Abstract
Increasing economic integration of sovereign nations, reflected by the growth of trade flows in the past decades and associated with a rapid increase of economic activities and world-wide GDP, has also been accompanied by an alarming increase of local, national, international and global environmental problems. Economists tend to view this as a coincidence, treating the two developments as separate.
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References
See standard textbooks on international trade such as Gandolfo [1994] or Markusen et al. [1995].
See for example Baumol & Oates [1989] for a comprehensive textbook of environmental economics.
See Esty [1994, 9pp] for a summary of environmentalists’ critique of free trade.
It should be noted that GATT/WTO rules and regulations do not prevent trade measures taken pursuant to environmental objective in general. However, trade measures addressing production and process methods of imported goods are not sanctioned by the GATT/WTO.
For an extensive summary of the debate see Esty [1994].
From a (neo-classical) point of view, environmental problems arising from human activities are subsumed under negative externalities or external effects; compare Rauscher [1997, 19pp] for further elaboration on environmental problems as externalities.
Compare Baumol & Oates [1988, 258], Feess [1998, 207], and Siebert [1995a, 170]. Examples are pollution of inland water resources, or smoke generated by a production process which is not transported outside the vicinity of its source.
Some authors further distinguish regional environmental problems, i.e. spill-over externalities which affect a subset of the world community. Siebert [1995a, 187pp] and Feess [1998, 210pp] for example analytically differentiate regional and global externalities.
This reflects the legal definition. However, the definition used in non-legal literature for global environmental commons also encompasses resources whose value affects nations other than those having jurisdiction over them, i.e. portions of the globe located within the jurisdiction of sovereign states whose value accrues to all mankind (e.g. bio-diversity); compare Tschofen [1992, 1/2].
Global environmental commons comprise common pool resources such as minerals in deep sea beds, common sink resources such as the atmosphere and the oceans, and global public goods such as bio-diversity and the ozone layer. This tripartite nature of global environmental commons has been stressed by Siebert [1990, 1]. Yet other definitions only distinguish two aspects, i.e. common pool and sink resources (e.g. Eckhaus [1993, 3] and Vogler [1995, 3]), or subsume all global environmental commons under global public goods (e.g. Oberthur [1992, 11]).
The term ‘tragedy of the commons’ has been introduced by Hardin [1968] with respect to population growth. However, it is now commonly used with reference to global environmental resources.
The problems of ozone depletion and global warming are summarised in chapter 13.
See Blackhurst & Subramanian [1992, 248] and Sandler [1992].
E.g. Merrifield [1988] and Choi & Johnson [1992]. A combination of both, i.e. an externality which harms society directly and indirectly has also been considered (see Pethig [1992] and Rauscher [1997, ch.5]).
Similar formulations have been used by Hoel [1993] and Rauscher [1991a&b, 1994, 1995d & 1997 ch.5].
This assumption is analytically convenient; it avoids environmental quality affecting the structure of demand. A further implication of additive separability is that both welfare components are superior. Hence, if consumption utility increases — e.g. as a consequence of trade liberalisation — society’s desire for environmental quality grows as well. (For a detailed discussion of additively separable utility functions see Deaton & Muellbauer [1980, ch.5]. For the superiority feature in particular, see Deaton & Muellbauer [1980, 139]).The separability assumption is made in the majority of models similar to ours. However, some authors choose a less restrictive approach (e.g. Copeland [1993 & 1994], v. Long & Siebert [1989], Ludema & Wooton [1994], Markusen [1975] Panagariya et al. [1993], Pethig [1976], and Siebert [1977]).
As regards the source of pollution, it is also possible to model externalities arising from consumption (e.g. Rauscher [1997, ch.5] and Beghin et al. [1994b & 1996]. However, for our purposes — i.e. addressing environmental policy and trade policy linkages — a PPM externality is more appropriate since multilateral trade rules ban trade instruments addressing PPM externalities, while trade instruments addressing consumption externalities are allowed. Chakarian [1994], Lee [1994], Tudini [1993], and Vaughan [1994] provide a survey of PPM pollution in the context of trade and environment.
Further specifications of environmental pollution, i.e. which environmental medium is affected and their dynamic features, i.e. whether the damaging effect arises from the stock or the flow of a pollutant, are neglected in our study. For a taxonomy of environmental pollution see Siebert [1995a, 21/22].
Choi & Johnson [1992], Markusen [1975], and McGuire [1982] for example use Heckscher-Ohlin-Samuelson type models with sector-specific environmental externalities. In Ricardo-Viner models Copeland [1993] and Rauscher [1991b] also use a sector-specific environmental externality arising as a by-product of production in one of two sectors. Heckscher-Ohlin-Samuelson models in which both sectors release environmentally harmful emissions are modelled by Pethig [1976] and Siebert [1977&1979]. n-sector international trade general equilibrium models where all sectors pollute the environment are considered by Copeland [1994] and Hœl [1993].
Yet, if this model was to be generalised to a Heckscher-Ohlin-Samuelson formulation, factor specificity would imply that both sectors pollute the environment as it does in Klepper [1994], Pethig [1976] and Siebert [1977&’79]. Panagariya et al. [1993] set our a similar model by augmenting an Heckscher-Ohlin-Samuelson model with a third, sector-specific input factor which causes an environmental externality.
Often environmental pollution arises in capital-intensive sectors (e.g. industrial sectors, energy generation) where they are largely determined by the production technology, which in turn reflects the particular capital stock available in the economy; compare Sohmen [1976, 228]. Furthermore, a number of pollutants (e.g. sulphur dioxide and carbon dioxide) are positively correlated with the capital stock of economies; see World Bank [1992, 11]. Further advantages of our modelling approach are that the model can be handled like a ‘normal’ Heckscher-Ohlin-Samuelson model; i.e. the environmental externality does not add analytical complexity. At the same time, we do not reduce the generality of the Heckscher-Ohlin-Samuelson approach.
Focussing on the relation between the environment and trade as they appear in our model, we suppress many aspects feeding the ‘awkwardness’ (Rauscher [1997, 1]) of the connection. For example, we neglect environmental cost from transportation (see Helm [1995, 29pp]) and problems associated with cross-border waste disposal (see Rauscher [1997, ch.4]. A further dimension, namely the ‘clash of cultures’ (Esty [1994, ch.2]) between environmentalists and free-traders as protagonists in the debate is completely ignored in our study.
Compare also Helm [1995, 34pp] and Rauscher [1997, 1].
Hence, if an increase in environmental protection efforts stemming from the latter effect trigger environmentally less disruptive PPMs, the aggregate effect cannot be determined in advance. Furthermore, since the Heckscher-Ohlin-Samuelson model is static, empirical observations cannot be expected to reflect its predictions; see Helm [1995, 32pp] for a cursory empirical glance.
The validity of the gains of trade theorem (see Gandolfo [1994, 54pp] and Markusen et al. [1995, 61pp]) is based on a number of assumptions of which the absence of market failures such as (uninternalised) environmental externalities is just one.
This categorisation follows Rauscher [1997, 21]. Siebert [1995a, 125/126] lists in addition moral suasion, publicly financed pollution abatement and abatement subsidies. The three we have listed yield an identical allocation in a static competitive economy where welfare-maximising governments have perfect information.
Government allocates (optimal) pollution quotas or restricts technology choice of firms by setting PPM standards (if pollution is generated by PPMs).
To be an efficient instrument, this tax should be levied on emissions; its optimal level corresponds to the Pigouvian tax, i.e. is set equal to marginal social damage caused by the negative environmental externality.
Government determines the (optimal) emission level and distributes (or auctions) pollution permits accordingly. To yield an efficient solution, a perfect market for these permits is needed.
Rauscher [1991a, 1995c&d] also uses taxes as regulatory instrument. We do not perform a 30 comparison of alternative environmental policy instruments which has been frequently undertaken for closed (Bohm & Russel [1985] provide a survey) and also open (Verdier [1993], Rauscher [1992a]) economies.
E.g. Bhagwati & Srinivasan [1971], Hazari [1978], Herberg & Kemp [1971], Jones [1971], and Magee [1971, 1973&1976].
In general, tariffs can be positive or negative; negative tariffs correspond to an export subsidy. In our theoretical investigation, we shall restrict tariffs to positive tariffs.
E.g. voluntary export restraints, local content requirements, administrative requirements and product standards (compare Krugman & Obstfeld [1997, 197] and Siebert [1994, 179]).
Reasons for restricting our investigation to tariffs are twofold: tariffs and quantity restrictions are in the absence of uncertainty equivalent (see Vousden [1990, ch.2]). Furthermore, since we chose a tax rather than tradable permits as environmental policy instrument, we chose tariffs as environmental policy instrument as the corresponding (price) instrument in trade policy.
It is also possible to analyse trade instruments as (sole) environmental policy instruments (as done by Brandner & Taylor [1998]). However, we confine ourselves to the case when environmental policy is used for trade policy objectives. In view of increasing environmental regulation and decreasing scope for trade policy, we think that this case is more realistic.
The term ‘regulatory capture’ is borrowed from Stigler; similarly adequate would be the term ‘political capture’.
Compare Deardorff [1994].
While the assumption that producers of a particular good gain regulatory capture is rather ad hoc, the fact that producers (rather than consumers) are successful in manipulating government is not: since there are generally fewer producers than consumers, gains from rent seeking are larger for the former. Furthermore, members of a particular industry are often already organised which alleviates coordination for lobbying activities (compare Vousden [1990, ch.8].
For a detailed treatment of the comparative statics approach see Krauss & Johnson [1974].
I.e. a Pareto optimum, an idea originally developed by Pareto [1909]; compare Debreu [1983, ch.1] and Lockwood [1987] on the concept of Pareto optimality in economics.
See Gandolfo [1994, 57], and Markusen et al. [1995, 67p]. For this result, we also need the assumption that government intervention does not take place in these perfectly competitive economies.
Such is for example the case if an environmental externality is present, and prices resulting from decentralised, uncoordinated actions no longer accurately reflect environmental (and hence economic) scarcities. See Mas-Colell et al. [1995, ch. 11] for externalities in general and Baumol & Oates [1988] for environmental ones in particular.
When for example an environmental externality is present, the Coase Theorem applies: if those suffering from the externality and those causing it can (costlessly) bargain, a welfare optimum is restored; see Coase [I960]. Alternative to the bargaining solution, a welfare-maximising government can also correct the market failure with the equivalent result if an efficient policy instrument is chosen, see above.
The parallel to market imperfections causing inefficient resources allocation within an economy is obvious: although none of the assumptions required for a competitive equilibrium in each individual economy is violated, the world market exhibits imperfections, i.e. market power by one of the market participants.
See Markusen et al. [1995, 258].
Optimal domestic environmental policy does not restore global optimality since it does not internalise cross-border externalities. However, a supranational government — for whose establishment countries have to cooperate — can introduce global environmental policy measures to yield a Pareto optimum. Alternatively, governments can bargain to find a Coase solution.
For an introduction to game theory see Rasmusen [1989]; for a sophisticated treatment of the issues see Fudenberg & Tirole [1991]. For the game theory used in our study a basic knowledge of the concepts as presented in Tirole [1988, ch.11] suffices. The Nash equilibrium concept was originally developed by Nash [1950&51] (compare Tirole [1988, 427]). If countries decide sequentially upon their policy measures, the relevant concept would be a Stackelberg equilibrium (originally developed by Stackelberg [1934]; compare Tirole [1988,315]).
See for example Ranné [1996, 1]: “In den Medien oder in der politischen Diskussion werden Handelspartner üblicherweise des Öko-dumpings bezeichnet, wenn ihre Umweltschutzvorschriften weniger streng sind als ein bestimmtes Referenzniveau. Dieses Referenzniveau kann sich .... an den in anderen Ländern üblichen Reglementierungen [oder einem weltweiten Standard] orientieren...Meist werden jedoch als Meßlatte die Umweltschutzvorschriften des eigenen Landes angelegt.”
The relation between eco-dumping and ‘normal’ dumping which refers to locally differentiated prices may not be immediately obvious. First of all, ‘normal’ dumping is undertaken by individual producers, while for eco-dumping governments are the relevant agents. Moreover, while ‘normal’ dumping refers to a situation when exported goods are sold at a price below the one prevailing at the domestic market, eco-dumping may be undertaken by import-competing countries as well. The parallel between them is the fact that ‘normal’ dumping may occur when governments grant subsidies to domestic firms; eco-dumping is thus seen as an ‘implicit’ subsidy (Ranné [1996, 3]; for a different view according to which eco-dumping has nothing to do with ‘normal’ dumping see Kuhn & Tivig [1996, 7]).
This corresponds to a definition advanced by Revesz [1994, 376–9]. Similarly Rauscher’s [1993a, 5] definition: “... environmental dumping is pricing of environmental resources, that are used in the production of export goods, at less than marginal domestic social cost”, which we augment by the fact that lax policies are introduced because of trade relations. Rauscher [1994, 825] advances and investigates a third definition of eco-dumping, namely the laxer treatment of an exportables sector with regard to environmental regulation.
See Revesz [1994, 373] and Rauscher [1997, 279/280]. Often, the term used in this context is ‘environmental race to the bottom’, which might be interpreted to imply no regulation at all. This concept is not particularly useful, since strategic interaction resulting in too low levels everywhere does not depend on the level actually going all the way to zero (see Wilson [1996, 393, footnote 1]). Esty [1994] uses the term ‘political dra’ in similar circumstances.
See e.g. VanGrasstek [1992, 233]. The term is also used by Rauscher [1997] to describe situations when governments introduce too stringent environmental regulation.
See Wilson [1996, 395].
Whether it does is in fact one of the central questions addressed in this study.
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Kraus, C. (2000). Introductory Remarks. In: Import Tariffs as Environmental Policy Instruments. Economy & Environment, vol 19. Springer, Dordrecht. https://doi.org/10.1007/978-94-015-9614-5_1
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