be tariffs Appropriate border adjustments could be tariffs or, or, equivalently, a requirement that importers surrender tradable permits.equivalently, a requirement that importers surrender tradable permits.

Guiding principles include:Guiding principles include:

• Measures should follow guidelines multilaterally-agreed among countries participating in the targets of KP & its successors.

• Judgments as to findings of fact (who is complying, etc.) should be made by independent expert panels.

• Measures should only be applied by countries that cut their own emissions in line with the KP & its successors, against countries not doing so due to either refusal to join or failure to comply.

• Import penalties should target fossil fuels, and a half dozen of the most energy-intensive major industries: aluminum, cement, steel, paper, glass, and perhaps iron & chemicals.

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Summary of conclusionsSummary of conclusions• My report considers whether globalization

has damaged environmental goals, – either among open countries in general (through

a “race to the bottom” in environmental regulation) or

– in certain countries (“pollution havens”). – Such effects are plausible in theory, but empirical

studies of cross-country data find no detrimental effects of trade on some measures of environmental degradation such as SO2 air pollution, controlling for income.

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Summary of conclusions,Summary of conclusions, continuedcontinued

• Thus globalization and the environment need not necessarily be in conflict. – Trade & growth give countries the means to

clean the air, • provided they have effective institutions of

governance in place.• For local air pollution, the appropriate

governance is at the national level.

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Summary of conclusions,Summary of conclusions, continuedcontinued

• But the evidence does suggest that trade & growth can exacerbate other measures of environmental degradation, particularly CO2 emissions.

• The difference can be explained by the observation that CO2 is a global externality– which cannot be addressed at the national level

due to the free rider problem. – We need institutions of governance at the multilateral level.– These have not been in place, at least until recently.

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The solutionThe solution

• Greater international cooperation on environmental and trade issues,

• so that we can get the best of both.• Very specifically, the Copenhagen

Conference of Parties should negotiate guidelines for penalties on carbon-intensive imports that countries are allowed to impose on each other.

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The author acknowledgesThe author acknowledges

• capable research assistance by Danxia Xie;• valuable input from Joseph Aldy, Scott Barrett,

Jagdish Bhagwati, Thomas Brewer, Steve Charnovitz, Arik Levinsohn, Gary Sampson and Robert Stavins;

• useful comments on the first draft from Pontus Braunerhjelm, Prasanth Regy, Rob Stavins, Helena Svaleryd, and Danxia Xie;

• and support from – a Faculty Grant in Sustainability Science from

Harvard’s Center for Intenational Development, – as well as from the Government of Sweden.

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AppendicesAppendices

• WTO– Seattle demonstrators – Language regarding environment– Panels

• Characteristics of carbon-intensive import penalties

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WTO protests.WTO protests.Why did they march together in Seattle?Why did they march together in Seattle?

Category of demon-strator

Claimedconsti-tuency

True position of constituency

Protestor in turtle costume

Environ -ment

In favor of the Kyoto Protocol

Labor union official

Organized labor

Against the Kyoto protocol; in favor of keeping out cheap imports from poor countries

NGO volunteer

Poor countries

In favor of selling their goods to rich countries; in favor of Kyoto protocol if it exempts them from commitments.

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Mutual respectMutual respect• Drafters in Kyoto and Geneva showed more consideration

for each other than the rank & file of environmentalists and free traders.

• The Kyoto Protocol text: – Parties should “strive to implement policies and measures...to

minimize adverse effects on international trade...” ; – FCCC features similar language

• WTO regime is equally solicitous of the environment:– Article XX allows exceptions for health & conservation– Preamble to 1995 Marrakesh Agreement establishing WTO seeks

“to protect and preserve the environment;” – 2001 Doha Communique starting new round of negotiations: “the

aims of ... open and non-discriminatory trading system, and acting for the protection of the environment ... must be mutually supportive.”.

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Typical WTO panel casesTypical WTO panel cases• Tariffs or other measures that discriminate against

producers in some trading partners, – either in favor of other trading partners

(potential violation of MFN principle of Article I) or – in favor of “like products” from domestic producers

(potential violation of national treatment provision of Article III).

• If targeted country files a WTO complaint alleging such a violation, the question is whether the measure is permissible under Article XX – which allows for exceptions to the non-discrimination principles for

environmental reasons (XXb), – provided that the measures in question are not “a means of arbitrary

or unjustifiable discrimination” or a “disguised restriction on international trade.”

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I classify characteristics of possible border I classify characteristics of possible border measures into 3 categories, named by color:measures into 3 categories, named by color:

(1) “White” category: those that seem reasonable & appropriate.

(2) “Black” category: those that seem dangerous, in that they are likely to become an excuse for protectionism.

(3) “Grey” category: those that fall in between.

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French President Sarkozy:French President Sarkozy: • “…if large economies of the world do not engage

in binding commitments to reduce emissions, European industry will have incentives to relocate to such countries…The introduction of a parallel mechanism for border compensation against imports from countries that refuse to commit to binding reductions therefore appears essential,– whether in the form of a tax adjustment or – an obligation to buy permits by importers.

• This mechanism is in any case necessary in order to induce those countries to agree on such a commitment.” letter to Barroso, January 2008

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Black (inappropriate) border Black (inappropriate) border measures include:measures include:

• Unilateral measures applied by countries that are not participating in the Kyoto Protocol or its successors.

• Judgments as to findings of fact made by politicians, vulnerable to pressure from interest groups for protection.

• Unilateral measures to sanction an entire country.• Import barriers against products that are removed from

the carbon-intensive activity, such as firms that use inputs that are produced in an energy-intensive process.

• Subsidies -- whether in the form of money or extra permit allocations -- to domestic sectors that are considered to have been put at a competitive disadvantage.

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The Gray (intermediate)The Gray (intermediate)measures include:measures include:

• Unilateral measures that are applied in the interim before there has been time for multilateral negotiation over a set of guidelines for border measures.

The import penalties might follow the form of existing legislation on countervailing duties (CVDs).