Current concerns that domestic environmental protection policies will reduce certain industries' competitiveness are inducing demands in rich countries for trade policies to influence environmental policies elsewhere. In Discussion Paper No. 830, Research Fellow Kym Anderson argues that such measures will unnecessarily reduce conventionally measured global economic welfare and may even damage the global environment. Concern for the environment also provides excuses to raise trade barriers, which risks a trade war that could undermine global prosperity. The common claim that trade liberalization that raises global income will thereby harm the environment also ignores the reduction in population growth and rise in demand for stricter environmental standards that typically follow; similar concerns about relocation of production and consumption focus only on its most direct effects.

Anderson then considers the liberalization of two of the world's most distorted commodity markets. Coal and food are both typically overpriced in industrial and underpriced in poor countries. Taxing rich countries' coal consumption is reasonable, since it is pollutive, but protection reduces the world price and encourages its use elsewhere; liberalization may therefore improve the environment and also raise economic welfare. Liberalizing food trade raises objections that higher world prices will lead to further deforestation and more intensive use of chemical fertilizers and pesticides in the tropics, but global models indicate that most output expansion will occur on land already cleared in countries such as Argentina and Australia, which currently make much less use of such pollutants than Western Europe. Increasing farm output in Central and Eastern Europe may also benefit the environment by diverting labour and capital from alternative uses in smokestack industries. Anderson acknowledges in conclusion that trade liberalization could damage the environment in some cases, but trade policy cannot provide a solution: the global trading system underpins the future prosperity of the next generation and hence also its concern for the natural environment.

Economic Growth, Environmental Issues and Trade
Kym Anderson

Discussion Paper No. 830, September 1993 (IT)