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January / February 2003

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Trading on the Environment

Illustration by Valerie Williams

Trading on the Environment
UMaine economist's research indicates that free trade policies don't always equate to more pollution

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The economic impact of free trade agreements is tough enough to study. Try measuring the environmental effects of such policies.

Does more trade necessarily mean more pollution? Are there aspects of free trade that can be good for the environment? How do countries balance "green" interests against pro-growth pressures?

Given the complexity of the relationship between trade and the environment, there are no easy answers. The multiple variables social, economic, political and industrial are constantly in flux. Determining the environmental impact of liberalized trade is about as difficult as forecasting the weather several months in advance.

However, there are economists and other academics who think it's important that countries understand, to the extent possible, the environmental impact of their trade decisions and vice versa. Among those studying the trade-pollution connection is Georges Tanguay, assistant professor of economics and Canadian studies at the University of Maine.

"Governments have a responsibility to offset possible negative effects of free trade and growth, and to base their environmental policies on the public interest," Tanguay says. "They should aim to maximize social welfare and not bend to pressure from interest groups, but it's not obvious that they are currently playing that role."

Tanguay and his colleagues have found that lobbying and other forms of political pressure greatly influence environmental policies. Their study of 22 of the world's richest countries indicated that, in a five-year period, all other things being equal, strong lobbying by industry groups resulted in less stringent pollution controls, while countries with large numbers of Greenpeace members had tougher environmental protections.

Free trade refers to trade among countries that isn't constrained by artificial barriers, mainly tariffs and quotas. Free trade policies bring economic growth and, it is widely believed by the general public, environmental harm. For economists, part of that story is correct, based on what's called the scale effect, says Tanguay.

"The idea is that a country's industries will generate more pollution simply because they are producing more goods while technology and the composition of the consumption basket (food and nonfood goods) stay the same," says Tanguay, who came to UMaine in 2001 from the Business School at the University of Montreal.

But there's more to it. The so-called technique effect can be a positive influence on the environment when trade increases.

"Wealthy countries with strong environmental standards may put pressure on their less-developed trading partners to change their ways of doing things and pollute less," says Tanguay. "The developed countries will do this because they are under pressure from the public at home and from their own industries, which don't want to be operating at an economic disadvantage."

Also, more developed countries often export cleaner production technologies to poorer ones. "Both technology transfer and public pressure can have the effect of decreasing pollution in poorer countries after they start trading with richer ones," Tanguay says.
As wealth increases, industries can afford to pollute less, and the public demands more environmental controls.

"When people have more money, they become more interested in protecting or restoring environmental quality," Tanguay says. "To put it simply, when they get richer, they want to get cleaner."

A third factor to consider in the impact of trade on the environment is the composition effect. Countries tend to trade with each other based on their production strengths. For example, capital-rich countries such as the United States produce high-tech goods that require more capital than labor, and poor countries with large populations have more labor-intensive industries since their relative wages are low.

Based on that, it has been widely believed that when poor countries open themselves to trade, they tend to become "pollution havens." The assumption is that polluting companies will move to poorer countries since they have lower pollution standards and will keep environmental regulation weak in order to boost their economies.

"Theoretically, the hypothesis that trade liberalization sets off a race for the bottom in terms of environmental protection has been proven over and over," Tanguay says. However, it is a theory that empirical studies have failed to support.

"In reality, many factors influence industrial location decisions, including taxes, labor costs, amenities and political stability. Often environmental regulation is less important than many of these factors."

Currently, one of the biggest problems in determining the environmental impact of free trade policies is uncertainty about the extent of pollution and the effects that pollution will have in future years worldwide. Another complication, Tanguay says, is that pollution doesn't recognize national boundaries.

"Even if a country has strong pollution regulations for its own industries, its environment can suffer because of pollution generated in neighboring countries," he says. "That is why there need to be global solutions to global environmental problems."

by Dick Broom

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