Thanks to the debates between free-traders and environmentalists, most sophisticated environmentalists no longer hold the view that if trade is freed without environmental policies being in place, not only will the environment be harmed but the country’s economic welfare will be set back. But this misconception is still commonplace in the wider environ- mental community.
That this may happen is surely correct. That it must happen is incor- rect. I and my GATT colleagues Richard Blackhurst and Kym Anderson addressed this issue in 1991 when I was economic policy adviser to Arthur Dunkel, the director general. The GATT Secretariat was working on a special report on trade and the environment, and we took the occasion to clarify matters.8 In particular, we provided examples from the real
world that showed that, contrary to the environmentalists’ pessimistic certainties, economic welfare increased with trade liberalization even though ideal environmental policies were not in place, and that the en- vironment improved also.9
The most compelling illustration came from agricultural trade lib- eralization contemplated in the Uruguay Round of multilateral trade negotiations. Anderson calculated that such liberalization would shift agricultural production from higher-cost, pesticide-intensive European agriculture to lower-cost, manure-using agriculture in the poor coun- tries, so that both income and welfare would increase in each set of coun- tries, and total environmental quality would also improve.
Environment in Peril?
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139The GATT report also cited a study by Robert Feenstra that showed (as is illustrated in the following chart) that import quota protection had led, as economists had predicted, to increased imports of larger gas- guzzling cars from Japan and reduced imports of smaller, higher-fuel- efficiency cars because the bigger cars carried more margin of profit than the smaller ones and it paid the Japanese car manufacturers to ex- port more of the larger cars within a given quota. So the imposition of protectionist quotas had led to both lower economic welfare and to in- creased pollution.
But one could equally cite cases where the freeing of trade, in the absence of an appropriate environmental policy, would lead to a dete- rioration in the environment. This seems to have been the case with what is called sometimes the “blue revolution” (following the “green revolu- tion” for new seeds, which also inspired, believe it or not, the phrase “pink revolution” for improvements in raising pigs): the rapid expansion of
Perverse consequences for the environment may result from trade restrictions. This graph shows Japanese car exports to the United States before and after Japan’s acquies- cence in voluntary export restraints. Sales of small, fuel-efficient models declined, whereas those of the larger “gas guzzlers” soared. Source: Robert C. Feenstra, University of California, Davis.
coastal shrimp farming in the 1980s in several countries in Asia and Latin America, principally in Ecuador, Colombia, Indonesia, Thailand, the Philippines, India, Bangladesh, China, Taiwan, and Vietnam. By the early 1990s, the share of pond production of shrimp had risen to nearly a third of the total shrimp harvested.
While private domestic firms and foreign multinationals from around the world led the process, this expansion was also assisted by development specialists in the national governments and in multilateral aid agencies such as the World Bank and the Asian Development Bank. Shrimp exports constituted a growing share of export earnings, which these agencies correctly—recall Chapter 5—assumed would also accel- erate the growth of the economy. But it turned out that coastal shrimp farming, often described also as “shrimp aquaculture,” was creating harm- ful environmental spillovers regarding which no policies were in place. Three acute problems had arisen:
• The shrimp ponds produced effluents that contaminated the water supply for others (and for themselves as well).
• They used large quantities of fresh water, which then led to a drop in the water table and the intrusion of salt water.10
• Their expansion often led to the destruction of surrounding mangrove forests, “with serious consequences for commercially valuable fish and shrimp stocks which depend on a mangrove habitat during the juvenile stages of their life cycles, [with the result that there may be] serious reductions in marine harvests and domestic fish supply in the future.”11
It will be immediately obvious in this example that if those who own and operate the shrimp farms were forced under a “polluter pay” principle to compensate those whom they harmed, then the environ- mental damage inflicted by the coastal farms would be reduced because the production of coastal shrimp—whose producers are currently not having to pay for the social costs they are imposing through spillover effects—would have to cover those social costs. Economic welfare would also improve since the policy would have raised the cost of production to reflect true social costs.
So, in the absence of an appropriate environmental policy that makes producers pay for the pollution they cause, there is no reason to say that free trade will necessarily do worse or better than trade restrictions on either the environmental or the economic front. The examples of agri- culture and car imports were favorable to free trade; the coastal shrimp example was not. It all depends on the particular case.
Environment in Peril?