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Environmental Quality and International Trade

Published online by Cambridge University Press:  22 May 2009

Ralph C. d'Arge  and
Allen V. Kneese
Ralph C. d'Arge
Affiliation:
Ralph C. D'Akge is associate professor of economics, University of California, Riverside
Allen V. Kneese
Affiliation:
Allen V. Kneese is director, Quality of the Environment Program, Resources for the Future, Inc., Washington. The authors would like to express their indebtedness to E. Brook, O. Bubik, S. Follmer, T. Munnecke, and W. Schulze.
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Extract

Environmental problems are currently a matter of international interest and concern for a wide variety of reasons ranging from those which are rather general and even vague to others which are concrete and sometimes very pressing.1 There are, hopefully, more than a few people who are concerned about the welfare of their fellow man wherever he may be; moreover, there is an evident feeling of “one-worldness” resulting from an increasing degree of interdependence in several spheres, including the economic and the cultural. Further, the developed countries feel that they can learn useful lessons from one another about how to cope with environmental problems which are quite similar from country to country. These problems usually result from high population densities combined with large and rapidly growing per capita production and consumption which are often brought about by the use of technologies that generate large amounts of destructive residual materials. There is also an almost universal absence of satisfactory institutions for collective management of a number of “common property resources” including the air mantle, watercourses, and other large ecological systems.

Type
Part 4. Salient Issues for The Future
Information
International Organization , Volume 26 , Issue 2 , Spring 1972 , pp. 419 - 465
Copyright
Copyright © The IO Foundation 1972

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References

1 The matters passed over lightly in this section are discussed in some detail in Clifford Russell, S. and Landsberg, Hans H., “International Environmental Problems—A Taxonomy,” Science, 06 25, 1971 (Vol. 172, No. 3990), pp. 1307–1314;Google ScholarClawson, Marion, “Economic Development and Environmental Impact: International Aspects” (Paper prepared for the Symposium on Political Economy of Environment—Problems of Method, Ecole Pratique des Hautes Etudes, Paris, 07 1971);Google Scholar and Baumol, William, Environmental Protection, International Spillovers, and Trade (Wicksell Lectures 1971) (Stockholm: Almquist and Wiksell, 1971).Google Scholar

2 See Kneese, Allen V., Rolfe, Sidney E., and Harned, Joseph W., eds., Managing the Environment: International Economic Cooperation for Pollution Control (New York: Praeger, 1971).Google Scholar

3 See Kneese, Allen V. and Bower, Blair T., Managing Water Quality: Economics, Technology, Institutions (Baltimore, Md: Johns Hopkins Press [for Resources for the Future], 1969),Google Scholar chapters 5, 6.

4 United States Congress, Subcommittee on Priorities and Economy in Goveminent, Joint Economic Committee, Hearings, Economic Incentives to Control Environmental Pollution, 92nd Cong., 1st sess., July 12, 1971.

5 These issues are examined to some degree in a draft report Development and Environment, submitted by a panel of experts convened by the secretary-general of the United Nations Conference on the Human Environment, Founex, Switz., June 4–12, 1971. (Mimeographed.) Our summary here is based largely on this report. A discussion of the impacts of environmental controls on the balance of payments and the national income of developing countries is offered in section IV.

6 Another broad question, of course, is whether environmental protection really deserves the low status the developing countries are giving it in their domestic priorities. Our view is that in many instances it does not. Developing countries, especially in the western hemisphere, exhibit great diversity internally from region to region. In addition to economically primitive backcountry with poor environmental conditions related to extreme poverty and often ignorance of even basic sanitation they also have the dubious distinction of being centers of some of the worst environmental pollution in the world: Sao Paulo and Mexico City are excellent examples. Moreover, one of the most important characteristics of these situations is the rate at which they are deteriorating. Some measure of this is given by rates of population growth for these cities which range up to 500,000 people, net, per year. It seems that these facts are neglected by those persons in developing countries who claim that “this is not a problem for us.” On the contrary, inclusion of environmental considerations in development planning appears to be a matter of some urgency.

7 There is considerable economic literature on this. See, for example, Kneese, Allen V., “The Political Economy of Pollution,” American Economic Review, 05 1971 (Vol. 61, No. 2), pp. 153–166.Google Scholar

8 See the discussion in Kneese and Bower.

9 This has been demonstrated in ibid., chapter 5.

10 There is some evidence, though meager, that long-term direct investment flows are quite responsive to short-term changes in relative profitability. See d'Arge, R. C., “Customs Unions and Direct Foreign Investments: A Correction and Further Thoughts,” Economic Journal, 06 1971 (Vol. 81, No. 322), pp. 352–355.Google Scholar

11 See Water Wasteland (Report of Ralph Nader's Task Force on Water Pollution) (Washington: Center for the Study of Responsive Law, 1971).Google Scholar

12 See Samuelson, P. A., “The Gains from International Trade Once Again,” Economic Journal, 12 1962 (Vol. 72, No. 288), pp. 820–829.Google Scholar

13 While tariffs tend to reduce global output and efficient utilization of resources viewed globally, tariffs may improve the welfare position of any individual country, especially if there is little or no tariff retaliation by other countries. As a simple example, if country x placed a tariff on comodity B and this action caused y to demand less of commodity A but pay more for it in terms of commodity B, i.e., inelastic demand for commodity B in country y, then country x may be made better off. This occurs because x receives in addition to the tariff revenue on B a greater amount of B per unit of A exported which is large enough to offset the loss in revenue from reduced exports of A.

14 In the economist's language there is distortion between domestic consumers' marginal rates of substitution between environmental goods and other goods which thus distorts marginal rates of substitution between other goods and domestic prices. Likewise, the existence of the externality in production means that producers' marginal rates of transformation are equalized with international price ratios but not with the social marginal rates of transformation for the domestic economy. Therefore, external diseconomies not only induce discrepancies in equality of marginal rates of transformation between producers in different countries but also marginal rates of substitution between consumers in different countries on traded commodities. The one case in which such consumer preference distortions would not occur is when no substitution existed between environmental “bads” and internationally traded commodities.

15 In this and later sections we have assumed that developing countries can and do develop adequate analytical procedures for assessing damages and monitoring waste flow as well as reasonable enforcement provisions. If this is not true, then the statements on global efficiency and comparative advantage may well be invalid.

16 See W. Leontief and W. Ford, “Air Pollution and the Economic Structure: Empirical Results of Input-Output Computations” (mimeographed), referenced in the General Agreement on Tariffs and Trade study cited below; Ralph C. d'Arge, “International Trade and Domestic Environmental Control: Some Empirical Estimates,” in Kneese, Rolfe, and Harned, appendix F; and “Industrial Pollution Control and International Trade,” GATT Studies in International Trade (Geneva: General Agreement on Tariffs and Trade, 07 1971), p. 26.Google Scholar

17 In this discussion we implicitly presume that pollution control costs or damages are not so pervasive as to cause a basically decreasing-cost industry to become an increasing-cost industry or vice versa.

18 In addition there is some slight evidence that decreasing-cost industries in the United States will have higher costs for pollution abatement. A correlation coefficient of 58 was obtained between measured returns to scale and air pollution abatement costs as estimated by Leontief and Ford, where both variables were transformed into logarithms. From this one might even infer that a proportion of the observed increasing returns to scale is“explained” by excessive utilization of the natural environment although the meager evidence at this point does not allow more than a casual hypothesis. Data on increasing returns to scale for the United States by industry was obtained from: Hildebrand, George H. and Liu, Ta-Chung, Manufacturing Production Functions in the United States, 1957: An Inter-Industry and Interstate Comparison of Productivity (Ithaca, N.Y: New York State School of Industrial and Labor Relations, Cornell University, 1965).Google Scholar

19 See Claire Sterling, “Depolluting Autos is Complex Issue,” Washington Post, 11 9, 1971, p. A18.Google Scholar

20 Estimate is taken from Allen V. Kneese, “The Economics of Environmental Pollution in the United States,” in Kneese, Rolfe, and Harned, chapter 1.

21 Ibid.

22 This calculation is made by presuming the United States government subsidies 50 percent of the change in costs for treatment of municipal sewage and 100 percent of the costs associated with separation of storm and sanitary sewers. All other industrial, municipal, and vehicular waste emissions control costs are presumed to be paid for by the emitter or some other nongovernmental entity.

23 For some evidence on this assertion see Houthakker, H. S. and Magee, Stephen P., “Income and Price Elasticities in World Trade,” Review of Economics and Statistics, 05 1969 (Vol. 51, No. 2), pp. 111–125.Google Scholar

24 That is, provided our assumptions on demand elasticities of the different blocs are valid.

25 On this point see the discussion by Baumol.

26 See, for example, Vanek, Jaroslav, International Trade: Theory and Economic Policy (Homewood, 111: Richard Irwin, 1962).Google Scholar

27 “ See d'Arge, in Kneese, Rolfe, and Harned, appendix F.

28 See d'Arge, in Kneese, Rolfe, and Harned, appendix F. Some of the results of the earlier aggregated model were also presented in: d'Arge, R. C., “Essay on Economic Growth and Environmental Quality,” Swedish Journal of Economics, 03 1971 (Vol. 73, No. 1), pp. 25–41.Google Scholar

29 Despite the present United States administration's position against such action (see Environmental Quality: The Second Annual Report of the Council on Environmental Quality together with the President's Message to Congress [Washington: Government Printing Office, 08 1971])Google Scholar it is already embodied in American policy to some extent through tax writeoff provisions. There seems to be a consensus developing among the major industrial powers (at least at the international conference level) that industry should in general bear the cost of residuals control.

30 “ United States International Economic Policy in an Interdependent World; Report to the President, Submitted by the Commission on International Trade and Investment Policy (Government Printing Office: Washington, 07 1971).Google Scholar