Trade and the environment : a survey of the literature

The recent revitalization of concern for environmental quality has generated many questions about the interaction between trade and the environment. Most of these questions have to do with the impact of environmental regulation on trade patterns and gains from trade. If a tradeoff is perceived, it is often argued that some intervention becomes appropriate: either a specific trade policy or the establishment of an international environmental standard. Present GATT policy then becomes an issue of debate. Should GATT revise its rules to accommodate the specific trade measures suggested? How can GATT ensure that the environmental objective is not a disguise for a trade barrier? Should GATT establish some international environmental standard with procedures to ensure compliance? The importance given to trade liberalization and exchange rate policy reform as part of adjustment for development has raised another set of questions: Is there a direct link between the removal of trade barriers and environmental degradation? If so, how should liberalization strategies incorporate this cost? Should trade policy be used to meet environmental objectives? The author surveys the literature on the main questions being debated in both of these areas. Among her conclusions: (1) More stringent regulations in one country are thought to result in reduced competitiveness and perhaps industrial flight and the development of pollution havens. The many empirical studies that have tried to test these hypotheses have shown no evidence to support them. (2) Countervailing duties or an international environmental standard have no place here. Both concepts ignore the reallocation of resources that must occur if externalities are to be efficiently incorporated into costs. They also ignore the fact that standards should be based on local calculations of marginal costs and benefits. Only if an exporter's standards are below what is locally optimal would a countervailing duty be justified. (3) Subsidies are likely to be trade barriers in disguise and should generally not be accommodated. They are not usually an efficient means of achieving an environmental objective and may hinder the efficient allocation of resources away from pollution-intensive industries. (4) Imposing a tariff when pollution spills over national boundaries can be no more than a second-best policy. If the tariff is based on damage to the victim country alone, it will not reduce trade in the polluting product enough; if it maximizes the welfare of the victim, it may reduce trade in the product too much. (5) There seems to be a case for establishing some international code of product standards, to prevent the use of such standards as nontariff barriers.