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Environment and Free Trade

Countries Must Be Rich Before They Can Be Clean

FEBRUARY 01, 1994 by JO KWONG

Environmental activists, who typically take a unified stance on major issues ranging from global warming to endangered species protection, experienced an unusual split with regard to the North American Free Trade Agreement (NAFTA). Generally speaking, environmentalists divided between those who were convinced that free trade would lead to greater damage to the environment, and those who believed that freer trade would stimulate national economies, ultimately creating more resources to help protect the environment.

NAFTA brought these two positions into stark conflict. Most vocal was the anti-NAFTA environmental lobby. The Sierra Club, Friends of the Earth, and Public Citizen, among others, argued that NAFTA would provide an opportunity for U.S. companies to migrate to Mexico and escape more rigid American environmental laws. Larry Williams, international program director for the Sierra Club, cautioned that the flight of factories from the United States to Mexico: “would increase pollution loading levels on the continent and would trigger pressures within the United States to lower environmental standards to improve competitiveness in order to stop the flights.”1

This thinking, however, is flawed on several counts. First, there is little historical evidence of polluting industries migrating to countries where environmental standards are lax. While many developing countries are experiencing rapid industrial growth, this reflects the economic stage that they are going through, rather than environmentally induced migration. Polluting industries which spend heavily on controls remain concentrated in the developed countries. Ironically, it was the closed, protectionist countries–particularly in the former Communist world–that became pollution havens.

Environmental regulations pose a negligible factor on migration decisions because they typically comprise less than 4 to 5 percent of total costs. Other factors may easily overwhelm such a modest cost savings: On my last trip to Mexico City, several people indicated that problems like unstable telephone service are of far greater concern than environmental considerations in making location decisions.

Moreover, irrespective of the level of regulation, companies are fearful of liability arising from environmental accidents. A firm’s desire to protect its reputation in its home market weakens the temptation to cut environmental costs–companies are sensitive to the demands of “green” consumers in export markets.

Another common environmentalist objection to reducing trade barriers is that doing so will inhibit harmonization of environmental, health, and safety standards regarding production processes. For example, in a highly publicized case involving yellowfin tuna imports, environmental activists ran newspaper advertisements with the headline “SABOTAGE! of America’s Health, Food Safety and Environmental Laws.” The ads argued that “the only thing free about free trade is the freedom it gives the world’s largest corporations to circumvent democracy and kill those ‘pesky’ laws that protect people and the planet.” The activists were furious about a GATT ruling against a U.S. ban on tuna imports from Mexico, imposed because the United States alleged that Mexican fishing boats kill too many dolphins. Yet, according to the Journal of Commerce, the U.S. killing rate was significantly greater than that of Mexico: “In 1988 the US fleet caught 70,000 tons of yellowfin tuna and killed 19,000 dolphins; in 1990 the Mexican fleet caught 120,000 tons of yellowfin tuna and killed only 16,000 dolphins.”2 Thus, this controversy provides a better example of economic protectionism than environmental destruction.

Other allegations by the U.S. environmental lobby illustrate how politics has overtaken science in the making of domestic law. Activists warn, for example, that foreign nations might use pesticides that are banned in the United States. Therefore, trade restrictions are necessary. However, the United States greatly overregulates most pesticides: many are banned even if the residues found in food are minuscule and threat to human health is virtually nonexistent. Much of this is a result of the Delaney Clause, a provision of federal food safety law, which states that “no additive shall be deemed to be safe if it is found to induce cancer when ingested by man or animal.” Much has changed since the clause was added in 1958, particularly the ability to detect minute chemical residues measured in parts per million, even parts per billion. Thus, the law now bans all sorts of products that would have been considered perfectly safe in 1958.

Such draconian rules are inefficient in America; in poorer, Third World nations they could prove to be downright fatal. DDT is a case in point. U.S. environmental activists, not satisfied with banning the substance in America, are still trying to ban it elsewhere around the world. To this day, serious controversy persists about whether DDT really poses a serious environmental danger. The World Health Organization, the U.S. Surgeon General, and the National Science Foundation have been unable to document many of the charges raised against DDT over the decades.

In contrast, the harm to human health from the ban on DDT has been very real. In just two decades of DDT use, malaria deaths in India were cut by 98 percent, raising the average life span by 18 years. In the nearly 20 years since the ban, malaria death rates have soared. Similar trends have been observed in Sri Lanka, Bangladesh, Burma, and Thailand. Thus, the environmental benefits of the DDT ban may have been far outweighed by the human costs.3/sup>

As this case suggests, many environmentalist arguments against trade reflect more emotion than rational analysis. In fact, with freer trade it is probable that Mexican ecological, health, and safety standards would evolve towards U.S. standards, rather than vice versa. One reason is that most international companies have universal policies in place regardless of where they are operating. They don’t set lower standards for operations in less developed countries. In this way Mexico’s environment would be enhanced by opening up trade.

Furthermore, companies typically expect rising environmental standards in developing-country markets, so they tend to introduce state of the art technology initially. One GATT report published early last year cited cases in which firms gain a competitive edge by investing first in clean technologies.

A Conflict of Visions

If the environmental arguments against freer trade are so flawed, why are they nevertheless held so tenaciously? One reason is the intellectual framework of many environmental activists. Broadening trade runs against the environmental vision, particularly that of local self-reliance and a return to a simpler, low-technology world. Consider the argument of David Morris of the Institute for Local Self-Reliance: “Most people believe that a global economy is the only path to a higher standard of living as well as the inevitable next step in economic evolution. The economic emphasis on imports and exports continues to guide our thinking even when we can see that it endangers the survival of humans and other species.”

In his view, the “key to achieving a Green future . . . is localizing the world economy.”4 The problem with this quaint way of thinking is that it ignores elementary economic concepts. For instance, as long as trade is voluntary, both partners benefit; otherwise they wouldn’t trade. The buyer of a shirt, for example, values the shirt more than the money spent, while the seller values the money more. Trade makes the world economy more efficient by allowing nations to capitalize on their strengths.

Of course, Morris accepts trade within his local region, but where does he draw his trade boundary lines? If it makes sense for Morris’s butcher and baker to trade in their region, how about trading with the community next door? Morris’s vision makes no rational sense, but retains enormous emotional appeal.

Another point that should interest environmentalists is the fact that opening economies to the competitive global marketplace forces nations to become more efficient and waste fewer resources. For instance, in the Soviet Union every barrel of crude oil consumed produces $253 of GNP; the corresponding outputs for the United States, western Germany, and Japan are $341, $420, and $639, respectively. Similarly, Swedish sawmills use 98 percent of a tree in timber production whereas Malaysian mills use only 40 percent. The sort of waste and inefficiency evident in more closed economies is responsible for much of the environmental degradation of the world today. Competition, which forces technological improvements and the modernization of plants and equipment, can vastly enhance environmental quality.

Freer trade would boost environmental amenities in other ways. For instance, much of the current pollution on the U.S. side of the border results from crowding on the other side, largely as a result of the maquiladora program. That program gives special tariff treatment to Mexican industries that import U.S. products for assembly and re-export. It originally required Mexican firms to locate along the border in order to receive the program’s benefits. While these restrictions have been eased, others remain which encourage firms to remain in the border area. Free trade would reduce today’s artificial incentive for border crowding.

The bulk of the environmental improvements are most likely to occur in Mexico. Companies operating in developing countries bring new technologies to market and, for reasons mentioned earlier, are likely to adhere to American standards. In addition, Mexican companies would find they have to adhere to standards acceptable to U.S. consumers in order to successfully export. Just the promise of free trade is already encouraging U.S.-Mexico cooperation on the cleanup of their common boundary. Before NAFTA, U.S. activists largely ignored environmental problems in Mexico. Now, the two countries are hammering out details on the Border Plan, the most comprehensive attempt to cooperate on cleanup.

Perhaps the biggest reason for environmental gains in Mexico from freer trade, however, would result from increased economic prosperity. To some environmentalists, this seems backwards. Many argue against trade because it encourages industrialization, which in turn, is blamed for pollution. Yet the experience of Western developed countries is just the opposite. Over the long term, emissions eventually fall, even as economic growth continues to increase. Several years ago, Hoover research fellow Mikhail Bernstam detailed what he calls “the environmental split of the 1970s and 1980s”–a divergence between consumption and pollution involving Western market economies and the socialist world. He found that resource use and discharges began to decline rapidly in those nations with competitive markets, even as economic growth continued. In contrast, during the same two decades, consumption and environmental disruption were rapidly increasing in the USSR and European socialist countries even though their economies slowed down and eventually stagnated.5

Bernstam’s conclusions are borne out by other studies as well. Gene Grossman and Ann Krueger examined air quality in urban areas of the developed and developing world. Their analysis related the level of pollutants to the level of the nation’s per capita GDP. They found that concentrations of sulfur dioxide have risen with incomes at low levels of per capita income, fallen at higher levels of per capita income, and leveled off when per capita income reached about $5,000 (1988 U.S. dollars).

The basic point is that countries must be rich before they can be clean. As societies become wealthier, they attach a greater value to environmental quality. Ecological prosperity is a luxury that only developed nations can afford. Trade enables countries to become richer, and, as the studies suggest, this in turn reduces pollution.

Free Market Environmentalism

Another interesting finding of the Bernstam study was that the strictness of government environmental regulation does not correlate with the drop in pollution. If anything, he writes, there is a slight negative correlation. Far more important in determining emission levels is an economy’s incentive structure. Thus, as we discuss markets and trade within North America, we should consider using markets in natural resources to foster incentives for environmental stewardship.

Free market environmentalism is premised on the idea that the failure to apply markets has led to many of today’s environmental problems. Air, water, and land pollution are often the worst on common property resources such as those owned by the government. In these cases, no one is responsible for seeing that resources are used efficiently and adequately protected.

This is the essence of the standard textbook concept called the “tragedy of the commons,” whereby users of communal land will use the property as intensively as possible, since they gain little benefit from conserving the resource. Users of communal grazing lands face the incentive to boost personal gains by overgrazing the land at public expense. In contrast, users of private land face the incentive to consider the costs of maintaining the pasture at varying intensities of grazing. Of course, many people object that the owners will exploit the land for profit, caring little about environmental preservation. However, property rights give even an uncaring owner a financial incentive to preserve his land, since overgrazing will lead to both economic ruin and environmental devastation. By maintaining the property, he maximizes both.

Unfortunately, the standard approach to environmental problems in the United States has been regulatory rather than market oriented. But most major environmental initiatives, such as Superfund, the Endangered Species Act, and the Federal Water Pollution Control Act, have fallen far short of their goals.

Most have been extremely expensive and relatively ineffective. Some have even created severe disincentives for people to preserve the environment. Consider the Endangered Species Act, intended to protect plants and animals that are experiencing serious population declines. Under the Act, it is a federal crime to use land in a way that endangers the habitat of protected plants and animals. Once an endangered species shows up on private property, the landowner is no longer free to use the land without federal approval. Some owners have lost millions of dollars after the discovery of protected wildlife on their property. As a result, many now discourage natural habitat and destroy any protected species that they find–the “shoot, shovel, and shut-up” strategy.

Such problems are no stranger to Mexico. As Roberto Salinas, Executive Director of the Centro de Investigaciones Sobre la Libre Empresa in Mexico City, writes, “the lack of property titles in rural farming areas has forced peasants to turn to burning the rich forests in southern Mexico in search of new arable land.”

As Mexico confronts its many environmental problems, hopefully its leaders will consider more efficient market-oriented conservation strategies. They are more likely to do so as part of a freer economic and trade regime.

Summary

In the end, anti-free trade environmentalists need to address the evidence and, equally important, rethink their warped vision of the future, a “shallow ecology” that, intentionally or not, aims at protecting the health and affluence of people in the developed countries. Argues Roberto Sanchez, an environmental specialist at the Colegio de la Frontera Norte, a research institute in Tijuana, environmental changes will only occur “if the American environmentalists give up some of their romantic notions and let [Mexico] find its own way.” Environmentalists may “want to save the planet, but it is not the same planet on their side of the border as it is on [Mexico's]. They can afford to defend the environment for its own sake. Our people must use the environment to survive.”6

Trade negotiations, including but not limited to NAFTA, present unique opportunities to coordinate trade with environmental policy. The evidence is overwhelming that opening markets will provide both economic and environmental prosperity for all parties. It is the poverty of a closed economy, not free trade, that threatens ecological degradation around the globe.

Moreover, free market environmentalism provides a means for advancing both economic and ecological ends. It uses rather than suppresses the powerful incentives embodied in property rights and voluntary trade to better protect environmental and natural resources. As environmental concerns grow in importance in the global economy, so too will debate over this alternative vision.

  1. Larry Williams, “Mexican Trade Deal: Fallout or Fantasy?” The Washington Times, December 22, 1991.
  2. Journal of Commerce, October 28, 1991, p. 5a; November 5, 1991, p. 8A.
  3. Warren Brookes, “An Economic Silent Spring,” The Detroit News, March 11, 1990.
  4. David Morris, “The materials we need to create a sustainable society lie close to home,” The Utne Reader, November/December 1989, p. 84.
  5. Mikhail S. Bernstam, “The Wealth of Nations and the Environment,” Institute of Economic Affairs, London, 1991.
  6. Quoted in Fred Smith, “Environmental Quality, Economic Growth, and Trade,” paper presented at the Cato Conference “Liberty in the Americas, Free Trade and Beyond,” Mexico City, May 19-22, 1992.

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February 1994

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