One of the other arguments against the allowance of trade policy for environmental goals is that such trade restrictions would unnecessarily inhibit economic growth. In addition, those that argue against trade restrictions for economic reasons claim that such restrictions will cause inefficiency in the use and management of resources because the free market is no longer deciding where products will be made or used (Brack, 1998). If these arguments were true, then perhaps there would be a good reason for preventing environmental trade policy, as a decrease in economic growth would also be seen to adversely affect the environment. However, the arguments against environmental trade policy are based, themselves, in a system of economic inefficiency.
To accept this idea it is important to understand the ideas of economic efficiency, external costs, and cost internalization. These concepts have a great influence over the international economic system, and through economics and trade, impact on the environment. Although a great deal of study has been done on the effects of these economic concepts on trade and environmental effects, as of yet, the international and domestic trade policies of the WTO and its member states do not yet take all of the concerns over the economics of free trade into account when formulating trade rules.
To begin, a basic definition of the economic concepts that will play a significant role in environmental and trade interaction is useful in helping us make decisions as to the merit of environmental trade policy. The first concept to be so examined is that of externalities. An externality is the effect of one party’s actions upon another. The effect is originating externally from the one experiencing it. Many environmental problems are caused by events that would be classified as environmental externalities that are the result of the production or consumption activities of others (Uimonen & Whalley, 1997). These environmental externalities can occur on many levels and in many sizes, from the small-scale case of one firm polluting a river used by others downstream, to large-scale global effects, such as the burning of coal causing SO2, which then causes acid rain in other countries, regardless of boundaries. Such wide-scale environmental externalities are often called transboundary externalities. Due to the increase of human activity and its impact on the global environment, transboundary externalities have increased in numbers, an increase that mirrors the increase in international trade and economic growth (Anderson, et.al. 1995). These externalities impose a cost upon the state where the effects are felt, and this cost is often not calculated in the producer’s economic decision-making process, although individual negotiations over some issues, such as SO2 may occur between states. It is conceivable, then, that trade barriers may be justified when environmental damage occurs as a result of environmental externalities from other countries, as trade barriers may cause a change in action with regards to the polluting state in the absence of other measures such as international environmental law (Anderson, et.al. 1995). Trade measures are necessary due to the lack of another economic concept n many of the economic analysis that are done by producers and states. This is the concept of cost internalization.
When individual firms or domestic governments decide whether or not to undertake a project, they examine a cost-benefit analysis, which weighs the costs of producing with the benefits that will be received. However, this is one area where a significant part of applied economics is lacking in many cases. For in most cases, the decision of whether or not to produce some product (for the purposes of this argument, the example of whether or not to construct a dam is beneficial) is made without taking into account the full range of costs, to both the producer and society as a whole. Those wanting to construct the dam will take into account only those costs they will experience in the physical construction of he dam. However, society as a whole may experience a range of costs far greater that those felt by the constructors of the dam, such as loss of habitat and water quality, as well as negative impacts to fishing.
These costs will not necessarily be taken into account in the cost-benefit analysis done by those deciding whether or not to build the dam. Environmental externalities are often costs that fall under this category of social costs, and therefore are often overlooked or disregarded completely when decisions about production or development are made (Devlin & Grafton, 1998). The difficulty exists because often these social costs are not easily quantified with a specific dollar value. Many aspects of social and environmental health have intrinsic value, meaning value of existence or value to society, but not a tangible physical value. Yet, by affecting the environment, social costs are imposed by the loss or degradation of the value of the environment.
This mistake in calculating actual versus observed costs is what will lead to true economic inefficiency. This is because if businesses were forced to take into account the full production and social costs of producing a good, their production costs would be higher, leading to higher prices or less supply of goods, which would in turn affect the amount consumed by society. Or in the case of a large project such as the building of a dam, if all costs and benefits were compared, the benefits gained by electricity or agriculture would not equal the costs of not only construction, but also of loss of land and habitat, the health of the ecosystem, and intrinsic value of a wild, free-flowing river, and therefore, the dam, which is an inefficient project, would not be built.
However, as today most social costs are not fully realized in cost-benefit analysis, the actions of business and government still contribute to high levels of economic inefficiency with regard to the production and consumption of goods. In this respect, we can see that free trade, far from eliminating economic inefficiency, may act to increase it. For if the economic institutional structure of a state ignores the fact that its production of gods imposes environmental degradation and costs not accounted for, then trade in these gods will strengthen this trend, and free trade will act as a magnifier of the problem (Anderson, et.al., 1995). This impact of trade upon the environment is not taken into account when arguments about creating environmental trade policy are made.
How then do we begin to realize the full costs associated with the production, consumption, and trade in goods? The third economic concept described allows us a way of accounting for social and environmental costs. This is through the process of cost internalization. Cost internalization is the process of bringing the economic market to a more efficient outcome by using methods such as full-cost pricing and the polluter-pays principle to force producers to feel and ay the full costs of production, including the sometimes hidden social and environmental costs of production (Esty, 1994). There are many ways that costs can be internalized, including the imposition of control measures by the state, or, what is often more useful and efficient, a set of taxes upon the producers that will account for the social costs of production. For many environmental externalities produced, the producers are untaxed for additional benefits they receive by not paying the full costs of production due to the lack of environmental property rights and pricing. A tax that corrects this imbalance and forces the polluter to internalize the social costs of production includes such taxes as a Pigouvian tax, which is a tax on the generator of emissions, or a tax on the product at sale or consumption, which will affect the demand for the substance (Uimonen & Whalley, 1997, last 2). If this concept of cost internalization were put into process, we would see a shift towards a more economically efficient system, where the benefits of economic growth and free trade would truly benefit society as a whole.
This graph shows how the addition of a tax to the price of goods will shift the demand for those goods to a smaller quantity at a higher price, from Q` to Q* and P to P+tax. In this case, if the government imposing the tax has the information needed to set the tax equal to the amount of social costs not paid by the producer, they can shift the economically efficient equilibrium to the marginal social cost curve (MSC). On the graph, the crosshatched area represents the tax revenue gained by the government, revenue that can be put towards projects that benefit society, which means that this tax is not a cost to society. Through the graph we can see that society as a whole would be better off if producers were to pay the full costs of production, through the marginal social cost curve rather than the marginal private cost curve (MPC). However, due to the inequalities caused by environmental externalities, the current system provides an inefficient share of benefits to producers, while imposing the environmental costs of pollution, overuse of resources, and degradation of the environment on other members of society.
Due to the intrinsic value of the environment, which is not easily quantified, putting cost internalization into action will be difficult to achieve. Also, the political influence of businesses that want to protect the status quo of not paying the full costs of their pollution should not be underestimated when it comes to attempting to implement cost internalizing measures (Esty, 1994). Many producers view the emission of pollutants into air or water as their right, because for so long a time it was allowed to happen without businesses needing to pay the costs. The attitudes of business and consumers need to change in order to bring an economic shift towards a more equal and efficient method of production.
Once we can reach a system of cost internalization, many of the problems caused by environmental – trade policymaking will be lessened. Daniel Esty presents an example of how such a policy could be put into place. If the United States imposed a higher gasoline tax on its population to discourage the se of petrochemicals and pollution emission, instead of imposing fuel efficiency requirements on automobiles (a command and control feature), foreign automakers would have no basis for complaining of unfair or discriminatory treatment in the US market (Esty, 199). Such a tax would remove the necessity of trade measures seen to directly influence a foreign product, but rather, would influence the costs of use, adding the environmental costs of pollution to the other costs associated with the use of the product in question. The benefits to adopting a broad system of cost internalization would be impressive. Such a system could be implemented in a number of ways.
Environmental externalities can be internalized through both direct and indirect methods and policies. Such actions include the following:
1. New laws and regulation of products and the technology used to produce them, for example, command and control policies, however, these can be inefficient due to a lack of incentives for businesses to innovate in order to save extra costs.
2. Markets for emission rights, environmental charges, and taxes, which have seen some success in programs such as SO2 trading.
3. Controlling resource use and waste through better defined property rights and reforms, such as defining who has the use of the rivers, air, and resources, which can be difficult to delineate due to transboundary and common property effects.
4. Macro-economic policy
5. Legislation that indirectly affects the cost internalization or environmental structure
6. Consumer behavior, such as buying "marked goods" or boycotting others
7. Changes in social values. Requiring the use of clean technology, and full payment of costs.
Some of these policies have been put into use, and action can be taken towards achieving others; although it is difficult to change the entrenched beliefs of a system, the current state of the environmental system demands that the attempt is made.
If costs were internalized, disagreements over trade-based control measures and environmental standards regulation would no longer be needed, removing a large area of conflict from the free trade system (Esty, 1994). There may still be disagreements, particularly over the amount of cost internalization needed to reach the economically efficient level of production and consumption, however, these disagreements would tend to be ones of scale, where an increase in information on environmental effects of pollution and work towards a clearer system of environmental property rights will provide information needed to reach an efficient level of cost internalization.
Once policies of cost internalization for the goal of abating the effects of environmental externalities are put into place, the argument of what effect trade has on the environment can be discussed in a more accurate way. In such a situation, by examining the growth of a state’s economy under free trade and how that growth impacts the state’s environment, we can better determine the effects of free trade on the environment. The WTO itself states that often the cause of environmental degradation is the low income of local people, who cannot look to conserve resources due to their poverty, which forces them to consume what little they can get today. The WTO also states that economic growth through free trade could improve environmental use and conditions if the following criteria were met:
* That higher income would translate to higher economic standards, meaning that as peoples incomes grew, their desire to spend more on having clean air and water would also increase.
* Equal distribution of income from growth through governmental policy allows those at the bottom to increase wealth and afford environmental conservation.
* Economic incentives for producers and consumers would exist to reduce pollution levels.
* Economic growth must eventually shift from resource driven (exploitative) to technological progress that increases output while reducing pollution or inputs.
* Correct environmental standards must be set by leaders and governments that allow for wise resource use and conservation.
With a system like this in place, trade will act towards benefiting the environment. Growth and technological development by themselves cannot guarantee solutions to environmental problems, but rather it is how economic growth occurs and in what direction technology develops within the underlying institutional structures that will determine if ecologically sustainable development will take place (Anderson, et.al. 1995).
Therefore, to say that any and all trade will work towards raising a state’s economic growth, thereby bringing increases in environmental quality is taking as simplistic and one-sided a view as claiming that all trade will harm the environment. Only by observing a set of policies and values similar to those outlined above can we disregard the potentially negative impacts trade can have on the environment. Until all costs are realized and economic growth occurs in a sustainable way, trade measures should be available to states in order to obtain environmental action. Whether agreements are made on regional scales, such as agreements within the European Union, or on a global scale, such as the Montreal Protocol, states must work together, using any method at their disposal, to work towards reducing environmental degradation.
Therefore, many of the arguments against the negotiation and implementation of MEA’s, in particular, those that incorporate trade measures into their structure, are not taking into account the entire economic and social situation. Just as many environmentalists are locked into the idea that trade is bad for the environment, many of the policymakers of international organizations like the WTO are stuck in the idea that trade has no effect, or possibly a beneficial effect on the environment. In reality, the trade and environment relationship is extremely complex, with various connections on all sorts of levels. Working towards a pure system of anything, be it free trade or sustainable development, is far too difficult for a quick fix by one or two organizations or agreements. A slow process of change and multilateral action must take place in order to work towards bringing about a system that takes into account all costs and benefits of a state’s economy, and what role that economy will have on international trade and the environment.
Copyright 2001 by Stacy Schumacher