World trade and the environment

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  • WORLD TRADE AND THE ENVIRONMENT

    Paul Ekins Department of Economics, Birkbeck College, University of London

    This article looks at the background to the current debate about trade and the environment, before considering the possible environmental impacts of trade. Several reasons are identified as to why increased trade may impact negatively on the environment, if appropriate domestic and international policies are not in place. Yet, with regard to the former, GATT discourages such policies where they act as non-tariff barriers to trade, and corporations oppose such policies where they are perceived to reduce international competitiveness. The latter are extremely difficult to conclude. Such considerations mean that an indiscriminate thrust towards trade liberalization could seriously hinder moves towards environmental sustainability. The article concludes by setting out a different approach that seeks to secure the benefits of orderly world trade in a context that puts environmental sustainability first.

    BACKGROUND

    The eminent trade theorist Jagdish Bhagwati is afraid that the worlds trading system i s at risk, a situation he views with great alarm. It i s also an almost undisputed fact that the global environment i s at risk, expressed thus in a joint statement by the U K Royal Society and the US National Academy of Sciences:

    Unrestrained resource consumption for energy production and other uses ... could lead to catastrophic outcomes for the global environment. ... Mans own prospects for achieving satisfactory living standards are threatened by environmental deterioration, especially in the poorest countries where economic activities are most heavily dependent upon the quality of natural resources.

    If the worlds trading system were to collapse, doubtless much hardship would result. If the global environment were to collapse, the result would be much worse. Insofar as the worlds trading system leads to unrestrained resource consumption that risks catastrophic environmental damage, its operation is a serious cause for concern. Proposals for environmentally sustainable trade must seek to secure the benefits accruing to orderly world trade, but in the context, and only in the context, of moving determinedly towards environmentally sustainable patterns of economic activity. It would be a profound distortion of priorities, of great potential harm to human welfare, for the objectives of the trading system to be allowed to impede progress towards sustainability. This is the challenge facing the General Agreement on Tariffs and Trade (GATT) and the World Trade Organisation (WTO), its probable successor.

    GATT rules provide the essential framework conditions for most world trade and seek to embody for GATTs Contracting Parties (CPs) reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international ~ommerce.~ By 1991, 103 states were CPs to GATT, including the 24 industrialised countries that comprise the OECD and account for 75% of world trade, and another 29 states were applying GATT on a de facto basis.

    GATT rules are amended, or their scope enlarged, by periodic Rounds of negotiations, of which the current Uruguay Round, begun in 1986, i s the eighth. The principal objectives of the Uruguay Round are to bring agriculture, textiles and services within the scope of GATT for the first time, and to formulate rules for trade- related investment and intellectual property. In 1991 the GATT Secretariat inserted a proposal in the Draft Final Act of the Uruguay Round to establish a WTO to subsume GATT in future. While negotiations in the Uruguay Round have now been completed, the resulting Act still has to be agreed by governments.

    As John Whalley has observed:

    Our global trade institutions, (especially GATT), have evolved as i f there were no environmental linkages to trade. l4

    However, GATT rules do allow exceptions to be made where necessary to protect human, animal or plant life or health or relating to the conservation of exhaustible resource^.'^ In addition, the Agreement on Technical Barriers to Trade, the Standards Code, concluded in 1979 as part of the Tokyo Round and accepted by 38 countries

    4 EUROPEAN ENVl RONMENT

  • 4% WORLD TRADE AND THE ENVIRONMENT by 1991, specifically acknowledges the environment as one of the considerations that can justify the setting of product standards higher than international norms.

    Growing evidence of environmental damage from economic activity, a number of environmental disputes under GATT6, and pressure from environmentalists have brought trade-environment linkages into high relief, with calls from some for a new protectionism. This is the context in which the issue of world trade and the environment i s now being debated.

    THE ENVIRONMENTAL IMPACTS OF TRADE

    One of the principal purposes of trade liberalisation is the expansion of output. If the structure and behaviour of the economy generates pervasive negative environmental externalities as at present, proportionate economic growth wil l increase the absolute level of externality, that is the environmental damage. Of course, this is not an inevitable result. Substituting more damaging factor inputs with less damaging alternatives; more efficient use of the same input; environmentally improved technologies, production processes, and waste management techniques; and changes in economic structure and consumer behaviour can at1 reduce the environmental impact per unit of output. Moreover, as the proponents of free trade have arguedg, it is possible that free trade can improve the environment by helping to generate economic growth and improved living standards, which may both increase the demand for environmental protection and provide the resources necessary for it. However, realising this benign outcome depends on several non-trivial conditions being met.

    First, it must be recognised that, i f the expansion of output increases environmental damage, a certain amount of extra environmental protection i s necessary even to maintain environmental quality following such expansion, let alone improve it.

    Second, for economic growth to benefit the environment, it i s not enough for it to generate resources that could be spent on environmental protection. They must actually be so. It is a common observation that growing economies around the world often have a deteriorating environment because they do not allocate the resources necessary to maintain environmental quality in the face of growth, far less to improve it.

    And, of course, the whole argument depends on the resources generated by growth being able to repair the environmental damage their generation has caused. Where there is irreversible damage to the environment, with no scope for reparation (e.g. when species are made extinct), this is clearly not the case. So although the free trade produces growth which benefits the environment argument emerges as a theoretical possibility, it is not as easily put into practice.

    There are other interactions between trade and the environment apart from the possible impact of economic growth. First, a precondition for trade is transportation. Transportation requires fuel, normally fossil fuel. It has been estimated that international trade is responsible for

    one eighth of world oil consumption. Thus trade contributes substantially to energy-related environmental damage, such as carbon dioxide emissions and other air pollution. If this damage were reflected in the price of oil (internalized), the trading system and production and consumption patterns might be quite different from todays. Yet in much of the trade literature transport costs are either explicitly assumed to be absent, or simply ignored12.

    Second, trade is a mechanism for transferring goods and services from their place of production to another place for consumption. If commodities to be exported are produced in a more environmentally destructive fashion than goods destined for domestic consumption, then producing goods for trade may increase environmental damage. For example, growing cotton, the great majority of which i s exported, accounts for 2 5 % of al l pesticide useI3. The curing of the UKs imports of tobacco burns up nearly 200,000 hectares of woodland every year4.

    Furthermore, opportunities for trade can result in changes in land ownership and other property rights. This may be trades most important, and least studied, environmental effect. Where land i s perceived as only valuable for growing food for subsistence, traditional smallholders and indigenous people are more likely to be left undisturbed. Where it i s perceived as being able to grow food for export (i.e. being able to grow money, and foreign currency at that), then powerful ,interests immediately have an incentive to expropriate it from its original farmers. The farmers may then migrate into forests, up hillsides or onto marginal lands not suitable for export crops, where they cause enormous environmental damage. The environmental damage they cause is often blamed on their poverty. Less often is their poverty seen to be the result of powerful expropriators keen to corner the benefits of trade, unrestrained by effective and counteractive domestic, regional and international policies.

    If, on the other hand, commodities produced in an environmentally benign way are traded, trade may contribute to improving the environment as well as to development. Hence, there is a need for empirical analysis of how the driving forces related to trade actually affect the environment in the real world. Without a better understanding of such complex relations an uncritical support of free trade as beneficia