ECON3315ECON3315International Economic IssuesInternational Economic Issues

Instructor: Patrick M. CrowleyInstructor: Patrick M. Crowley

Issue 5: Trade, the environment and outsourcing

OverviewOverview

Environment and tradeEnvironment and trade Some cases of environmental concerns in trade Some cases of environmental concerns in trade

decisionsdecisions WTO and the environmentWTO and the environment A race to the bottom?A race to the bottom? Case studiesCase studies Outsourcing: what is it?Outsourcing: what is it? Who does it?Who does it? Case studiesCase studies

Environment and tradeEnvironment and tradeTrade and environmental concerns are inevitably linked

Kuznets curve – U-shaped

Environmental worsens as GDP per capita increases, and then improves beyond a certain point

3 effects with increased trade:i) Technique – better practices with globalization as technology

transfers to poorer nationsii) Composition – shift in consumption preferences towards cleaner

goodsiii) Scale – expansion in activity with development leads to degradation

of environment

Argument is that i) and ii) will eventually outweigh iii)

Where is China right now?

Trade and Environment Committee in WTO does study these issues

Trade-environmental cases: ITrade-environmental cases: I GATT Article 20 has trade excluded under certain circumstances GATT Article 20 has trade excluded under certain circumstances

relating to environmental reasonsrelating to environmental reasons Shrimp-turtle case (GATT): India, Malaysia, Pakistan and Thailand Shrimp-turtle case (GATT): India, Malaysia, Pakistan and Thailand

vs USAvs USA

- US Endangered Species Act (1973) protects turtles as - US Endangered Species Act (1973) protects turtles as endangered speciesendangered species

- US requires turtle excluder devices (TEDs) when shrimp - US requires turtle excluder devices (TEDs) when shrimp fishingfishing

- US lost case because it discriminated against certain - US lost case because it discriminated against certain countries, giving Caribbean countries loans to buy countries, giving Caribbean countries loans to buy TEDsTEDs

Trade-environmental cases: IITrade-environmental cases: II

In Eastern pacific, yellow-fin tuna often swim underneath dolphins

In fishing for tuna, dolphins are often also trapped in the nets – particularly when using "purse seine" fishing methods.

US Marine Mammal Protection Act (1988) does not allow US to import tuna from countries or intermediaries that cannot prove that they follow the same rules as the US

Mexico appealed against ban of imports of tuna by US to GATT (1991)

Mexico won, but only because of “extra-territoriality” – US not allowed to impose it’s environmental laws on other countries

It can make sure that “Dolphin-friendly” labelling appears when non- “purse seine” fishing methods employed

Trade-environmental case: IIITrade-environmental case: III

Chrysotile asbestos is generally considered to be a highly toxic material, exposure to which poses significant threats to human health (such as asbestosis, lung cancer and mesothelioma).

However, due to certain qualities (such as resistance to very high temperature), chrysotile asbestos has been widely used in various industrial sectors.

To control the health risks associated with asbestos, the French Government, which had previously been an importer of large quantities of chrysotile asbestos, imposed a ban on the substance as well as on products that contained it.

EU justified ban on basis that asbestos was damaging to EU justified ban on basis that asbestos was damaging to workers and to the population as a wholeworkers and to the population as a whole

Trade-environmental case: IIITrade-environmental case: III

Canada claimed that the Decree violated GATT Articles III:4 and XI, and Articles 2.1, 2.2, 2.4 and 2.8 of the TBT Agreement.

Canada argued that a distinction should be made between chrysotile fibres and chrysotile encapsulated in a cement matrix. The latter, it argued, prevented release of fibres and did not endanger human health. 

Despite finding a violation of Article III, the Panel ruled in favour of the EU. Under Article III (which requires countries to grant equivalent treatment to like products) the Panel found that the EU ban constituted a violation since asbestos and asbestos substitutes had to be considered “like products” within the meaning of that Article.

Panel found that the French ban could be justified under Article XX(b). In other words, the measure could be regarded as one which was “necessary to protect animal, human, plant life or health.” 

The WTO and the environmentThe WTO and the environmentProblems with trade and environmental issues:

Environmental issues have “transboundary externalities”

Environmentalists seen as “closet” protectionists by many economists

Bhagwati (1999) makes the point that WTO should deal with trade issues, and environmental policies should be dealt with elsewhere or in separate international agreement

Kuznet’s curve doesn’t work for some forms of environmental degradation: e.g. CO2 emissions

Kyoto Accord was an effort to control CO2 emissions as they suffer from “transboundary externalities”

US refused to sign Kyoto – why?

A race to the bottom?A race to the bottom?

Economists dismiss the argument that different Economists dismiss the argument that different levels of environmental protection promote a levels of environmental protection promote a “race to the bottom”: whole point of comparative “race to the bottom”: whole point of comparative advantageadvantage

But as environmental issues are transboundary, But as environmental issues are transboundary, bound to eventually be harmonizing effect – but bound to eventually be harmonizing effect – but when?when?

US environmental standards certainly did not US environmental standards certainly did not drop after WTO or NAFTA were introduceddrop after WTO or NAFTA were introduced

But in real world developing countries often have But in real world developing countries often have weak regulatory bodies, which might not have weak regulatory bodies, which might not have capacity or ability to properly regulatecapacity or ability to properly regulate

Suggestions for WTO reformSuggestions for WTO reform

Distinguish between product standards Distinguish between product standards and production processand production process

No free-riding on global environmental No free-riding on global environmental commitmentscommitments

Allow protections for environmental Allow protections for environmental reasons if justifiablereasons if justifiable

Blend environmental concerns into the Blend environmental concerns into the GATT agreementsGATT agreements

OutsourcingOutsourcing What is it? What is it?

It is where companies close down US parts of It is where companies close down US parts of their business and locate that part of their their business and locate that part of their business overseasbusiness overseas

Outsourcing has become a very controversial Outsourcing has become a very controversial topic – raised by US politicians of all stripes as a topic – raised by US politicians of all stripes as a concernconcern

Could even affect US tax policy under Obama Could even affect US tax policy under Obama administrationadministration

Economic effects of outsourcingEconomic effects of outsourcing

Case studiesCase studies

- credit card industry- credit card industry

- support for electronics- support for electronics

- publishing- publishing

- software- software

Offshoring vs OnshoringOffshoring vs Onshoring

OutsourcingOutsourcing

Obviously certain factors drive offshoring abroad: Obviously certain factors drive offshoring abroad: educated but cheaper labor force, english educated but cheaper labor force, english language, time zone, lack of skilled labor in home language, time zone, lack of skilled labor in home country.country.

Numerous surveys indicate that anywhere between Numerous surveys indicate that anywhere between 17 percent and 53 percent of customers have not 17 percent and 53 percent of customers have not realized business value/return on investment from realized business value/return on investment from offshore outsourcing. offshore outsourcing.

So in some cases savings have been So in some cases savings have been underestimated from offshoring – Q: but why?underestimated from offshoring – Q: but why?

A: US$ exchange rate, time zone and overtime, A: US$ exchange rate, time zone and overtime, language, increased quantity of labor required language, increased quantity of labor required (lower productivity, more functions required)(lower productivity, more functions required)

Economic effects of outsourcingEconomic effects of outsourcing

In country that receives outsourcing, demand for In country that receives outsourcing, demand for labor increases, increasing wages in those labor increases, increasing wages in those sectors, and thereby changing relative wagessectors, and thereby changing relative wages

In country that outsources, demand for labor falls In country that outsources, demand for labor falls in that sector, lowering wages, and also changing in that sector, lowering wages, and also changing relative wages.relative wages.

In theory should have same effect as migration of In theory should have same effect as migration of labor…except that the labor doesn’t relocate!labor…except that the labor doesn’t relocate!