Environment and Trade

Contents

1 Introduction

2 The linkage between trade and environment

3 Global Trade and WTO
3.1 Functions and core principles of the WTO
3.2 Exceptions from the core principles in context to the environment
3.3 Dispute settlement

4 Regional Trade Agreements
4.1 European Union
4.2 North American Free Trade Agreement
4.3 MERCOSUR

5 Case Study: Banana Production, Trade and Environment in Costa Rica
5.1 Environmental externalities
5.2 Improvements

6 The European Banana Regime and the Banana War

7 Conclusion

8 References

Acronyms and abbreviations

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1 Introduction

Though trade has a rather long tradition since the mankind started to specialize more and more on special fields resulted in a steady grow of importance of trade, some special events in this context were the colonization and the start of the industrial revolution. But more most impressive in connection with trade and environment are the trends over the last 50 years. A fundamental change of the economic structures took place. National economies became integrated in a global economic structure. Today many products consist of single parts produced in different countries and regions all over the world and are assembled somewhere else. The whole globe is connected via powerful means of communication and information technologies like the Internet. Within 50 years, the importance of international trade increased dramatically: It grew by a factor of 14, while global economy quintupled (UNEP, 2000). One reason is that barriers to global trade and investment have been reduced, and global as well as regional trade agreements have been founded.

During the same 50 years, we have also seen dramatically environmental changes. Emis- sions of substances like carbon dioxide, nitrogen and sulfur from transportation, agri- culture and industrial production increased, polluting the abiotic goods water, soil and air. Human mankind became more and more unsustainable. The population increased in industrialized and, at higher velocities, in developing countries. Between 1950 and 1999, world’s population increased about 2.5 times, reaching a number of over 6 billion people (UNEP, 2000). In approximately 50 years, we run out of crude oil. Also our most important substance, water, will become more and more scarce, among other re- sources, whereas the population will still increase and strengthen the pressure on the environment if there will be no changes.

Another point is that the benefits that trade can bring along with have not been evenly spread. The inequities increased, and this also affects the relation between trade and the environment, as “Poverty and environmental degradation are closely interrelated. While poverty results in certain kinds of environmental stress, the major cause of the continued deterioration of the global environment is the unsustainable pattern of consumption and production, particularly in industrialized countries, which is a matter of grave concern, aggravating poverty and imbalances” (Agenda 21, Chapter 4.3). This paper aims to visualize the linkage between trade and environment as well as the complex patterns of global trade and its influence on our environment more in detail in a case study about the banana production.

2 The linkage between trade and environment

The trends presented in the introduction are not isolated. Environment and trade form a relatively complex relation. For a possible solution towards a more sustainable world these connections are very important. As the interrelations between trade and environment are so complex, there are different approaches for a further investigation. Besides an approach to analyze the roots of environmental degradation sector-wise, the so-called general equilibrium effect approach allows an overview over the relevant interrelations between the different sectors and countries.

By the help of these general equilibrium models of international trade, the connections between international trade on the one hand and the environment on the other hand can be studied in a much more global context. Especially at the beginning of the 1990s this issue became discussed in context with the foundation of the North American Free Trade Agreement (NAFTA) between Canada, USA and Mexico as well as the general trend towards trade liberation. Since a study on environmental effects of the NAFTA by Grossman and Krueger in 1991, it has become popular to divide the environmental impact into the following three elements: the composition effect, the scale effect and the technique effect.

The composition effect is caused by a further specialization in the world due to global trade activities. That means that in countries there will be a specialization on certain goods and an import of the other ones instead of producing everything for the local mar- ket. As specialization will lead to an increase in efficiency, this is economic beneficial. It will be also beneficial for the environment in case that the pollution on average caused by the expansion in export sectors is less than the pollution of the production of such goods that have to be imported. Vice versa, the net effect on the local environment is negative in case of the opposite situation. A problematic aspect of the composition effect is that the exports of one country are the imports of another country and vice versa. Therefore pollution problems are likely to be shifted from one part of the earth to another: “International trade will therefore redistribute local pollution problems in the world from countries that have a comparative advantage in industries that are inherently less polluting to countries that have a comparative advantage in industries that are in- herently more polluting, whatever the basis for these comparative advantages may be” (Nordstrom and Vaughan, 1999).

As second effect, the scale effect is related to the result of increasing economic activ- ities, especially in connection with the composition effect. Enhancing the production will result in higher pollution if production composition and pollution coefficients re- main untouched. By this correlation, one can say that higher production is harmful to the environment and speeds up environmental degradation. Finally, the technique effect is strongly connected with the scale effect because higher production rates will lead to growth in income. With reference to the interrelation between poverty and en- vironmental degradation, one can state that the environmental awareness will increase. This leads to a higher willingness to pay for more environmentally-friendly products. Furthermore, there will be stricter environmental regulations and therefore the result will be an decrease in pollution per output unit.

However, most important for the environment is the net result of all the three single effects, especially in connection with trade liberalization between countries of the North (developed countries) and the South (developing countries). As already mentioned, it can happen that more polluting industries will shift to developing countries, where environmental standards can be expected to be lower than in the developed countries. Among others, Copeland and Taylor tried to model what is likely to happen. In Copeland and Taylors first paper (1994) pollution is said to be a local problem. It might be that further trade liberalization is beneficial, especially if the economic development in the South is larger than in the North. Environmental standards of developing countries will then reach the level of the developed countries and this will result in a lower total pollution. In a second paper, Copeland and Taylor (1995) find that if pollution problems are said to be global, in connection with trade-able pollution permissions, it may be that the result will be higher emissions than before this further liberalization.

In general, one can say that “by combining trade and environmental reforms one should be able to find ways to raise incomes without compromising the natural environment” (Nordstrom and Vaughan, 1999). Therefore trade does not neccessarily conflicts with environmental protection. Trade liberalization is not by itself positive or negative for the environment. The effects depend to the extent to which issues of trade and environment can be joined in such a way that they can be supportive. In order to find a solution, it can be helpful to consider three common perspectives, namely these of trade, envi- ronment and development. Though these three sights are stereotypes, they are a good example for all the different aspects which have to be considered in the interrelations and dependencies between trade, environment as well as development issues.

From the trade perspective, wealth can be derived from trade activities and this wealth could be the basis for increasing the living conditions as well as for environmental improvements. But often national governments give demands from national industries far too much importance, and this results in inefficiency in terms of the use of resources and waste production, but also higher prices for the consumers.

The environmental perspective however states that “Trade means more goods produced and thus in many cases more environmental damage” (UNEP, 2000) because national governments tend to protect their industries from implementing methods for environmental standards. This leads to the situation that companies generate profits while the public pays the costs of environmental degradation. In other words, the so-called environmental externalities are not fully internalized.

From the development perspective, the problem is that the majority of the world population lives in developing countries, and disparities are still increasing. Liberalization is might be a key to overcome these disparities, if the industrialized countries would not try to protect their industries via subsidies and special trade rules. Additionally, industrialized countries have a too deep influence on multilateral trade organizations like the World Trade Organization.

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