International Trade, Factor Movements, and the Environment

By Michael Rauscher | Go to book overview

3
Environmental Policy and International Capital Movements

3.1 Introduction

Before we turn to issues of foreign trade, the problem of international factor mobility will be addressed. One reason for dealing with this issue first is the simpler model framework. International factor mobility can be dealt with in a one-good model whereas the consideration of international trade in final goods requires at least two commodities. Thus, it is easier to derive results and to develop an intuition of what happens in models involving environmental resources and international economic relationships. It will be seen in the following chapters that similar results are obtained in models with international trade in final goods but these results will in many cases be not as unambiguous as those derived in the factor-mobility model.

The other-more important-reason to consider international factor movements here is their relevance. In the standard model framework which perfect competition and absence of scale economies, international trade and factor movements are substitutes.1 Trade in final goods occurs when factors of production are internationally immobile. The specialization effects that are induced by foreign trade in final goods require the intersectoral relocation of the factors of production. Thus, there has to be some mobility of factors of production. In many cases, however, this assumption of intersectoral mobility and international immobility is not particularly realistic. Often it is easier to move sector-specific capital and know-how to other countries than to other industries. Thus, if we considered only trade models we would neglect an important and topical issue in international economics.

The basic problem in the context of environmental issues and international factor movements is that of environmental capital flight. The international mobility of capital is considered to be higher than that of other factors of production. This implies that capital tends to react more sensitively to cross- country differences in environmental policies. Tight environmental standards raise production costs and cause the delocation of environmentally intensive

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1
Situations in which trade and factor movements are complements have been considered by Markusen ( 1983) and Wong ( 1986).

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