The Hindu Business Line : Is free trade good for the environment?

Workers in India, China and the Philippines salvage materials from used computers and other electronic appliances which contain highly toxic chemicals, polluting the soil, air and water in the process... Free trade unconstrained by environmental protection could be a recipe for disaster.

ONE of the most contentious issues surrounding globalisation is the concern that free trade hurts the environment, both locally and globally. The classic argument for free global trade is that it is efficient for countries to specialise in goods where they have a comparative advantage and then exchange them for other goods.

But sceptics like ecological economist Herman Daly have questioned this on the grounds that the real costs of trade — including depletion of natural resources and pollution — are hidden and routinely ignored.

A new book by economists Brian Copeland and Scott Taylor (Trade and the Environment, Princeton University Press, 2003) attempts to replace some of the rhetoric in this debate with systematically produced results.

Based on a study of sulphur dioxide concentrations in over 100 cities around the world from 1971 to 1996, they reach the surprising and provocative conclusion that free trade can actually be good for the environment.

Copeland and Taylor find no evidence for the "pollution haven" hypothesis, which states that free trade will prompt polluting industries to move to poor countries where environmental regulations are lax.

Their results suggest that rich countries have a comparative advantage in capital-intensive polluting industries, so these industries are likely to stay in rich countries even if environmental regulations are tighter.

For these developed countries, the right environmental policy can produce a net good for the environment. Pollution policy, in the form of regulation or taxes, can lead to cleaner production methods by encouraging better technologies. Conversely, environmental problems can be exacerbated if trade liberalisation outpaces environmental policy.

But the complexity of the subject becomes evident as the book leaves a host of questions unanswered. The authors limit their focus to local pollution caused by production of goods, while ignoring other significant environmental impacts of trade.

If a car is manufactured in Japan and then shipped to the US, there would be some local pollution in Japan due to the manufacturing process. Some natural resources — both local and imported — would also be used up in manufacturing the car.

There would be additional resource use and pollution from transporting the car to the US, and even more from driving that car year after year.

Pollution from transportation and consumption of goods, as well as resource use throughout the life cycles of products, are all potentially major avenues through which global trade can damage the environment.

When all these effects are combined with production-driven pollution, the final outcome could easily reverse the optimistic result that trade benefits the environment.

The argument that polluting industries will stay in capital-rich developed countries also loses steam when capital itself is highly mobile. China, for example, received around $50 billion in foreign direct investment in 2003.

Even if companies are investing in China to take advantage of its cheap labour, an indirect consequence of concentrating an increasing part of the world's manufacturing in China will be heavy resource use and pollution locally.

A more direct instance of the "pollution haven" effect is the routine transfer of electronic waste — used computers and other electronic appliances that contain highly toxic chemicals — from the US to countries like India, China and the Philippines.

Low-paid workers in these countries work under hazardous conditions to salvage valuable materials from this fast-growing waste stream, while polluting the soil, air and water in the process.

Studies of air quality show that it deteriorates in the early stages of economic growth, and then starts improving when per-capita income exceeds $5,000 per year.

If this holds for most kinds of pollution and resource depletion, then incomes will have to increase by a factor of 5 to 10 in large developing countries such as China and India before there is sufficient local demand for environmental protection.

Assuming that free trade can eventually deliver this income growth, the big question is whether this process will lead to strong environmental policies before the cost of cleaning up the environment becomes prohibitively high.

Equally troublesome is the issue of trans-boundary pollution, such as greenhouse-gas emissions, where countries with widely different income levels will have to come together with a unified policy response.

Between 1973 and 2001, a period in which many domestic economies were turned inside out by globalisation, annual carbon-dioxide emissions from worldwide fuel combustion increased 50 per cent.

By 2030, these emissions are projected to be 60 per cent higher than in 2001 if no new policies are adopted.

Power generation and transportation — two sectors crucial to trade — will account for three-quarters of this increase.

A great deal of uncertainty remains about the long-term environmental impacts of globalisation. But the evidence we have so far suggests that free trade unconstrained by environmental protection could be a recipe for disaster.

(The author works in Silicon Valley's hi-tech industry and writes about the social and environmental impacts of technology and globalisation.)

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