Tuesday, November 23, 1999

Free Trade Protects Environment

A version of this paper "Free Trade Protects Environment" appeared in The Asian Wall Street Journal on 23 November 1999 and The Wall Street Journal Europe on 26 November 1999.

Are economic and environmental goals really in conflict with each other? Or can the market, which has proved its ability to meet economic interests of the consumers most efficiently, now meet the environmental preferences of the people as successfully? These are some of the basic issues that the participants at the WTO Ministerial Meeting at Seattle will have to try and answer.

The battle lines are being drawn up. While developing countries like India are strongly opposed to any linkage between trade and environment, many of the developed countries are pressing for a working group to look into the relationship between these two areas.

However, trade and environment need not be mutually exclusive. Nor need the interests of one be balanced against those of the other. Free trade and an open market, with defined property rights, can be the best friend of the environment.

Over the past few decades, multilateral environmental agreements (MEAs) have increasingly addressed transboundary health and environmental problems, and sought to relate these to international trade and economic activities.

Likewise, international trade has generated concern about impacts on the environment, locally and globally. Although, there is no agreement on trade and environment at WTO, a Committee on Trade and Environment (CTE) has been discussing many of these issues.

It seems that the most fundamental reason some parties want to link trade and environment is the apparently effective and binding dispute settlement mechanism under WTO. And that is clearly the reason other parties are adamantly opposed to such a linkage. First, it may be argued that in view of the existence of wide range of environmental agreements, it would be better to equip them with WTO like dispute settlement mechanisms. Secondly, the issue may be superfluous if other mechanisms are developed to harness the efficiency of the marketplace to produce environmental goods.

However, long before in 1973, the Convention on International Trade in Endangered Species (CITES) sought to regulate and restrict trade that some argued could adversely affect specific species and their environment.

The Montreal Protocol, set down rules on manufacturing and trade in ozone depleting substances (ODS). A special multilateral fund was set up to help promote non-ODS technologies. The Kyoto Protocol seeks to regulate emission from domestic energy production, and promote foreign investment in projects which reduce greenhouse gas (GHGs) emissions.

The Basel Convention is aimed at restricting and eliminating transboundary shipment of hazardous waste. The Convention on Prior Informed Consent for Trade in Dangerous Chemicals focuses on the risks posed by international trade in such chemicals.

Clearly, there are quite a few areas where the interests of trade and environment overlap. And this can cause problems. For instance under the GATT, rules of trade applies to products. Expert opinion is divided on whether wastes that are potentially hazardous can be termed “products” within the meaning of GATT.

The potential for conflict between environmental goals and trade was also recognised at the United Nations Conference on Environment and Development (UNCED) in 1992. The Agenda 21, seeks to make trade and environmental policies mutually supportive. It also acknowledged that the environmental standards valid for developed countries may have unwarranted social and economic costs for developing countries.

The Global Environment Facility (GEF) was the fallout of the 1992 Rio Conference. It set up funds to mitigate some of these socio-economic costs in pursuing the goals of the Convention on Bio-diversity (CBD), the Convention on Climate Change (CCC), and others.

Today, the developed countries are pressing for greater discussion on environment with the aim of creating an environmental agreement under WTO. The developing countries, like India, are clearly against any such linkage between trade and environment, and consider the attempt of the developed countries to relate the two as protectionist.

Likewise, the developed world interprets sustainable development to mean maintaining the status quo, and thus focus attention on climate change, ozone hole, extinction of species, and similar broad issues. Developing countries believe different issues should be covered by sustainable development - poverty, inequity, disease and mortality.

Much of the time, discussions boil down to political negotiations to strike a deal between the environmental and trade goals on the one hand, the political and economic costs on the other hand, and who will bear which costs. Needless to say, without the discipline of market forces, the efficiency of allocation and utilisation of economic and environmental resources is greatly undermined. Often defeating the very objective.

There are two basic flaws to this line of thinking. One, it presumes that economic and environmental goals necessarily conflict with each other. This ignores the fact that environmental degradation is primarily the result of the “tragedy of the commons”, where the incentive to define property rights and restrict access to the resource in concern are lacking. Therefore, there are no mechanisms to internalise the so-called externalities on economic grounds.

Secondly, rather than looking at this basic problem, the strategy adopted so far has been to provide funds to make alternative technological quick-fixes accessible. This approach is a repeat of the old discredited system of foreign aid and technology transfers, and cannot be expected to perform any differently. Because of lack of clarity on the first point, it attempts to bypass the normal trade route, and considers the disciplining influence of the price signal under the market mechanism avoidable.

For instance, much of the funds under GEF dealing with CBD in India seeks to wean people away from the natural resources around them by providing them alternative sources of income and sustenance. Instead of creating the institutions under which the economic potential of local resources can be harnessed by the people themselves, and therefore develop a stake in those resources, they are being subsidised out of their own surroundings.

Such an approach is clearly unsustainable without perpetual outside support. Apart from loss of local culture and knowledge bases, this approach tells the people that the so-called resources are actually of no value. No resources, environmental or economic, can be protected and conserved under such an incentive structure.

If we are really concerned about environmental degradation, then it is time we realised that free trade and open market are the best friends of the environment. Voluntary exchange at a marketplace is not a zero-sum game. Free trade is a win-win, for both the participants otherwise they would agree to trade. Competition in the marketplace provides the incentive to producers to continually enhance their competitive advantage by improving their products at lower prices. On the other side, this process improves productivity and therefore the purchasing power of the consumers. Consequently, consumers can afford a wider range and better quality of products.

Environmental quality is no different from all other products in the marketplace. Improvement in environmental quality is a value-added product that becomes affordable as one goes up the economic ladder. Rather than restricting trade and seeking to put environmental resources outside the scope of the marketplace, we ought to strive to bring these resources under the discipline of the marketplace. Rather than restricting consumption, under the belief that resources are scarce, we ought to try and bring all these resources under the institution of property rights. Then we will discover that more we consume, the more there is to consume.

Rather than market failure, it is the failure to bring environmental resources under the economic laws of the marketplace that is at the root of all environmental problems. If we concerned about our environment, we must embrace the market.

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