The Environment And Free Trade

Published Date: 02 Nov 2017

Proponents of trade liberalization argue that freer trade might actually increase the quality of the environment. The writer of this paper will make arguments in favor and against tradable pollution permits. For example, the "polluter-pays principle," which is an international environmental policy of the U.S. and other industrial nations.

There are a few terms that essential to understand the arguments presented in this paper. First, there are externalities and cost internalization. Externalities are the economic term for the costs (environmental and social) of an economic activity, which are not suffered by the operator, but instead by the broader community. For example, if a silviculture operation contributes to species loss or habitat damage and these costs are not someway paid by the operator and thus exposed in the price of the final product. These will be paid by the wider community, such as locally, nationwide or even globally. These effects are known as externalities. The hypothetical idea that trade benefits all is partly based on the belief that externalities do not occur because prices reflect the true costs of production, such as the costs have been 'internalized'. This assumption is a misconception; the environment is being damaged, but costs are not internalized, thus trade is not benefiting all. Many now acknowledge that, for the trade system to work appropriately, costs must be internalized. Nevertheless, this acknowledgement has not been turned into reality because, mostly, the world trade system encourages competition to decrease costs, which may include actively externalizing cost, rather than encouraging the internalization, thus increasing of costs through taxes, regulations, or other means.

Another key term is known as trade and specialization. This is one of the key elements of trade theory is that countries will specialize in producing those products, which they are reasonably better at making relative to other products and other nations. On the one hand, this specialization allows a nation to take advantage of economies of scale, such as larger scale operations producing goods more inexpensively, and become more competent. Moreover, such specialization can lead to other problems. For example, if a nation is subject largely on exports of a small number of goods, changes in the international markets of those goods can have drastic influence on the nation in inquiry. Additionally, specialization of production can result in the specialized use of natural resources (e.g. monocultures) which impoverishes the natural environment.

The major issues that are leading to the argument that trade liberalization harms the environment are: trade liberalization leads to a "race to the bottom" in environmental standards, trade liberalization conflicts with morally-conscious environmental policies, trade liberalization encourages trade in products that create global pollution ("pollution havens").

The global 'race to the bottom'

The increasing global mobility of companies means that they can often move, or threaten to move, to wherever the costs of production are lowest. Such costs include environmental and social issues (such as the exploitation of cheap labour, often women). The use, by companies and/or governments, of the uncosted services to gain competitive advantage could lead to what has been called the 'global race to the bottom'.

ARGUMENTS FOR

Put simply, this is competition between countries to lower, or keep low, social and environmental standards in order to be more 'competitive'. Averting a 'race to the bottom' requires government involvement yet the world trade system aims to reduce government 'interference' in the international flow of goods, services and capital.

ARGUMENTS AGAINST

It leads to the deterioration of environment (See arguments against free trade)

Tradable pollution permits

a modern development in the area of controlling negative externalities has been the use of tradable pollution permits. These can be used to control the degree of structural change and focus on tackling the worst culprits.

ARGUMENTS FOR

Firms are allowed to buy and sell those rights. Then they could take the polluters to court for compensation as the provision of property rights would give them individuals ownership rights and they can take the action promptly. It will also increase the accountability.

ARGUMENTS AGAINST

It leads to the deterioration of environment (See arguments against free trade). This is leading to another entry barrier.

SUMMARY

ARGUMENTS FOR FREE TRADE

Classical economic analysis indicates that free trade increases the global level of output because free trade permits specialization among countries.

Specialization allows nations to devote their scarce resources to the production of the particular goods and services for which that nation has a comparative advantage.

The benefits of specialization, coupled with economies of scale, increase the global production possibility frontier. An increase in the global production possibility frontier indicates that the absolute quantity of goods and services produced is highest under free trade. Not only are the absolute quantity of goods and services higher, but the particular combination of goods and services actually produced will yield the highest possible utility to global consumers.

Free trade policies are often associated with general laissez faire economic policies, which can allow for faster growth.

Laissez faire policies—the absence of government intervention in trade, entrepreneurship and investment—is often positively correlated with high per capita income.

ARGUMENTS AGAINST FREE TRADE

Neoliberal policies are leading to a global system of unsustainable production and consumption that benefits giant corporations but fails people. The natural resources that sustain livelihoods are being extracted and destroyed, while inequality between people and societies is increasing.

Whilst a certain degree of international trade may be inevitable and even desirable, healthy and sustainable local economies and communities are the key to meeting people's basic needs. However, the current trade liberalization process in many ways is undermining them. Serious social and environmental impacts include:

* a failure to account for environmental and social degradation;

* a potential reduction in environmental and social standards;

* Specialization which increases monocultures and decreases diversity;

* Environmental damage caused by long-distance transport;

* Export-oriented growth which exacerbates all of the above;

* Incompatibility with some environmental protection measures;

* Increasing inequality between rich and poor countries, rich and poor people and women and men, all of which also exacerbate poverty and environmental degradation.

Remedies

Government intervention is needed to make market more efficient as the private sector is motivated by the profit only and don’t seek efficiency as the prime objective. Thus the State is an indispensable instrument of economic development and it take undertake activities that would compensate for the market failure. Market failure is perceived as the inability of markets to allocate optimally resources over time.

The regulatory role of the government may include:

A) Determination of the conditions under which individuals or groups would be permitted to enter certain lines of business or avail of public facilities and scarce resources.

B) Regulating the conduct of Industrial or business through legislation such as telecom regulatory authority in India has laid down fair rules for the industry.

C) Regulating the relationship between different segments or interest groups in the economy so as to protect legal rights.

By providing an analytical framework for the industries, private sector, externalities such as pollution etc., it allows economic development, structural change and social welfare. It sets the national priorities such as defense and utilities and allocates scarce resource accordingly.

In the case of an externality, which is a spill over from an economic activity. It is often referred to as a by-product of the market mechanism (supply equals demand). Negative externalities are often viewed as examples of market failure, in other words, the market mechanism creates a level of consumption / production that is higher than society desires.

A negative externality occurs when the by-product is viewed as having a social cost. For instance, when a car is driven it creates air pollution. This air pollution can have very harmful effects on other people. Interestingly, you - as an individual - do not account for this in the costs of driving, however society pays the costs of dealing with air pollution. Therefore, car pollution is a negative externality. Regulation / legislation involves the government introducing legislation that regulates the externality to reduce it.

How to correct is most controversial because there are various policies:

Market solutions - change the costs of the activity to account for the negative externality. This usually involves the use of charges, taxes or subsidies.

Regulation / legislation - this policy involves the government introducing legislation that regulates the externality to reduce it.

Property rights - for some negative externalities, such as, pollution, if somebody had ownership rights to the air, sea etc., then they could take the polluters to court for compensation. The provision of property rights would give individuals ownership rights on the sea, air etc.,

Source:

Book- Macro Economics : Mishara & Puri

www.indiainfoline.com

Book- Macro Economics by Mishra & Puri

http://en.wikipedia.org/wiki/Externality

. www.thehindubusinessline.com/iw/2004/02/29/stories/2004022900171100.htm - 16k -

Part 2: Summarize and evaluate the arguments/counter-arguments

Write a 4-5 page document in which you:

Summarize each argument and counter-argument. Be sure to note the relevant parties in the debate and their interests/objectives.

Evaluate the arguments and counter-arguments. Be sure to address the following questions:

Can the conflicting positions in these debates be resolved? If yes, how? If not, why not? Your answer should be well-reasoned and supported with examples.

1) Arguments for ‘Trade liberalization lead to a "race to the bottom" in environmental standards:

The primary concern of the environmental lobbies is that further trade liberalization through the Free Trade Area of the Americas (FTAA) initiative will have adverse consequences on the environment. Their first point is that international trade law under World Trade Organization (WTO) regulations provides an incentive to lower domestic environmental regulations, so that domestic producers will be on a "level playing field" with foreign competitors. The second concern is that the General Agreement on Tariffs and Trade (GATT) policy of "product, not process" prohibits the discrimination of imports based solely on the methods of production, a practice which induces foreign producers to use the cheapest (and environmentally costly) processes, knowing that their products will receive equal treatment as those made with "environmentally-friendly" production techniques.

Generally it is the tendency of the firm as a cost saver to produce where they have lower costs of production, and avoiding pollution reduction techniques. Domestically, producers could claim foreign production facilities and firms have an unfair advantage because of lower environmental standards, so business lobbies would pressure for lower domestic standards in an effort to stay "competitive" with goods produced abroad. One of the most famous examples of international trade policy under the GATT colliding with domestic environmental policy is the tuna-dolphin dispute between the U.S. and Mexico.

Economic globalization ties the world together as never before. But it also poses serious new threats to our health and the environment. Trade agreements promote international commerce by limiting governments' ability to act in the public interest. Already food safety, wildlife and pollution controls laws have been challenged and weakened under trade rules as illegal "barriers to trade." In our global economy, corporations move operations freely around the world, escaping tough pollution control laws, labor standards, and even the taxes that pay for social and environmental needs. Thus we must realize that opening markets to trade and preserving the environment are equally desirable goals.

2) Counter arguments:

Global trade is now a fact of life. Poor nations cannot afford to value environmental protection more highly than such basic goods as food or health care. If poor nations are to increase environmental protection, they must first increase their wealth. Free trade is a necessary component in catalyzing economic growth. Therefore, free trade is critical in providing the economic means that will enable countries to adopt measures that enhance their protection of the environment.

As illustrated by Dr. Alan Moghissi, President of the Institute for Regulatory Science, in his testimony before the International Financial Institutions Advisory Commission (the Meltzer Commission), "how do you explain to a father in the Brazilian rain forest, who is poor, has sick children, and is hungry that he should not cut trees because it may impact the biodiversity?" Until the underlying issue of poverty is addressed, Dr. Moghissi added, "poverty [will be] the equivalent to exposure to the most toxic pollutant."

The key to increasing environmental protection in developing nations is to increase economic growth. As a country's standard of living rises through economic liberalization and trade expansion, its industry can more readily afford to control emissions and its citizens have more discretionary income to allocate toward improved environmental quality. Moreover, the United States is an example of the elasticity of spending for environmental protection. As incomes have risen over the past three decades, America has increased real spending by government and business on the environment and natural resource protection has doubled.

The Heritage Foundation calculated a "Trade Openness Index" based on the 2001 Index of Economic Freedom by averaging the score for the trade policy, property rights, capital flows and foreign investment, and regulation factors. In countries with an open economy, the average environmental sustainability score is more than 30 percent higher than the scores of countries with moderately open economies, and almost twice as high as those of countries with closed economies.

Solutions:

By considering the above conflicts, the following solutions can be suggested

A fair trade bill of rights would make trade clean, green, and fair, upholding the following basic principles: Trade rules should

allow standards for products if they are produced, for example, in a way that harms endangered species, ecosystems, or the global commons;

ensure the availability of strong environmental exceptions to trade and investment rules for laws and regulations that protect health and natural resources.

ensure that market opening agreements are accompanied by environmental initiatives to protect natural resources that would be vulnerable to increased exploitation;

prohibit the lowering of environmental and labor standards to attract investment or gain trade advantages;

work to develop cooperative, multilateral solutions to trade and environment conflicts.

3) Arguments for ‘Trade liberalization conflicts with morally-conscious environmental policies’:

The moral insight and wisdom of the Catholic bishop’s economic analysis and ethical evaluation have not been well heeded by the market players from government and business alike. In direct contrast to Catholic teaching on human dignity and human rights, from the Americas to Asia and around the world, the gap between rich and poor has escalated steadily. Women and children continue to be exploited. Rainforests disappear. Fish stocks are depleted. Natural resources are ravaged. Environmental pollution abounds. And, the dignity of God’s people is defamed on every side.

The U.S. Catholic bishops, fully in concert with a human rights consciousness, teach that "every economic decision and institution must be judged in light of whether it protects or undermines the dignity of the human person." In short, "the dignity of the human person…is the criterion against which all aspects of economic life must be measured."

4) Counter arguments:

It was argued by the supporters of free trade as that from farmers in producer countries to students in a U.S. school studying the environment, the concept and practice of fair trade connects producers and consumers in new and powerful ways. It is the nexus for: meeting both environmental and economic considerations of indigenous peoples; re-balancing the trading relationship between the countries; building a link between U.S. policy and publics to a larger world community that is knocking at the door.

Solutions:

Today, an alternative to the FTAA does exist. It was developed by the Hemispheric Social Alliance (HSA) in response to the proposed FTAA. The HSA is a coalition of labor unions, environmentalists, family farmers, economists, scholars, and other coalitions representing more than one hundred organizations throughout North, Central, and Latin America. It was created in 1999 to facilitate information exchange and joint strategies and action towards building an alternative democratic model of development in the face of the currently proposed international trade agreements within overall economic globalization.

The HSA guidelines would make the economic integration process of hemispheric globalization more inclusive, democratic, environmentally and culturally sustainable, and equitable. Fully consistent with Catholic social teaching on human rights, the plan proposes economic development based on democratic citizen participation, local control over resources, and the reduction of economic and social inequalities. It proposes a more responsible proactive role for the state and increased regulation of the economy both nationally and internationally in the pursuit of social justice, public services, and public security.

5) Arguments for ‘Trade liberalization encourages trade in products that create global pollution’

The critics argue that free trade is responsible for many aspects of environmental degradation and for the failure of policy makers to protect the environment adequately. They argue that free trade shifting the production of pollution-intensive goods toward the low-income, high-polluting South and that will increase global pollution, because the decrease in northern emissions is insufficient at the margin to compensate for the increase in southern emissions. They also think that because pollution is not local but trans-boundary or global in nature, so pollution in one country may affect another country’s environment.

Besides, the international trading system, actually encourages any participant country, particularly one that is less wealthy, to relax its environmental standards to gain a competitive advantage. Once any country does so, other countries, also struggling to develop sustainable economics, feel compelled to relax their standards in order to stay competitive in the international markets. Thus, both the developing countries and developed countries will lower the environment standards.Thus, the environmentalists criticize that the world trade organization plays negative role as to the environmental protection.

6) Counter argument:

The free trade supporters argue that there should be no inherent conflict between trade and environment. The common objective of the two sides is better life, trade is regarded as a means to attain sustainable development, and we should use trade measures to further protect the environment, but not use environmental measures to restrict trade. They argue that as countries developing, they spend more on environmental controls and so tend to pollute less than they did when they were less advanced economically. The changed attitude of the developed countries is the best example. It is the same to the developing countries.

China has 1.3 billion people living in the limited territory. In the past, peasants had to destroy plenty of forest and grassland for cultivating to support so many people. Now, some of these peasants are encouraged to give up cultivating and to plant more trees and grasses because China central government promises to provide free food to them. And it was also reported that between 1998 and the end of 2000, China's central government would have spent a total of RMB 27 billions (US$3.26 billions) for ecological and environmental project. It is incredible and unprecedented in China’s History.

So countries especially developing countries argue that economic growth and trade liberalization have a positive role to play in the achievement of sustainable development. And an open, equitable and non-discriminatory multinational trading system has a key contribution to make to national and international efforts to better protection and conserve environmental resources and promote sustainable development.

Solution:

This conflicting situation suggests the setting up a new global environmental organization equal to the WTO regime. The eco-labeling scheme was widely used by many countries to protect the environment. Eco-label is also referred to as green-label which means putting labels on products to inform consumers of their environmentally-friendly character. It comes into being accompanied with the political awakening and rising level of public concern with the environment protection. In 1971 the Germany government put first forward the concept of Eco-label for consumer products and in 1978 the first Eco-label program in the world was launched in Germany. Now there are over 20 countries, especial industrialized countries, including Canada, Japan, Norway, Austria, France, Singapore, etc, have adopted the Eco-label program in many different forms at local, national, regional and international level.

Providing technical assistance to developing countries may help reduce the potential negative trade effects of environmental labeling on developing countries. Technical assistance can play an important role in helping developing countries establish their own programs and will consequently lead to international deliberations.