94-291 - GATT Trade Liberalization, and the Environment: An Economic Analysis
5-Apr-1994; Arlene Wilson; 14 p.
Abstract: The primary cause of environmental degradation is market failure, not trade liberalization. One type of market failure occurs when, for example, production pollutes a nearby river, but the cost of the product produced does not include the cost of environmental degradation. The most efficient remedy is to address the market failure at its source, either by establishing or enforcing property rights, or with policies such as taxes, subsidies, or user fees. In the presence of market failures, however, trade liberalization can exacerbate environmental problems. On the other hand, trade liberalization may reduce pollution by increasing economic growth; evidence suggests that countries with higher per capita income spend more on pollution control. Trade liberalization could also benefit the environment by eliminating restrictive trade policies, such as agricultural subsidies, that have contributed to higher pollution levels. For economists, the general dislike for import restrictions is rooted in the economic importance of trade and the need for a viable multilateral trading system to sustain the commitment to free trade. Over the postwar period, the General Agreement on Tariffs and Trade (GATT) has been successful in liberalizing trade, and stimulating economic growth. Since pressures for protection from import competition always exist, however, many economists are concerned that trade restrictions for legitimate environmental or other social goals might be abused by protectionists. Although trade restrictions are generally not the most efficient policy to resolve environmental problems, they could play a role in some limited cases. For example, it might be useful to amend GATT rules to permit trade restrictions to enforce multilateral environmental treaties. If GATT rules are amended, they need to be carefully defined to avoid being used as disguised barriers to trade. In general, GATT rules permit a country to adopt any environmental standards it wants for domestic products, and to require that imported products meet the same standard. GATT rules have been interpreted to prohibit countries from unilaterally imposing trade restrictions because products were produced abroad by methods deemed unacceptable. Some are concerned that firms in countries with high environmental standards may relocate to countries with lower standards. Suggestions to use subsidies or tariffs to offset the difference in standards are economically undesirable because they inhibit trade, investment, and economic growth. Moreover, it is argued that lower environmental standards are only one factor in the relocation decision; infrastructure, transport costs, access to markets, and the cost and quality of labor are much more important in most cases. The interaction between trade and the environment in recent years has raised a number of important questions. For example, do environmental goals conflict with those of the multilateral trading system? If so, to what extent? How is the environment affected by trade liberalization, which increases the volume of trade, and spurs economic growth? In what circumstances are trade restrictions, historically monitored by the General Agreement on Tariffs and Trade (GATT), appropriate to enforce environmental goals? Environmental concerns have been an important issue in negotiations towards the North American Free Trade Agreement (NAFTA) and in the Uruguay Round. After much discussion and compromise, the NAFTA and a side agreement addressed concerns such as safeguarding stricter U.S. standards, enforcement of environmental standards in Mexico, and border pollution. Although some environmental modifications were made in the Uruguay Round, most substantive issues were left for future negotiations. At the conclusion of the Round, it was agreed that a work program on trade and the environment would be formulated by April 15, 1994, the date of the signing of the Final Act (which incorporates all the Uruguay Round Agreements). Thus, it is likely that the interaction between trade, GATT, and the environment will continue to be an important issue in the 1990s. This report surveys the most important issues in the trade-environment-GATT debate from the perspective of economic analysis, assuming that environmental goals in society are a given. (1) Thus, the report focuses on the most efficient way to address environmental concerns. In particular, the use of trade restrictions to achieve environmental goals is analyzed. The report begins with a section on the rationale for a strong multilateral trading system. The following three issues are then surveyed: The effect of trade liberalization on the environment, Import restrictions for environmental purposes, and The effect of differing environmental standards on industrial location. Although the above issues are among the most prominent, they are not the only ones of concern. Other important issues, such as dispute settlement and subsidies, are beyond the scope of this report. [read report]
Topics: Economics & Trade, International Finance