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Free Trade and Blue Skies

Guest Column
Dawen Choy

Reduced barriers to trade and capital flow, as well as rapid improvements in communications and transportation, have conspired to make the economies of nations more integrated than ever before. German CDs on sale from a French website, Nike shoes made in Indonesia, Toyota Camrys and Volkswagen Beetles on Boston roads -- the effects of international trade on everyday life are obvious and direct.

This visibility, however, has its drawbacks. The very ubiquity of trade makes it the bogeyman, real or perceived, of a variety of economic, social and political problems. Cheap clothing from China is blamed for the decline of the American textile industry, and the relocation of manufacturing plants to developing countries is associated with the loss of jobs and rising income inequality in developed nations.

As a result, even though most countries have benefited greatly from opening up their economies, progress on free trade is slow. Tariffs and import quotas still abound, and trade disputes occasionally find their way into the news headlines. In the last decade, concomitant with a general rise in awareness about environmental issues, there has been increasing conflict between environmentalists and proponents of free trade. There are two major areas of dispute.

First, international trade is widely recognized to reduce governmental ability to influence the economy because prices and exchange rates become subject to global forces rather than being endogenously determined within local boundaries. Such power is generally believed to be benign because it enhances efficiency by weeding out unproductive industries; however, environmentalists fear that this very same power can undermine the power of domestic laws aimed at protecting the environment. For example, businesses can choose to relocate operations to countries with weak or nonexistent regulations so as to minimize the costs of compliance, then ship the finished products back home and thereby circumvent harsher domestic regulations. Similarly, foreign producers with lesser scruples can thus undermine domestic concern for the environment under the aegis of free trade.

This is the argument initially put forth in the column “WTO Policies Harmful to Environment,” published in Tuesday’s edition of The Tech, and the heart of this reasoning is the belief that greater capital and physical mobility forces a regression to the lowest common denominator.

The other issue of contention is that trade potentially magnifies the effects of negligent environmental policies. Conventional economic theory posits that countries specialize in industries where they have a comparative advantage; unfortunately, for many undeveloped countries, the economic activities in which they do have an advantage are often those that are related to the exploitation of natural resources. This is not very surprising, since it is relatively easy to get started in fishing, agriculture, and forestry, compared to setting up a factory to produce TVs or cars. As a result, world demand may promote unsustainable deforestation or over-fishing if local protection policies are impotent and ineffectual.

The point often lost in the debate, however, is that trade is not fundamentally responsible for environmental degradation. Industries pollute because they free-ride on the Earth’s capacity to absorb, recycle and detoxify harmful wastes. At the same time, the harm is often inflicted on third parties, which is what happens when factories dump effluent into rivers and hurt fishing activities downstream, so the costs of pollution are not internalised. Undefined property rights further contribute to the problem by permitting over-exploitation of resources shared by all.

Since such selfish practices arise from a basic failure to assign each person the full costs of his activity, opening up a country to trade has little to do with extant environmental problems. Industries that pollute under a free trade regime will continue to pollute even if borders were closed tomorrow.

Trade enters the picture insofar as it promotes global economic activity regardless of environmental behaviour. This means that sometimes industries that pollute or are environmentally irresponsible will not be penalized, as was pointed out in Tuesday’s article; in fact, they may even get a leg up over the competition because of reduced costs of compliance. But this pessimistic view need not be the only. The fight for free trade, led by institutions such as the World Trade Organisation, can be compatible with the fight for environmental protection too.

In many countries, there are huge subsidies given to protected domestic energy industries which foster the use of inefficient and unclean processes to generate power. By opening up these markets to foreign competition, free trade agreements can promote the introduction of cleaner, more efficient power plants to the benefit of all parties. Environmentalists and economists therefore need not be at opposite ends of the table.

Sadly, trade often becomes a weapon to further other political aims because, in the absence of a global policeman to enforce international rules, there are few other ways to impose a country’s intent and resolve on others. This is especially true in environmental issues because the problems are frequently global -- a factory in Asia emitting chlorofluorocarbons can cause damage to the ozone layer over North America, just as highly industrialised developed countries regularly chalk up a greater per-capita contribution to global CO2 emissions at the expense of less developed countries. “Green” nations may therefore be tempted to enact unilateral trade barriers in order to force cooperation from other recalcitrant countries without considering the true consequences.

When tuna fishers in Mexico fail to use dolphin-friendly nets because they lack the technology to do so or are too poor to afford them, would trade sanctions necessarily change their behaviour and save the dolphins? Would banning gasoline from Venezuela that is tainted with high concentrations of pollutants prevent Venezuelan cars and industries from burning that gasoline -- thereby releasing pollutants into the atmosphere that would eventually find their way into North America?

Environmental problems should be tackled either at their source or through the marketplace in order to maximise efficiency and actually solve the problem. For example, the US could require the labelling of tuna cans so that consumers can state their preferences through the price mechanism, much as organic vegetables and unleaded gasoline command a premium. When it becomes clear to Mexican fishermen that their tuna fetch a lower price, they can then be induced to purchase the more expensive dolphin-friendly nets in order to comply with US regulations. Consumers win, and the dolphins win too.

Trade is a poor weapon against environmentally-unfriendly practices because trade is not the cause; ineffectual local regulations are. If anything, hindering a country’s integration into the global economy by way of import quotas and tariffs merely isolates that country and allows it to continue polluting the environment to the detriment of all. Worse, unilateral action on the part of large, powerful nations like the US weakens the global institutions that foster international cooperation. By undermining organisations like the United Nations and the WTO, the only message sent to other nations is that such multilateral institutions do not matter; their decisions are not binding. It is difficult to see how such isolationism would help build international consensus in fighting problems like burgeoning carbon dioxide emissions and over-fishing in international waters, problems whose global scope absolutely require the cooperation of all nations. No matter how stringent US environmental laws and how “green” US businesses are, the US cannot single-handedly solve the problems of the whole world.

More than half a century ago countries learnt the costs of selfish trade protectionism the hard way, when stiff tariffs and restrictive import quotas exacerbated the demand crash and deepened the Great Depression. That lesson taught countries to cooperate on matters of international trade after World War II, resulting in the General Agreement on Tariffs and Trade, subsequently the WTO. Although there is still a long way to go, trade barriers have since been greatly reduced and today we are one step closer to an integrated global economy. Similarly, there is no reason to believe that the nations of the world cannot eventually draw up multilateral agreements on sustainable development, perhaps even establishing a “World Environment Organisation” with comparable powers to adjudicate environmental conflicts. One thing is clear, however; building the necessary international consensus for action certainly does not begin with the unilateral crippling of global institutions such as the WTO.

Dawen Choy is a graduate student in the Department of Political Science.