This is an optically scanned article from Scientific American, Nov. 1993 issue. Warning: The scanned article is not proofread. You will therefore surely discover errors due to optical recognition problems. ----- Begin Included Message ----- The Case for Free Trade Environmentalists are wrong to fear the effects of free trade. Both causes can be advanced by imaginative solutions by Jagdish Bhagwati Economists are reconciled to the confllct of absolutes: that is why they invented the concept of trade- offs. It should not surprise them, there- fore, that the objective of environmen- tal protection should at times run afoul of the goal of seeking maximum gains from trade. In fact, economists would be suspicious of any claims, such as those made by soothsaying politicians, that both causes would be only mutually beneficial. They are rightly disconcerted, however, by the passion and the feroci- ty, and hence often the lack of logic or facts, with which environmental groups have recently assailed both free trade and the General Agreement on Tariffs and Trade (GATT), the institution that oversees the world trading system. The environmentalists' antipathy to trade is perhaps inevitable. Trade has been central to economic thinking since Adam Smith discovered the virtues of specialization and of the markets that naturally sustain it. Because markets do not normally exist for the pursuit of en- vironmental protection, they must be specially created. Trade therefore sug- gests abstention from governmental in- tervention, whereas environmentalism suggests its necessity. Then again, trade is exploited and its virtues extolled by corporate and multinational interests, whereas environmental objectives are embraced typically by nonprofit orga- nizations, which are generally wary of these interests. Trade is an ancient occu- pation, and its nurture is the objective of institutions crafted over many years of experience and reflection. Protection of the environment, on the other hand, is a recent preoccupation of national and international institutions that are nascent and still evolving. Last year the environmentalists' hos- tility to trade exploded in outrage when an impartial GATT Dispute Settlement Panel ruled in favor of Mexico and free trade and against the U.S. and the wel- fare of the dolphin. The U.S. had placed an embargo on the import of Mexican tuna on the grounds that the fish had been caught in purse-seine nets, which kill dolphins cruelly and in greater num- bers than U.S. law permits. The GATT panel ruled, in effect, that the U.S. could not suspend Mexico's trading rights by proscribing unilaterally the methods by which that country harvested tuna. This decision spurred the conserva- tionists' subsequent campaigns against free trade and GATT. GATT has no shortage of detractors, of course. In fact, some of its recent critics have feared its impotence and declared it "dead," re- ferring to it as the General Agreement to Talk and Talk. But the environmentalist attacks, which presume instead GATT's omnipotence, are something else again. An advertisement by a coalition of environmental groups in the New York Times on April 20, 1992, set a new stan- dard for alarmist, even scurrilous, writ- ing, calculated to appeal to one's in- stincts rather than one's intellect. It talks of "faceless GATT bureaucrats" mount- ing a "sneak attack on democracy." This veiled reference to Pearl Harbor pro- vides an example of a common tactic in trade controversy: Japan-bashing. The innuendos have continued unabated and are manifest in the endless battles in Congress over the supplemental envi- ronmental accords for the North Amer- ican Free Trade Agreement (NAFTA). The hostility is also intruding on the conclusion of the Uruguay Round of GATT taL*cs, now in their seventh year, with the environmentalists opposing the establishment of the new Multilateral Trade Organization, which is meant to provide effective discipline and a nec- essary institutional structure for GATT. It is surely tragic that the proponents of two of the great causes of the 1990s, trade and the environment, should be locked in combat. The conflict is large- ly gratuitous. There are at times philo- sophical differences between the two that cannot be reconciled, as when some environmentalists assert nature's au- tonomy, whereas most economists see nature as a handmaiden to humankind. For the most part, however, the differ- ences derive from misconceptions. It is necessary to dissect and dismiss the more egregious of these fallacies be- fore addressing the genuine problems. The fear is widespread among envi- ronmentalists that free trade increases economic growth and that growth harms the environment. That fear is misplaced. Growth enables governments to tax and to raise resources for a variety of objec- tives, including the abatement of pollu- tion and the general protection of the environment. Without such revenues, lit- tle can be achieved, no matter how pure one's motives may be. How do societies actually spend these additional revenues? It depends on how getting rich affects the desire for a bet- tcr cnvironment. Rich countries today have more groups worrying about en- vironmental causes than do poor coun- tries. Efficient policies, such as freer trade, should generally help environ- mentalism, not harm it. If one wants to predict what growth will do to the environment, however, one must also consider how it will affect the production of pollution. Growth af- fects not only the demand for a good environment but also the supply of the pollution associated with growth. The net effect on the environment will there- fore depend on the kind of economic growth. Gene M. Grossman and Alan B. Krueger of Princeton University found that in cities around the world sulfur di- oxide pollution fell as per capita income rose. The only exception was in coun- tries whose per capita incomes fell be- low $5,000. In short, environmentalists are in error when they fear that trade, through growth, will necessarily increase pollution. Economic effects besides those attri- butable to rising incomes also help to protect the environment. For example, freer trade enables pollution-fighting technologies available elsewhere to be imported Thus, trade in low-sulfur-con- tent coal will enable the users of local high-sulfur-content coal to shift from the latter to the former. Free trade can also lead to better environmental outcomes from a shi* in the composition of pro- duction. An excellent example is provid- ed by Robert C. Feenstra of the Universi- ty of California at Davis. He has shown how the imposition of restraints on Jap- anese automobile exports to the U.S. during the 1980s shifted the compo- sition of those exports from small to large cars, as the Japanese attempted to increase their revenues without in- creasing the number of units they sold. Yet the large cars were fuel inefficient. Thus, protective efforts by the U.S. ef- fectively increased the average amount of pollution produced by imported cars, making it more likely that pollution from cars would increase rather than diminish in the U.S. Although these erroneous objections to free trade are readily dismissed (but not so easily eliminated from public dis- course), there are genuine conflicts be- tween trade and the environment. To understand and solve them, economists draw a distinction between two kinds of environmental problems: those that are intrinsically domestic and those that are intrinsically transnational. Should Brazil pollute a lake Iying whol- ly within its borders, the problem would be intrinsically domestic. Should it pol- lute a river that flows into Argentina, the matter would take on an intrinsi- cally transnational character. Perhaps the most important examples of trans- national pollution are acid rain, created when sulfur dioxide emissions in one country precipitate into rain in anoth- er, and greenhouse gases, such as car- bon dioxide, which contribute to global warming wherever they are emitted. Why do intrinsically domestic envi- romnental questions create internation- al concern? The main reason is the belief that diversity in environmental stan- dards may affect competitiveness. Busi- nesses and labor unions worry that their rivals in other countries may gain an edge if their governments impose lower standards of environmental protection. They decry such differences as unfair. To level the playing field, these lob- bies insist that foreign countries raise their standards up to domestic ones. In turn, environmental groups worry that if such "harmonization up" is not un- dertaken prior to freeing trade, pres- sures from uncompetitive businesses at home will force down domestic stan- dards, reversing their hard-won victor- ies. Finally, there is the fear, drama- tized by H. Ross Perot in his criticisms of NAFTA, that factories will relocate to the countries whose environmental standards are lowest. But if the competitiveness issue makes the environmentalists, the businesses and the unions into allies, the environ- mentalists are on their own in other ways. Two problem areas can be distin- guished. First, some environmentalists are keen to impose their own ethical preferences on others, using trade sanc- tions to induce or coerce acceptance of such preferences. For instance, tuna fishing with purse-seine nets that kill dolphins is opposed by U.S. environmen- tal groups, which consequently favor restraints on the importation of such tuna from Mexico and elsewhere. Sec- ond, other environmentalists fear that the rules of free trade, as embodied in GATT and strengthened in the IJruguay Round, will constrain their freedom to pursue even purely domestic environ- mental objectives, with GATT tribunals outlawing disputed regulation. Environmentalists have cause for concern. Not all concerns are le- gitimate, however, and not all the solutions to legitimate concerns are sen- sible. Worry over competitiveness has thus led to the illegitimate demand that environmental standards abroad be treated as "social dumping." Offending countries are regarded as unfairly sub- sidizing their exporters through lax en- vironmental requirements. Such implic- it subsidies, the reasoning continues, ought to be offset by import duties. Yet international differences in envi- ronmental standards are perfectly nat- ural. Even if two countries share the same environmental objectives, the spe- cific pollutions they would attack, and hence the industries they would hin- der, will generally not be identical. Mex- ico has a greater social incentive than does the U.S. to spend an extra dollar preventing dysentery rather than re- ducing lead in gasoline. Equally, a certain environmental good might be valued more highly by a poor country than by a rich one. Contrast, for instance, the value assigned to a lake with the cost of cleaning up effluents discharged into it by a pharmaceutical company. In India such a lake's water might be drunk by a malnourished pop- ulation whose mortality would increase sharply with the rise in pollution. In the U.S. the water might be consumed by few people, all of whom have the means to protect themselves with privately pur- chased water filters. In this example, India would be the more likely to pre- fer clean water to the pharmaceutical company's profits. The consequences of differing stan- dards are clear: each country will have less of the industry whose pollution it fears relatively more than other coun- tries do. Indeed, even if there were no international trade, we would be shrink- ing industries whose pollution we de- ter. This result follows from the policy of forcing polluters of all stripes to pay for the harm they cause. To object, then, to the effects our negative valuation of pollution have on a given industry is to be in contradiction: we would be refus- ing to face the consequences of our en- vironmental preferences. Nevertheless, there is sentiment for enacting legislation against social dump- ing. Senator David L. Boren of Oklaho- ma, the proponent of the International Pollution Deterrence Act of 1991, de- manded import duties on the grounds that "some U.S. manufacturers, such as the U.S. carbon and steel alloy industry, spend as much as 250 percent more on environmental controls as a percentage of gross domestic product than do oth- er countries.... I see the unfair advan- tage enjoyed by other nations exploit- ing the environment and public health for economic gain when I look at many industries important to my own state." Similarly, Vice President Al Gore wrote in Earth in the Balance: Ecology and the Human Spirit that "just as government subsidies of a particular industry are sometimes considered unfair under the trade laws, weak and ineffectual enforce- ment of pollution control measures should also be included in the defini- tion of unfair trading practices." These demands betray lack of eco- nomic logic, and they ignore political reality as well. Remember that the so- called subsidy to foreign producers through lower standards is not given but only implied. According to Senator Boren, the subsidy would be calculated as "the cost that would have to be in- curred by the manufacturer or produc- er of the foreign articles of merchandise to comply with environmental standards imposed on U.S. producers of the same class of merchandise." Anyone familiar with the way dumping calculations are made knows that the Environmental Protection Agency could come up with virtually any estimates it cared to pro- duce. Cynical politics would inevitably dictate the calculations. Still, there may be political good sense in assuaging environmen- talists' concerns about the relo- cation of factories to countries with lower standards. The governments of higher-standards countries could do so without encumbering free trade by insisting that their businesses accede to the higher standards when they go abroad. Such a policy lies entirely with- in the jurisdictional powers of a higher- standards country. Moreover, the gov- ernments of lower-standards countries would be most unlikely to object to such an act of good citizenship by the foreign investors. Environmentalists oppose free trade for yet another reason: they wish to use trade policy to impose their values Oh other communities and countries. Many environmentalists want to suspend the trading rights of countries that sanc- tion the use of purse-seine nets in tuna fishing and of leg-hold traps in trap- ping. Such punishments seem an in- appropriate use of state power, howev- er. The values ih question are not wide- ly accepted, such as human rights, but idiosyncratic. One wonders when the opponents of purse-seine nets put the interests of the dolphin ahead of those of Mexico's people, who could prosper through more productive fishing. To borrow the campaign manifesto of Pres- ident Bill Clinton: Should we not put people first? Moreover, once such values intrude on free trade, the way is opened for an endless succession of demands. En- vironmentalists favor dolphins; Indi- ans have their sacred cows. Animal- rights activists, who do not prefer one species over another, will object to our slaughterhouses. The moral militancy of environmen- talists in the industrialized world has begun to disillusion their closest coun- terparts in the undeveloped countries. These local environmentalists accuse the rich countries of "eco-imperialism," and they deny that the Westem nations have a monopoly on virtue. The most radical of today's proenvironment mag- azines in India, Down to Earth, editorial- ized recently: "In the current world re- ality trade is used as an instrument en- tirely by Northem countries to discipline environmentally errant nations. Surely, if India or KeI*ya were to threaten to stop trade with the U.S., it would hardly af- fect the latter. But the fact of the mat- ter is that it is the Northern countries that have the greatest [adverse] impact on the world's environment." If many countries were to play this game, then repeated suspensions of trading rights would begin to undemline the openness of the trading system and the predictability and stability of intema- tional markets. Some environmentalists assert that each country should be free to *nsist on the production methods of its trading partners. Yet these envi- ronlnentalists ignore the certain con- sequence of their policy: a Pandora's box of protectionism would open up. Rare- ly are production methods in an indus- try identical in different countries. There *e certainly better ways to in- dulge the environmentalists' propensity to export their ethical preferences. The U.S. environmental organizations can lobby in Mexico to persuade its govem- ment to adopt their views. Private boy- cotts can also be undertaken. In fact, boycotts can carry much clout in rich countries with big markets, on which the targeted poor countries often de- pend. The frequent and enommously ex- pensive advertisements by environmen- tal groups against GATT show also that their resources far exceed those of the cash-strapped countries whose policies they oppose. Cost-benefit analysis leads one to con- clude that unilateral governmental sus- pension of others' trading rights is not an appropriate way to promote one's lesser ethical preferences. Such sanc- tions can, on the other hand, appropri- ately be invoked multilaterally to defend universal moral values. In such cases- as in the censure of apartheid, as prac- ticed until recently in South Africa-it is possible to secure widespread agree- ment for sanctions. With a large major- ity converted to the cause, GATT's waiv- er procedure can be used to suspend the offending country's trading rights. Environmentalists are also worried about the obstacles that the cur- rent and prospective GATT rules pose for environmental regulations aimed entirely at domestic production and consumption. In principle, GATT lets a country enforce any regulation that does not discriminate against or among foreign suppliers. One can, for example, require airbags in cars, provid- ed that the rule applies to all automo- bile makers. GATT even pemlits rules that discriminate against trade for the purpose of safety and health. GATT, however, recognizes three ways in which regulations may be set in gratuitous restraint of trade; in fol- lowing procedures aimed at avoiding such outcomes, GATT upsets the envi- ronmentalists. First, the true intention- and effect-of a regulation may be to protect not the environment but local business. Second, a country may im- pose more restrictions than necessar to achieve its stated environmental ob- jective. Third, it may set standards that have no scientific basis. The issue of intentions is illustrated by the recently settled "beer war" be- tween Ontario and the U.S. Five years ago the Canadian province imposed a 10-cents-a-can tax on beer, ostensibly to discourage littering. The U.S. argued that the law in fact intended to discrim- inate against its beer suppliers, who used aluminum cans, whereas local beer companies used bottles. Ontario had omitted to tax the use of cans for juic- es and soups, a step that would have affected Ontario producers. The second problem is generally tougher because it is impossible to find altemative restrictions that accomplish exactly the same environmental results as thc original policy at lowcr cost. An adjudicating panel is then forced to eval- uate, implicitly or explicitly, the trade- offs between the cost in trade disruption and the cost in lesser fulfillment of the environmental objective. It is therefore likely that environmentalists and trade experts will differ on which weights the panel should assign to these divergent interests. Environmentalists tend to be fearful about the use of scientific tests to de- temline whether trade in a product can be proscribed. The need to prove one's case is always an unwelcome burden to those who have the political power to take unilateral action. Yet the trade ex- perts have the better of the argument. Imagine that U.S. growers sprayed ap- ples with the pesticide Alar, whereas Eu- ropean growers did not, and that Euro- pean consumers began to agitate against Alar as hamlful. Should the European Community be allowed to end the im- portation of the U.S. applcs without meeting some scientific test of its health concems? Admittedly, even hard science is often not hard enough-different studies may reach different conclusions. But without the restraining hand of sci- ence, the itch to indulge one's fears- and to play on the fears of others- would be irresistible. In all cases, the moderate environ- mentalists would like to see GATT adopt more transparent procedures for adjudi- cating disputes. They also desire great- er legal standing to file briefs when envi- ronmental regulations are at issue. These goals secm both reasonable and feasible. Not all environmental problems are local; some are truly global, such as the greenhouse effect and the depletion of the stratospheric ozone. They raise more issues that re- quire cooperative, multilateral solutions. Such solutions must be both efficient and equitable. Still, it is easy to see that rich countries might use their econom- ic power to reach protocols that maxi- mize efficiency at the expense of poor- er countries. For instance, imagine that the draft- ers of a protocol were to ask Brazil to refrain from cutting down its rain for- ests while allowing industrialized coun- tries to continue emitting carbon diox- ide. They might justify this request on the grounds that it costs Brazil less to keep a tree alive, absorbing a unit of carbon dioxide every year, than it would cost the U.S. or Germany to save a unit by burning lcss oil. Such a trade-off would indeed be economically efficient. Yet if Brazil, a poorer country, were then left with the bill, the solution would as- suredly be inequitable. Before any group of countries impos- es trade sanctions on a country that has not joined a multilateral protocol, it would be important to judge whether the protocol is indeed fair. Nonmembers targeted for trade sanctions should have the right to get an impartial hearing of their objections, requiring the strong to defend their actions even when they ap- pear to be entirely virtuous. The simultaneous pursuit of the two causes of free trade and a protected environment often raises problems, to be sure. But none of these conflicts is beyond resolution with goodwill and by imaginative institutional innovation. The aversion to free trade and GATT that many environmentalists display is unfounded, and it is time for them to shed it. Their admirable moral passion and certain intellectual vigor are better devoted to building bridges between the causes of trade and the environmcnt. ----- End Included Message -----