International Trade, Factor Movements, and the Environment

By Michael Rauscher | Go to book overview
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1.1 Trade and the Environment: An Awkward Relationship

Starting with Adam Smith ( 1776) and David Ricardo ( 1817), economists have always viewed free international trade as a source of wealth and welfare gains. The voluntary exchange of commodities induces favourable patterns of specialization and, therefore, leads to an improvement in the international division of labour. Since each country is driven to utilize its comparative advantage and to produce what it can produce most efficiently, the global output is increased and gains from trade accrue to all countries. This optimistic view of free trade has been challenged both from inside the body of mainstream economic theory (e.g. the optimal-tariff and infant-industry arguments) and by outsiders like dependencia theorists. It has survived these critiques, albeit with some qualifications. Knowing that there are some exceptions to the rule, most economists now accept the general validity of the free-trade principle, at least as a good rule of thumb e.g. see Krugman ( 1987). This view is now being challenged again, this time by environmentalists. 'Free Trade: The Great Destroyer' is a title of a recent article by Morris ( 1990) in the Ecologist.

Environmentalists are sceptical about international trade for several reasons.1 First of all, there are the specialization effects. Some countries specialize in the production of pollution-intensive goods and this tends to increase environmental disruption there. These countries may experience welfare losses and in the case of transboundary pollution other countries too may be worse off with free trade than without. Second, the mainstream economic theories predict that international trade raises global output and consumption. With increased output, waste-management problems will also be increased. Third, there is a factor-mobility problem. Everything else being equal, mobile factors of production will move to countries where the pollution abatement requirements can be met relatively easily and cheaply, i.e. to the world's pollution havens. This environmental capital flight can have severe consequences. Since all countries are interested in attracting mobile factors of production, they may wish to adjust their environmental regulation. Ultimately, so the argument goes, there will be a disastrous competition among jurisdictions, which results in undesirably low levels of environmental regulation worldwide and the whole

See Cobb and Daly ( 1989), Ekins ( 1989), Goldsmith ( 1990), Morris ( 1991), Shrybman ( 1991, 1991/92), Arden-Clarke ( 1991, 1992), Batra ( 1993, chs. 11-12), Daly and Goodland ( 1994), and Røpke ( 1994) for instance.


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