environment problem due to global trade.ppt

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International Trade and

the Environment

Jeffrey FrankelHarpel Professor, Harvard University

A Report for the Swedish Globalisation Council,

Government of Sweden

January 20, 2009, Stockholm



The anti-globalization movement

• Ten years ago some protestors at the Seattle WTOMinisterial meeting, launching the first of the big anti-globalization demonstrations, wore turtle costumes.

• They felt that a WTO panel had, in the name of free

trade, negated the ability of the US to protect sea turtles, – simultaneously undermining

national sovereignty &

– the international environment.



Central questions• Is trade good or bad for the environment?

• Does globalization help or hurt in achievingthe best tradeoff between environmentaland economic goals?

– Do international trade & investment allowcountries to achieve more economic growthfor any given level of environmental quality?

– Or do they damage environmental quality for

any given rate of economic growth?• Do the WTO & environment conflict?

• How can globalization best be harnessed?



Symmetric fears

• Free traders fear that talk about environmentalprotection will be used as an excuse by someeconomic sectors to gain protection for

themselves against competition from abroad.

• Environmentalists fear that talk about free tradewill be used as an excuse to give inadequate

weight to environmental goals and excessiveweight to maximization of GDP.



Is trade itself good or bad

for the environment?

• There are many possible effects of trade.

• They can be categorized according to

– whether they operate• via GDP, just like investment, technology,

& other sources of economic growth,

• or whether they are peculiar to trade alone,

and hold for a given level of GDP. – Within each category, there are effects both

• beneficial for the environment,

• and detrimental.




for the environment, in theory?

Environmental

effects of trade via growth in

income:

for a given level of

income :

Harmful effects larger scale of economic activity

“Race to the bottom”

in national regulation

Beneficial

effects

shifts to cleaner

techniques andcomposition of economic activity

“Gains from trade”:

ratcheting upstandards, consumer power innovation,



Globalization

Protectionism

THE IMPOSSIBLE TRINITY OF GLOBAL ENVIRONMENTAL REGULATION

Environmental

standards National

sovereignty

Unregulatedemissions

Multilateralgovernance

RACE TO

THE

BOTTOM



SO2 concentrations tend to fall with openness,especially after controlling for democracy, cross-country



CO2 emissions/cap tend, if anything, to risewith openness

CO2 Emissions vs. Trade Openness (ave data 1991 and 1992)

0

5

10

15

20

25

30

0 100 200 300 400

Trade Openness

C O 2 E m i s s i o n s p e r C a p i t a



But these rough correlations tell us little.

• To isolate the effect of trade on a country’s

environment, we need to control for other determinants, such as

– income

– democracy

– population density.

• Econometric analysis – Frankel and Rose, 2004




for the environment, statistically?Source: Frankel and Rose, R.Ec.& Stats., 2004

Environmental

effects of

trade (1990)

via growth in income:

for a given

level of

income:

for SO2concentrations

EKC: after an income of about$5,700/cap., further growthtends to reduce pollution

(via national regulation)

The favorableeffects of tradeseem todominate

for CO2emissions / capita

No sign that total emissionsever turn down.

(CO2 is a global externality:little regulation is possible atthe national level)

Trade may alsoincreaseemissions evenfor a given levelof income



Do harmful or beneficial effects of trade dominatefor environmental goals? Bottom lines:

• For SO2 – at low incomes, harmful effects (EKC) work

against beneficial effects – at high levels of income, trade helps throughboth channels.

• For CO2

– Even at high levels of income, trade continuesto hurt. <= Absent an effective multilateraltreaty, the popular will cannot be enacted.



I have now updated thiseconometric analysis

• for my Swedish Globalisation Council paper --

• putting together data from 1990-2004,

• for 158 countries.

• EKC (inverted U) shows upfor PM10 & CO2 emissions, and water pollution.

• Trade still appears to worsen CO2.

• Again, the obvious explanation is the lack of acomprehensive global climate agreement.



We now have the Kyoto Protocol

But it lacks:• Provisions for targets in future years

• Targets for US, China & other developing countries• An enforcement mechanism

– including an incentive for holdouts to join, and

– enforcement of the agreement. – Could trade sanctions be the mechanism?



Possible application of trade barriers by EU:

Directive of the European Parliament& of the Council, Paragraph 13, amending Directive 2003/87/EC so as to improve and extend

the EU greenhouse gas emissions allowance trading system; Brussels, Jan. 2008:

• “Energy-intensive industries which are determined to beexposed to significant risk of carbon leakage could receive a

higher amount of free allocation, or

• an effective carbon equalization system could be introduced

with a view to putting EU and non-EU producers on acomparable footing. Such a system could apply to importers of

goods requirements similar to those applicable to installations

within the EU, by requiring the surrender of allowances.”



Would carbon-import penalties be

compatible with the WTO?

Question (1):

GHG emissions are generated by so-called

Processes and Production Methods (PPMs).Does that rule out trade measures against them?

Question (2):

What specifics of trade control design are

appropriate?



Precedent (1): Montreal Protocol on

stratospheric ozone depletion

• Trade controls had two motivations:

– (1) to encourage countries to join, and

– (2) if major countries had remained outside,would have minimized leakage, the

migration of production of banned

substances to nonparticipating countries . – In the event (1) worked, so (2) not needed.



Precedent (2): The true meaning of the

1998 WTO panel shrimp-turtle decision

• New ruling: environmental measures can target,

not only exported products (Article XX), but also partners’

Processes & Production Methods (PPMs),

• subject, as always, to non-discrimination (Articles I & III).

• US was able to proceed to protect turtles, without

discrimination against Asian fishermen.

• Environmentalists failed to notice

or consolidate the PPM precedent.



Precedent (3): In case there is any doubt that

Article XX, which uses the phrase “health and

conservation,” applies to climate change, …

• A 3rd precedent is relevant:

• In 2007, a WTO Appellate Body decision regarding

Brazilian restrictions on imports of retreaded tires

confirmed the applicability of Article XX(b):

• Rulings “accord considerable flexibility to WTO

Member governments when they take trade-restrictivemeasures to protect life or health… [and] apply equally

to … measures taken to combat global warming.”



• Central message: border measures to addressleakage need not necessarily violate sensible trade

principles or the WTO, – but there is a great danger that they will in practice.

• The danger: If each country imposes border measuresin whatever way suits national politics,

– they will be poorly targeted, discriminatory, and oftendisguisedly protectionist.

– they will run afoul of the WTO, and will deserve to.

• We need a multilateral regime to guide such measures.

• Some subjective judgments as to principles thatshould guide design of border measures…



Appropriate border adjustments could be tariffs or,

equivalently, a requirement that importers surrender tradable permits.

Guiding principles include:

• Measures should follow guidelines multilaterally-agreed among countries participating in the targets of KP & its successors.

• Judgments as to findings of fact (who is complying, etc.) should be made by independent expert panels.

• Measures should only be applied by countries that cuttheir own emissions in line with the KP & its successors, against countries not doing so due to either refusal to join or failure to comply.

• Import penalties should target fossil fuels, and a half dozen of the most energy-intensive major industries:aluminum, cement, steel, paper, glass, and perhaps iron & chemicals.



Summary of conclusions

• My report considers whether globalizationhas damaged environmental goals, – either among open countries in general (through

a “race to the bottom” in environmental

regulation) or – in certain countries (“pollution havens”).

– Such effects are plausible in theory, but empiricalstudies of cross-country data find no detrimentaleffects of trade on some measures of environmental degradation such asSO2 air pollution, controlling for income.



Summary of conclusions, continued

• Thus globalization and the environmentneed not necessarily be in conflict.

– Trade & growth give countries the means toclean the air,

• provided they have effective institutions of governance in place.

• For local air pollution, the appropriategovernance is at the national level.



Summary of conclusions, continued

• But the evidence does suggest that trade & growthcan exacerbate other measures of environmentaldegradation, particularly CO2 emissions.

• The difference can be explained by the observationthat CO2 is a global externality

– which cannot be addressed at the national level

due to the free rider problem. – We need institutions of governance at the multilateral level.

– These have not been in place, at least until recently.



The solution

• Greater international cooperation onenvironmental and trade issues,

• so that we can get the best of both.

• Very specifically, the CopenhagenConference of Parties should negotiateguidelines for penalties on carbon-

intensive imports that countries areallowed to impose on each other.



The author acknowledges

• capable research assistance by Danxia Xie;• valuable input from Joseph Aldy, Scott Barrett,

Jagdish Bhagwati, Thomas Brewer, SteveCharnovitz, Arik Levinsohn, Gary Sampson

and Robert Stavins;• useful comments on the first draft from Pontus

Braunerhjelm, Prasanth Regy, Rob Stavins,Helena Svaleryd, and Danxia Xie;

• and support from – a Faculty Grant in Sustainability Science fromHarvard’s Center for Intenational Development,

– as well as from the Government of Sweden.



Appendices

• WTO

– Seattle demonstrators

– Language regarding environment

– Panels

• Characteristics of carbon-intensive import penalties



WTO protests.Why did they march together in Seattle?

Category of demon-strator

Claimedconsti-tuency

True position of constituency

Protestor inturtle costume

Environ -ment

In favor of the Kyoto Protocol

Labor unionofficial

Organizedlabor

Against the Kyoto protocol; infavor of keeping out cheap

imports from poor countries

NGOvolunteer

Poor countries

In favor of selling their goods torich countries; in favor of Kyotoprotocol if it exempts them from

commitments.



Mutual respect• Drafters in Kyoto and Geneva showed more

consideration for each other than the rank & file of environmentalists and free traders.

• The Kyoto Protocol text: – Parties should “strive to implement policies and measures...to

minimize adverse effects on international trade...” ;

– FCCC features similar language

• WTO regime is equally solicitous of the environment: – Article XX allows exceptions for health & conservation – Preamble to 1995 Marrakesh Agreement establishing WTO

seeks “to protect and preserve the environment;”

– 2001 Doha Communique starting new round of negotiations:“the aims of ... open and non-discriminatory trading system,and acting for the protection of the environment ... must bemutually supportive.”.



Typical WTO panel cases

• Tariffs or other measures that discriminate againstproducers in some trading partners, – either in favor of other trading partners

(potential violation of MFN principle of Article I) or – in favor of “like products” from domestic producers

(potential violation of national treatment provision of Article III).

• If targeted country files a WTO complaint allegingsuch a violation, the question is whether themeasure is permissible under Article XX

– which allows for exceptions to the non-discrimination principles for environmental reasons (XXb), – provided that the measures in question are not “a means of arbitrary

or unjustifiable discrimination” or a “disguised restriction oninternational trade.”



I classify characteristics of possible border

measures into 3 categories, named by color: (1) “White” category: those that

seem reasonable & appropriate.

(2) “Black” category: those that seem

dangerous, in that they are likely

to become an excuse for protectionism.

(3) “Grey” category:

those that fall in between.



French President Sarkozy:

• “…if large economies of the world do not engagein binding commitments to reduce emissions,European industry will have incentives to relocateto such countries…The introduction of a parallelmechanism for border compensation againstimports from countries that refuse to committo binding reductions therefore appears essential, – whether in the form of a tax adjustment or

– an obligation to buy permits by importers.

• This mechanism is in any case necessary in order to induce those countries to agree on such acommitment.” letter to Barroso, January 2008



Black (inappropriate) border measures include:

• Unilateral measures applied by countries that are notparticipating in the Kyoto Protocol or its successors.

• Judgments as to findings of fact made by politicians,vulnerable to pressure from interest groups for protection.

• Unilateral measures to sanction an entire country.

• Import barriers against products that are removed fromthe carbon-intensive activity, such as firms that useinputs that are produced in an energy-intensive process.

• Subsidies -- whether in the form of money or extra permitallocations -- to domestic sectors that are considered tohave been put at a competitive disadvantage.



The Gray (intermediate)measures include:

• Unilateral measures that are applied in the

interim before there has been time for multilateral negotiation over a set of guidelines for border measures.

The import penalties might follow the formof existing legislation on countervailingduties (CVDs).

environment problem due to global trade.ppt

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