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7/27/2019 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
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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.
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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?
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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.
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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.
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Is trade itself good or bad
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,
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Globalization
Protectionism
THE IMPOSSIBLE TRINITY OF GLOBAL ENVIRONMENTAL REGULATION
Environmental
standards National
sovereignty
Unregulatedemissions
Multilateralgovernance
RACE TO
THE
BOTTOM
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SO2 concentrations tend to fall with openness,especially after controlling for democracy, cross-country
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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
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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
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Is trade itself good or bad
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
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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.
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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.
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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?
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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.”
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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?
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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.
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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.
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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.”
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• 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…
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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.
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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.
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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.
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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.
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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.
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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.
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Appendices
• WTO
– Seattle demonstrators
– Language regarding environment
– Panels
• Characteristics of carbon-intensive import penalties
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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.
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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.”.
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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.”
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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.
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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
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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.
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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).
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