International trade and environment
Memorial University of Newfoundland
The environmental impact of international trade research has a long history and the debates between perspectives of whether international trade will damage the environment or mitigate the pollution problem are throughout the history of this research. This thesis will generally introduce this debate, and it has five parts. The first part presented the history and debate content of these researches. The second part demonstrated concepts frequently applied in these researches, such as international trade, foreign direct investment, sustainable development and globalization, and influential international agreement restrain international trade from environment protection aspect, like Basel Convention, Rotterdam Convention, Stockholm Convention and Bamako Convention. The third part illustrated important theories, their explanations, applications and limitations employed in these researches. These theories include pollution haven hypothesis; race to the bottom hypothesis; environmental kuznets curve hypothesis; factor endowment theory and scale, composition and technique evaluation framework. The forth part discussed research topics, like international trades of pollution-intensive product, FDI and pollution-intensive industries transfer, international trades of resource-intensive products, international trade of waste, and international trade and carbon emission. The fifth part investigated inevitable issues in this research, in which problems of data availability and data reliability, unified product-pollutant factor, simple environmental indicators, measuring environmental regulatory stringency and its expense and Omission factors are all discussed.
1. Research History and Main Debate
The debate between environment and international trade has a long history, and it has experienced three climaxes until nowadays. The first one occurred in the 1970s and was triggered by the events that OECD countries implemented stricter environment control system. Researches in this period are focusing on the impact of environmental regulations put on the international trade competitiveness, the degree to which the environment measures form obstacles to trade, and the quantity of defective products imported by developed countries and refused by developed countries. The second climax began in the 1990s leading by the worldwide globalization. This is a period when the globalization trend is reinforced, the concept of sustainable development is popular, the environment awareness is stronger, and the public interest of global environment problem is increased. The research subjects of this period are wider: including international competitiveness and environmental barriers, international trade and cross-border pollution, product standards work as non-tariff barriers, hazard goods trade, and relationship between trade liberalization and environmental degradation. The third climax began after 2000, accompanied with an extensive attention of global climate change issues. Besides the topics mentioned in the second climax, topics related with carbon emission are popular: carbon embodied in international trade, the producers and consumers’ responsibility of carbon emission, carbon emission transferred by international trade and carbon footprint along with international trade.
When conduct research on the international trade, it is consensus that free trade will increase the wealth of its participators. However, debates about the environment impaction of international trade have been persisted between environmentalists and people supporting free trade. Environmentalists thought international trade will damage the environment for four reasons: firstly, international trade enlarged the scale of economic activities, thus raising the amount of pollutant production; secondly, international trade regulation will override the environment regulation and causing the formation of pollution heaven; thirdly, international trade of hazard goods will reduce the exporter’s intensive of constraint its hazard foods generation and harm the environment of its importer; fourthly, the transportation of international trade increase the energy consumption and pollutant production embodied in goods. In conclusion, they thought international trade system will harm the environment, and international environment agreements and trade restrain measures are necessary to mitigating this problem.
However, supporters of free trade hold different opinions: firstly, free trade provided opportunity of more precise division of industrial sectors, thereby would enhance the resource utilization rate and reduce the production of pollutant; secondly, trade liberalization can promote economic prosperity, and thus raising resource available for environment protection; thirdly, frequent exchanges among countries will promote technology diffusion; therefore, during the process of globalization, environment friendly technology will transferred from developed countries to developing countries more smoothly, and thus reducing the environment pressure in developing countries. Collectively, they insisted that international trade system cannot degrade environment endogenously, and environment problem showed up with international trade because of poorly designed environment policy.
2. High-Frequency Conceptions
International trade implied the exchange of capital, products and services between different countries. Even through it is not a word recorded by dictionaries; it is frequently applied by researchers because its role as a very important research subject. This trade represents a large and increasing share of gross domestic product for a considerable number of countries. For example, the percentage merchandise trade takes as a share of GDP in EU is 42.2% in 1990, 56.5% in2000, 62% in 2010 and 66.7% in 2013(World Bank Database, 2015).
2.2 Foreign Direct Investment (FDI)
FDI can be defined as a long-term investment relationship, in which the investor from one country can control important aspect, such as the technology, management and even crucial inputs of a company or individual from another country. In this relationship, the most important feature is control, and only the investor possesses more than 10% of the ownership share can be considered as FDI. These investments have different forms: equity capital, reinvestment of earnings from the host country, or provision of long and short term intra-company loans. Other investment, such as public stocks and bonds, which are in the securities of the host countries and do not show a character of control, are not FDI. (Smith, 2004) FDI attract the attention of researchers because it is increasing rapidly, for example, the FDI in China is 3.4 billion dollar (current US$) in 1990, 38.3 billion dollar (current US$) in 2000, 273 billion dollar (current US$) in 2000 and 347.8 billion dollar (current US$) in 2013(World Bank Database, 2015). Besides, it can be interchangeable with international trade.
2.3 Sustainable Development
Sustainable development is defined in oxford dictionary as economic development that is conducted without depletion of natural resources(Oxford online dictionaries,2005). This conception has another widely accepted explanation: ‘Sustainable development is about meeting the needs of today without compromising the needs of future generations.’ In trade and environment relationship researches, sustainable development is frequently applied as environment indicator or trade target.
Globalization is referred in oxford dictionary as the noun of globalize, which is mentioned as ‘develop or be developed so as to make possible international influence or operation’ (Oxford online dictionaries,2005). It is defined in merriam-webster dictionary as ‘the act or process of globalizing’ and ‘the state of being globalized’, in which globalize is ‘to make (something) cover, involve, or affect the entire world.’(Merriam-webster dictionary, 2015) This conception implies the process of international change of goods, services, values, ideas and other aspects of culture, which is related to trade, investment and environment closely. Two important drivers of globalization are International trade and FDI. Critics of globalization thought it will harm the environment in a global scale.
The Basel Convention on the control of transboundary movements of hazardous wastes and their disposal was adopted on 22 March 1989 by the Conference of Plenipotentiaries in Basel, Switzerland, in response to a public outcry following the discovery, in the 1980s, in Africa and other parts of the developing world of deposits of toxic wastes imported from abroad. This convention has three aims: the reduction of hazardous waste generation and the promotion of environmentally sound management of hazardous wastes, wherever the place of disposal; the restriction of transboundary movements of hazardous wastes except where it is perceived to be in accordance with the principles of environmentally sound management; and a regulatory system applying to cases where transboundary movements are permissible. It has 181 parties (until 18 July 2014). (Basel Convention, 2015)
Rotterdam Convention on the prior informed consent procedure for certain hazardous chemicals and pesticides in international trade was adopted in 1998. Its aim is to promote shared responsibility and cooperative efforts among Parties in the international trade of certain hazardous chemicals in order to protect human health and the environment from potential harm, and to contribute to the environmentally sound use of those hazardous chemicals, by facilitating information exchange about their characteristics, by providing for a national decision-making process on their import and export and by disseminating these decisions to Parties.(Rotterdam Convention, 2015)
The Stockholm Convention on persistent organic pollutants is a global treaty come into force on 2004, May. It requires its parties to take measures to eliminate or reduce the release of persistent organic pollutants into the environment, and committed to protect human health and the environment from these pollutants. This convention has items about restrict the import and export of the intentionally produced Persistent Organic Pollutants. (Stockholm Convention, 2015)
Bamako Convention on the ban of the import into Africa and the control of transboundary movement and management of hazardous wastes within Africa is a ban of importation of hazard waste into Africa. This convention just accepts application from AU, and it has 29 Signatories and 25 Parties until 2013. (Bamako convention, 2013)
3.1 Environmental Kuznets Curve (EKC) Hypothesis
Even through the inverted U-shaped relationship between environment pollution and income were noticed before, Theodore panayotou(1993) was the first researcher who mentioned this phenomenon fit the Kuznets curve and proposed the EKC hypothesis. According to this hypothesis, when per income of an economy is low, economic growth is accompanied with environment degrade, while if this per income is relatively high, economic growth would coincide with environment improvement. Therefore, the relationship between environment quality and income shows a shape of invert U, and economic growth will finally be solution of environment problems.
Empirical studies of EKC found that when economic increased, different environment indicators show different characteristics. Environment health indicators, such as water pollution and air pollution, are more likely show an inverted U-shape curve. These indicators include concentration of air pollutant such as sulfur dioxide, concentration of chemicals release to the nature water such as organophosphorus, environment improvement indicator such as deforestation rates. However, natural resource consumption and biodiversity conservation indicator are not supported to have this curve relationship with income rise. For example, the total amount of natural energy consumption, land usage and natural resource consumption are all experience increase with rising GDP in developed countries.
Even through among the environment health indicator researches, critics of EKC hypothesis are also very common. For example, Arik Levinson (2000) indicated that the traditional inverted-U-shape pollution-income relationship is neither necessary nor sufficient for pareto-efficient environmental policies. The research from Millimet and Thanasis(1999) even show that this inverted U-shape curve can be an N-shape curve. In this N-shape hypothesis, when a country’s economy passed a threshold, its pollution will decrease with the rising income. However, as people with rising income will require more creature comforts, the amount of pollutant will finally rise with the rising economic after another GDP threshold.
Even through stemming from empirical data, the EKC hypothesis is a conceptual model fail to provide information about its working mechanism. Several possible explanations of this hypothesis are provided and three of them are generally discussed.
The first explanation is that EKC is driven by environment standards, and the hypothesis is actually illusion caused by environment policy changes, thus not a valuable investigation theory. In this explanation, pollution problem can be air pollution problem, water pollution problem and urban diseases related pollution problem conjunct with economic development. At the beginning of economic increase, poor people usually have less environment quality requirement and the economy tends to have less stringent environment regulation, causing the environment damaged with environment development. When this economy is rich enough, its people will demand better environment, the government will strengthen its environment policies and the economic structure will switch to a cleaner model, thus the environment will improve with economic development. Therefore, the EKC is not a special theory; it is just a reflection of residents’ environment awareness and local environmental policies.
The second explanation is that EKC is a result of industrial transfer during the process of globalization. In this process, rich developed countries transfer pollution-intensive and high resource-consumption industries to poor developed countries, and restructure its industry from a pollution-intensive industrial one to a cleaner service style. Because of this industrial restructure, when one country is rich enough, its environment quality will improve with the economic development. However, this story arises two problems: firstly, the number of countries in this world is limited, and thus this restructure on the base of industry shift also has limitation. The poorest countries will never have chance to transfer its pollution-intensive or resource-consumption industries; hence, their environment problem will never be cured by economic development. Secondly, even though the transfer of industry provides the rich countries opportunities to obtain an EKC, the total pollutant production remains the same or even grows larger. Therefore, the environmental problem is not mitigated with the economic development in the global scale.
The third explanation is that EKC is the representation of a combined effect of environment damage and environment purification. Environment damage coordinate with economic development can be reduced by time related effects in all countries with different levels of income. However, different countries have different economic increase speed, and thus reflecting different characteristics of environment changes. In rapidly growing middle income countries, the environment damage overwhelms the time related environment purification effect, and showing a degrading environment. While in rich developed countries, the economic grows slower and the time related pollution reduction overcomes the environment damage caused by economic growth, performing an improving environment.
International trade can influence the trader’s environment in three paths according with three explanations above. Firstly, international trade can exacerbate the economic competition among countries, encourage countries to set looser environment standards, and lead to inefficient of existing environment policies, resulting in fail of EKC hypothesis. Secondly, international trade increases the feasibility of pollution-intensive and resource-consumption industries transfer, and thus improving the domestic environment of developed countries. Thirdly, international trade can promote the economic development, thus driving the trader experience the environment quality change through the inverted U-shape path.
3.2 Pollution Haven Hypothesis
The pollution haven hypothesis is first proposed by Walter and Ugelow (1979), and then widely employed by researches focus on relationship between international trade or FDI and environment protection. In this hypothesis, countries are participated in international trade to maximize their benefit; hence, they should export products in which they have comparative advantages. In the situation of south-north trade, developing countries normally have better environment or higher toleration to pollution, causing their looser environmental stringency. Therefore, the loose environmental stringency in developing countries will attract high-polluting industries from developed countries, and thus forming a ‘pollution haven’. This hypothesis can happen in three scales: pollution control expense composes with other more important factors to decide the trade flows and investment decisions; pollution control expense is important factor which can evidently influence the trade flow and investment decision; environment standards below socially-efficient levels are set to promoted exportation or attract foreign investment.
Even through this hypothesis is supported by theoretical studies; its empirical evidences are controversial. Researches supporting this hypothesis found that developing countries are more likely conduct on dirty industries and export pollution-intensive and resource-consuming products, while developed countries are engaged on cleaner industry and export technology-intensive products. However, researches against this hypothesis thought the explanations from the supporters are weak. The opponents’ researches showed that developing countries which encourage trade lateralization and foreign investment experienced a decline of pollution, and that developed countries, such as the United States, also shift its industry structures to a more pollution-intensive model in specific period.
In these empirical studies, different research objects, environment indicators, and variable natures are employed. Regional level, provincial level and national level Relationships between trade (or FDI) and environment are all fully studied. Researches compare single country’s importation and exportation structure and researches contrast international trade structures among different countries are both popular. Environmental index from area of air pollution, water pollution and resource consumption are usually selected as criteria to evaluate the environment changes in the target countries. Concentration of carbon dioxide, concentration of sulfur dioxide, chemical oxygen demand, biological oxygen demand, forest area and other published environment indicators are most commonly employed because of their data accessibility. Environmental regulation levels are set as endogenous variables or exogenous variables in different researches. However, these differences are not reasons for whether they support the hypothesis; they just increase the complexity of the controversy.
3.3 Race to the Bottom (RTB) Hypothesis
RTB hypothesis believes that supposing the situation of completely free trade, the competition among traders will drive the deregulation of business in the global scale. In the trade-environment relationships researches, this deregulation will be relatively loose environment regulations. This hypothesis is a gloomy outlook of globalization, and can be theoretical basis supporting the critique of globalization.
In the RTB scenario, trade liberalization brought more intense competition and smoother capital flows among economies. This process would largely raise the capital inflows of countries with lower environment standards; therefore, would reduce the industry scale and the employment rate in other countries. In order to prevent the outflow of capitals, countries with stricter environment regulation will reduce its environment standard. Therefore, this trade competition evolved into a race of reducing environmental standard to the bottom, and all the participants in global trade will fall into ‘prisoner’s dilemma’. Finally, a considerable number of countries in the world would set environmental standards, with which the marginal cost of abatement will exceed the marginal cost of damage. Hence, the result of globalization would be a declined environment standards and an increased pollution level.
Even through the logic of RTB hypothesis is plausible, its empirical research results is controversial.
Supporters of the RTB believed that RTB is phenomenon under certain scenarios. For example, if the environment policy is inferior to industry policy, the domestic government will have incentive to set weaker environmental standards and take tax benefit over the potential environment damage. What’s more, even though countries with strong environmental protection systems and management capabilities will not participate in this race, other countries with a weak and defect government will be active participants because of the trade competitive pressure. In this case, the international environmental standards will be polarized, and the environment will be damaged in the global scale.
However, increasingly number of researches showed that the possibility that race to the bottom of environmental standards phenomenon exist is small and this hypothesis lack of sufficient evidence. It contained too many assumptions in its deduction, such as the corporations always prefer lower regulation standards, this standards are strong enough to affect a corporation’s location, and no capital is big enough to change the ‘prisoner’s dilemma’ among governments. Moreover, it ignored capital flow influence factors like the technology level, skilled workers, transportation expense, heterogeneity of products, and people’s preference of environmental friendly products. All these shortcomings make this theory unpersuasive. What is more, evidence even showed that when trade liberalization increase the income of an economy, the demand for environment as a product is also increased, and thus countries participated actively in international trade will take more stringent environment standards than before.
In conclusion, the RTB hypothesis is a pessimistic forecast of the future of globalization. Even through it is theoretically possible that a race to the bottom phenomenon could occur at certain industry in a special time period as a part of globalization; where capital does not rely on specialized assets and skilled workers, environment expense exceed other costs and the government is easily persuaded to change its environmental standard; this hypothesis still draw too much criticize and its predictive capability is still questionable.
3.4 Factor Endowment Theory
The factor endowment theory is based on a neoclassical model and attempts to explain the pattern of comparative
advantage. In this theory, countries are under same conditions, and will conduct on specific industries they have better endowment factors. These factors are not specifically defined, and can be any factor influence international trade, such as land, labor, capital, technology, resource, environmental capacity or policies.
Under this hypothesis, the influence of international trade will highly depend on its potential productivity abilities. If a country is better at intensive-pollution industries, trade liberalization will increase its environment damage; while if a country has better factors for cleaner industries, trade liberalization will reduce its pollution level. When compare countries in the world, it is obvious that developed countries have larger capital, if issuing similar environmental standards with developing countries, they will engage in heavy polluted capital intensive industries, while developing countries with cheaper labor, will engage in cleaner labor intensive industries. However, developed countries always enjoy higher environmental standards. Whether developed country will suffer worse environment in the process of globalization will be determined by whether the benefit coming from the low capital expense can overcome the cost resulting from environmental policy.
In conclusion, the factor endowment theory indicated that industry location is decided by comparative advanced factors, which cannot be decided by signal factor, and a combination of different factors should be considered.
3.5 Scale, Composition and Technique
Scale, composition and technique are metrics, which can work together as a useful framework to evaluate the relationships between international trade and environment damage. This framework is first developed by Grossman and Krueger (1993) for investigating how reduction of trade barriers can affect environment in Mexico. Later, this evaluation method is widely applied to identify the impact international trade or FDI can give to environment.
In this evaluation framework, scale effects, composition effects and technique effects are considered to be three mechanisms by which international trade or foreign direct investment can impact the environment. Scale effects imply to the process that if the scale of industry is increasing and the activity remains the same, then pollution and resource depletion will grow at the same speed of the scale growth. Composition effects refer to the process that when demand from international trade increase, the export country will change its industry structure to meet this demand. In the north-south international trade studies, this industry structure change is probably being a switch to more pollution-intensive activities for developing countries which probably had adopted relatively low environmental standards. Technique effects occur in two situations. One scenario is that the international trade or foreign direct investment will encourage developed countries to transfer advanced, cleaner or less resource-consumption technologies to developing countries. The other scenario is that when the international trade or FDI increased the economic level of a nation, the nation will require for a cleaner environment and thus developing more environmental friendly technologies by themselves.
The relationship between international trade and environment is a broad research topic, and it can be divided depending different trading subjects.
4.1 International Trades of Pollution-Intensive Product
The relationship of international trade of pollution-intensive products is the oldest and most popular topic. When mention the international trade’s environmental effects, a considerable number of researches are actually talking about the international trade of pollution-intensive products. The pollution heaven hypothesis, race to the bottom hypothesis, environmental Kuznets Curve hypothesis, factor endowment theory and the scale, composition and technique evaluation framework all can be applied to this topic.
4.2 FDI and Pollution-Intensive Industries Transfer
FDI and pollution-intensive industries transfer represents another aspect of the international trade story. The free trade of pollution-intensive products is the basic of the transfer of this type industries. The pollution heaven hypothesis, race to the bottom hypothesis and factor endowment theory all has implication of relocation of industries.
4.3 International Trades of Resource-Intensive Products
International trade of resource-intensive products will directly reduce the resource amount in the export countries. Resource-intensive products can be divided to two kinds, one is wildlife products, and the other is mineral products. Wildlife products include the skins, medicinal ingredients, food, adornment, building materials and other goods involve live animals and plants. Even through the amount of wildlife trade are rarely quantified, it is possible that the trade will influence the survival of special species. Among all these products, wood trade, which would influence a country’s forest area, are more frequently investigated. Mineral products referred to ore mined products. The international trade will increase the mineral exploration of the exporter, and thus raising the possibility of mining activity related environmental damages.
4.4 International Trade of Waste
Besides international trade of products, researches focusing on international trade of waste, especially electronic waste are flourishing. If the traded waste is not properly disposed, it can harm the importer’s environment directly. International agreement, such as Basel Convention, Rotterdam Convention, Stockholm Convention and Bamako Convention, are all try to forbidden the trade of special type of waste. However, because lack of data, the researches on relationship between international trade of waste and environment degrade is still not enough.
4.5 International Trade and Carbon Emission
International trade and carbon emission is a new hot topic. Carbon emission is different from other contaminants; its influence is not contained to a special area, and the caused greenhouse effect is worldwide. Therefore, the target of carbon emission is to reduce the carbon concentration in the global scale. This character distinguishes carbon emission from other air pollutants, and the industry transfer of carbon-intensive industry is meaningless. Hence, different research methods are applied.
5. Inevitable Issues in the Research of International Trade and Environment
5.1 Data Availability and Data Reliability
International trade data is impossible to obtain through research method, such as questionnaire. Therefore, most researchers apply international trade data are downloaded from World Bank Database, United Nation’s Comtrade and national statistical agencies. However, their data has three problems. Firstly, international trade data of special products are not available, such as most types of electronic waste international trade data. Secondly, among the available data, product categories are not divided meticulous enough, and thus the estimation of pollution generated from different life cycle stages are imprecise. Thirdly, the available data are not fully reliable because it fails to record the international trade data from rampant illegal international trade. This data reliability problem is more serious when researches are about products forbidden by international agreement or domestic laws, such as electronic waste.
5.2 Unified Product-Pollutant Factor
Among researches analysis pollutant embodied in the trade products, unified product-pollutant conversion factors are widely employed. However, these unified factors do not comply with the real-world situation for three reasons. Firstly, one broad category of product may actual contain different types of products which represent different pollution generation. For example, flat screen is only one kind of products, while it may contain flat screens of different sizes and structures, which will embody different pollution. Secondly, even the products are completely the same, there is strong possibility that this product coming from different companies with different production equipment, and thus generating different amount of pollutant. For example, electricity coming from different thermal power plant is completely indistinguishable, while the coal consumption can range from 298g/ (kW·h) to more than 500 g/ (kW·h). Thirdly, even the products and its produce processor are equal, the resource they consume are possibly different. For example, one big problem in the carbon emission estimation is that unified coal calorific value factor is applied in the national level, while this factor actually is very different depending on the quality of the coal mine.
5.3 Simple Environmental Indicators
When conduct on researches related to environment and trade, researchers tend to choose very simple environment indicator, such as concentration of a single pollutant or a composition of less than five pollutants, and it will cause tendentious conclusion. For example, it is possible that the concentration of one single pollutant is increase, while the overall quantity of the environment is improved. Another example is that the product investigated generate several different pollutants, the changes of the environment indicator displayed one pattern, while other pollutant shows another. Moreover, some government published environment indicators are unclear or imperfect, especially in developing countries.
5.4 Measuring Environmental Regulatory Stringency and its Expense
Poor proxies of the measurement of environmental regulatory stringency always cause endogeneity bias, and this representation easily arouses disputation. For example, the regulatory expense varies across region and industry, and studies focuses on these differences are conducted on specific product of small area, while the international trade researches tend to ignore this distinction and apply a universal conversion factor. Moreover, the execution of an environment policy is different among countries and industries too. What’s more, indirect measures of stringency, such as signing an international environmental treaty, are usually applied in a considerable number of researches, especially in studies referred to developing countries.
The relationship between international trade or FDI and environment are affected by several factors. Besides the factors frequently examined in existing researches, this relationship is also heavily influenced by other normally omitted factors, such as corruption, environmental self-purification capacity, geography situation and local culture. However, these important factors are simply ignored or assumed to be a fixed factor by most researches, which will reduce the persuasive and application of these researches.
Reference and Further Readings
Arik Levinson.2000. The Ups and Downs of the Environmental Kuznets Curve. The UCF/CentER conference on environment, Orlando, FL.9.
Bamako convention. 2013. BAMAKO DECLARATION ON PROTECTION OF AFRICA AGAINST ILLEGAL DUMPING OF HAZARDOUS WASTES,06. http://www.unep.org/delc/Portals/119/Bamako/BamakoDeclaration26June2013.pdf [accessed April 2015].
Basle Convention. 1992. Basle Convention on the control of transboundary movements of hazardous wastes and their disposal. http://www.basel.int/Portals/4/Basel%20Convention/docs/text/BaselConventionText-e.pdf [accessed April 2015].
Brian R. Copeland and M. Scott Taylor. 1994. North-South trade and the environment. The quarterly Journal of Economics, 08: 755-787.
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