Does Trade Help or Hurt the Natural Environment:
Perspectives from Lateral Pressure Theory
Science Applications International Corporation (SAIC)
Prepared for the Globalization and Democracy Research and Training Program,
The question of
whether trade helps or hurts the natural environment has led to a decade of
dialogue between economists and environmentalists (Williams 2002). Its terms were stated concisely in the pages
of Scientific American with economist Jagdish Bhagwati (1993) arguing
that trade helps the environment and Herman Daly (1993) that it hurts. Its salience was established on the streets
of Seattle in 1999, Prague in 2000, and Quebec City and
This study furthers the dialogue by contrasting and comparing Lofdahl (2002) with Lomborg (2001) and Bhagwati (2002), which leads to several conclusions. First, complex models can capture and connect both social and natural systems allowing for studies that have proven problematic for economists. Second, crafting studies that encompass social and natural systems offers the possibility of moving beyond the current conversational impasse between economists and environmentalists toward a more constructive policy dialogue. Third, complex models differ from their economic counterparts by representing multiple variables separately; striving to balance competing concerns rather than optimizing an artificially reduced variable space leads to more sophisticated policy prescriptions. Lastly, complex computer models are controversial in the economic, environmental, and policy communities but will doubtless prove necessary in addressing the hard economic and environmental problems of the twenty-first century.
The trade and environment debate
has recently, almost by force of the media coverage, been defined by the
anti-trade riots. The visual drama of
the demonstrations in Seattle,
For a true debate
to exist, each side must listen to the other, which has not been the case
recently with economists and environmentalists.
Instead an ongoing impasse has led to exasperation and indignation on
both sides, a development noted by World Trade Organization (WTO) President
Michael Moore: “Sweeping generalizations are common from both the trade and
environmental community, arguing that trade is either good for the environment,
full stop, or bad for the environment, full stop, while the real-world linkages
are presumably a little bit of both, or a shade of gray” (qtd. in Economist
1999). To get both sides talking and
communicating in a constructive manner,
The first step towards better communication is to articulate clearly the respective positions. One of the earliest, clearest, and most concise articulations of the trade and environment debate appears in the pages of Scientific American with economist Jagdish Bhagwati (1993) taking the pro-trade position and environmental economist Herman Daly (1993) the anti-trade. Environmental Impacts of Globalization and Trade, or EIGT (Lofdahl 2002), was written to evaluate empirically whether trade helps or hurts the environment: it reports that international trade, contrary to common economic wisdom, hurts the natural environment. The inquiry engages and connects both sides of the debate by including the social and natural environments within the same analytic framework using lateral pressure theory and complex systems methodologies.
Within the framework of the trade and environment debate, EIGT is a statement from environmentalists to economists. Two recent works can be characterized as countervailing statements from economists to environmentalists: Lomborg (2001), a work of statistics, and Bhagwati (2002), a work of economics. So far Lomborg and Bhagwati have yielded more heat than light. It must be recognized though that both are responding in part to the aggressive methods employed by the anti-trade protesters, so an impassioned response is understandable. Be that as it may, protestors are at least partially motivated by a historical lack of conversational engagement and policy dialogue with economists. Moreover, environmental scientists are not the same as environmental protesters. Incorporating the results and findings of environmental scientists into the economic policy dialogue would go a long way towards diffusing the anger of the protesters and improving the quality of the debate.
Bjorn Lomborg is a professor of statistics and
political science at
The Worldwatch Institute has claimed that the world's
forests have "declined significantly" in recent decades. In fact, the
longest data series, gathered by a United Nations agency, shows that global
forest cover grew between 1950 and 1994. In particular, the institute noted,
Were the disagreement limited to data veracity then the issue might simply be acknowledged with the discussion quickly turning to how best fix the problem. However, the reaction of Lomborg’s critics goes a good deal beyond matters of empirical accuracy and citation quality. The titles used by Lomborg’s respondents tell a more impassioned story: “Population: Ignoring its impact” (Bongaarts 2002), “Energy: Asking the wrong questions” (Holdren 2002), “Biodiversity: Dismissing scientific process” (Lovejoy 2002), and “Global Warming: Neglecting the complexities” (Schneider 2002). Rennie (2002) gets closest to the real problem with his article entitled, “Misleading math about the Earth.” Rather than address the whole of Lomborg (2001), a task that others are better positioned to undertake, let us continue with the Canadian forestation example, just to get a flavor.
To begin, nothing is said
about the quality or type of Canadian forests in question: Lomborg confuses old
growth, second growth, and commercial tree plantations (Lovejoy 2002, 71), and
there is a difference. Monoculture tree
plantations may look like forests but are not, both in terms of absent forms of
attendant forest life and their very unsustainabily. After a few generations of trees have been
harvested on a plantation, the soil becomes depleted of nutrients and the trees
become stressed and sick, a phenomenon known as Waldsterben or “the
dying forest” (Maser 1988, 69).
explanation is offered that explicitly accounts for and explains Canadian
forest growth. In the trade and
environment literature there is a distinction between the rich, developed North
and the poor, developing South. They are separable in terms of GNP and population
with the North having a preponderance of GNP and the South a preponderance of
population (Lofdahl 2002, 69), a distinction that can be verified empirically
(Lofdahl 2002, 107). There are 40
The Economist (2001) points out that Lomborg is an expert in numbers and sources, but it must be recognized that, “observations without theories to organize them tend to confuse more than they clarify” (Lofdahl 2002, xvi), and this seems to be the problem with The Skeptical Environmentalist. While numbers are manipulated and sources are checked, there is an underlying complexity to natural systems, social systems, and their interaction that is easy to get wrong in a facile analysis. Consequently it is easy to make unsupportable inferences without an understanding of the complex relationships that underlie and order such systems. Two such arguments were made here to explain Canadian forest growth: first, that different types of forests should be counted differently; and second, that the structure of the international system predicts growing forests in Canada but shrinking forests in the poorer and larger South. If Rennie (2002) is correct, Lomborg’s errors in this regard extend beyond his analysis of forest growth to include population, energy, biodiversity, and global warming as well.
Jagdish Bhagwati is a professor of international
When I was at Seattle and facing a tough Chinese Red Guards-style female demonstrator who was blocking my way illegally down a road and threatening me with bodily harm if I persisted, my good friend … drew me away from the confrontation that would have surely left me bloodied, saying, “You are the foremost free trader today; we cannot afford to lose you!” It was meant to be funny, and it was. But it also was a pointed reference that there were not too many of us out there, fighting the fight for free trade. We need to change that. (Bhagwati 2002, 10)
At stake is welfare of the world’s poor who, Bhagwati and Dixit maintain, are the primary beneficiaries of free trade. According to them, trade is a mechanism that transfers the goods of the industrialized world to less-developed countries, and this view is supported by history. Throughout the twentieth century, and especially its second half, trade liberalization brought huge welfare benefits to Southern countries; Bhagwati therefore argues that trade liberalization should continue. Environmentalists essentially agree that trade leads to economic growth and economic growth is good for populations. Where economists and environmentalists disagree is in the relationship between growth and the environment with economists arguing that growth helps the environment and environmentalists that it hurts, hence the controversy surrounding Lomborg (2001). If it is true that the environment is doing well, then economists can continue pursuing growth as usual. Environmentalists however maintain that the environment is not doing well and that it will not support continued, trade-driven growth of the global economy.
Bhagwati addresses the trade and environment debate in terms of market failures and cost-benefit analysis:
I should state that the best solution need not produce a
level of environmental damage that pleases environmentalists if the cost of
producing a reduction in such damage exceeds the cost to national income at the
margin. By setting the value attached to
environmental improvement sufficiently high, this margin can be extended in
favor of a higher environmental protection as desired. Thus, the environmentalists in the
This economic style of argument leads to several related observations. First, Bhagwati places the trade and environment debate into an economic model and then criticizes environmentalists because it does not fit. This is implied when he states that the shadow cost of environmental degradation is set at infinity – within the economic model, such a price point is irrational as it precludes economic development thereby invalidating the model or at least rendering it useless. Second, there is an implicit criticism of the rich North, as represented by environmentalists in the United States, as Bhagwati believes the North is attempting to deny the poor South the benefits of economic development, which is unfair because the South just wants to follow the development path to prosperity as defined and pursued by the North.
Third, consider the possibility that, with ever decreasing amounts of natural environment, the shadow price is accurate and really is moving to infinity, which is essentially the argument offered by environmentalists. Holdren (2002) goes so far as to say that the world is not running out of energy, “we are running out of environment.” Restating the argument within Bhagwati’s model, as the supply of environment runs out (cf. Lomborg 2001), then it is to be expected that environmental prices would rise, and if the very health of the planet is at stake, then the price should indeed be high. Fourth, Bhagwati states that cost-benefit analysis leads to a “best solution” in two dimensions, which is methodologically both problematic and revealing. The whole idea of setting a price on the environment is problematic: first because economics, economies, and economic actors all presuppose a healthy natural environment; second it is impossible to calculate environmental prices on the margin. An infinite environmental cost would accrue to the last acre of nature that, if developed, would push the global natural environment into an unrecoverable condition. Such an experiment is both infeasible and undesirable. But more than that, such questions and thinking naturally arise when arguing about tradeoffs in two dimensions. Economists tend to assign worth according to what somebody is willing to pay, but that kind of valuation does not really apply to the environment.
natural environment is not a homogeneous quantity that can be subdivided and
distributed into any configuration deemed necessary or convenient by the world
economy. The natural environment is
itself a multidimensional system that cannot be understood according to
two-dimensional analysis. A more
multidimensional and complex understanding would allow for more fruitful
discussions in several respects. First,
complex models differ from their economic counterparts by representing multiple
variables separately; striving to balance competing concerns rather than
optimizing an artificially reduced variable space leads to more sophisticated
policy prescriptions. Second, the use of
complex models allows for an understanding of environmental processes more
sophisticated than that obtained by the economic calculation of shadow
prices. Third, complex environmental
models can be expanded to encompass both economic and
environmental variables, which leads to a more profound policy
conversation regarding trade and development tradeoffs. Economists are used to arguing in terms of
supply and demand. However, the supply
of goods is derived from nature, and once used the effluents return to nature. In earlier times such flows were costless and
could be discounted. Some regions, such
The policy conversation between economists and environmentalists is currently impoverished, with the former labeled overly optimistic and the latter over pessimistic (Wilson 2002), as if their ideological proclivities had some bearing on the workings of the natural environment. Since there is little common ground between the two sides, perhaps the criticism of ideological predispositions is the best one can expect, but given the stakes of the debate, one hopes not. Williams (2002) gives a short history of the trade and environment debate, which is about 10 years old in its current form, and separates it into political, economic, and legal dimensions. Bhagwati (2002, front cover) states that, “free trade faces strong new challenges from a variety of groups, including environmentalists and human rights activists as well as traditional lobbies who wrap their agendas in the language of justice and rights.” Bhagwati here implies that his environmental detractors are long on general complaints and short on empirical specifics; indeed, Williams (2002) offers little in the way of empirical or methodological support. EIGT attempts to fill this missing element in the trade and environment debate by providing empirical evidence that trade hurts the environment.
that trade hurts the environment, while it may push the debate forward, by no
means settles it. The key remaining
question concerns trade policy: certainly trade will continue, but how best to
arrange and shape it so that its environmental impacts are minimized? Nordstrom and
Appendix A – Nordstrom & Vaughan (1999) Policy Prescription Synopsis
· Most environmental problems result from polluting production processes, certain kinds of consumption, and the disposal of waste products – trade as such is rarely the root cause of environmental degradation, except for the pollution associated with transportation of goods;
· Environmental degradation occurs because producers and consumers are not always required to pay for the costs of their actions;
· Environmental degradation is sometimes accentuated by policy failures, including subsidies to polluting and resource-degrading activities – such as subsidies to agriculture, fishing and energy;
· Trade would unambiguously raise welfare if proper environmental policies were in place;
· Trade barriers generally make for poor environmental policy;
· Not all environmental standards should necessarily be harmonized across countries;
· The competitiveness effects of environmental regulations are minor for most industries;
· A good environmental profile is often more of an asset for a firm than a liability in the international market-place, notwithstanding somewhat higher production costs;
· Little evidence bears out the claim that polluting industries tend to migrate from developed to developing countries to reduce environmental compliance costs;
· Yet, environmental measures are sometime defeated because of concerns about competitiveness, suggesting a need for improved international cooperation on environmental issues;
· Economic growth, driven by trade, may be part of the solution to environmental degradation, but it is not sufficient by itself to improve environmental quality – higher incomes must be translated into higher environmental standards;
· And not all kinds of economic growth are equally benign for the environment;
· Public accountability and good governance are essential to good environmental policy, including at the international level;
· Effective international cooperation is essential to protect the environment, especially in respect of transboundary and global environmental challenges.
· The cooperative model of the WTO, based on legal rights and obligations, could potentially serve as a model for a new global architecture of environmental cooperation.
· Meanwhile, even within its current mandate, the WTO could do a few important things for the environment. The most obvious contribution would be to address remaining trade barriers on environmental goods and services in order to reduce the costs of investing in clean production technologies and environmental management systems. Another contribution would be to seek reductions in government subsidies that harm the environment, including energy, agriculture and fishing subsidies.
Bhagwati, Jagdish. 1993. “The Case for Free Trade.” Scientific American 269 (November): 42--49.
Bhagwati, Jagdish. 2001. “Targeting Rich-Country Protectionism: Jubilee 2010 et al.” Finance & Development 38(3), September.
Jagdish. 2002. Free Trade Today.
Bongaarts, John. 2002. “Population: Ignoring its impact.” Scientific American 286 (January): 67--69.
Daly, Herman. 1993. “The Perils of Free Trade.” Scientific American 269 (November): 50--57.
Economist. 1999. “Embracing Greenery.” The Economist, October 9.
Economist. 2001. “Doomsday Postponed.” The Economist, September 6.
Holdren, John P. 2002. “Energy: Asking the wrong question.” Scientific American 286 (January): 65--67.
L. 2002. Environmental Impacts of Globalization and Trade: A Systems Study.
2001. The Skeptical Environmentalist: Measuring the
Lovejoy, Thomas. 2002. “Biodiversity: Dismissing scientific process.” Scientific American 286 (January): 69--71.
1988. The Redesigned
Nordstrom, Hakan and Scott Vaughan. 1999. Trade and
Rennie, John. 2002. “Misleading Math about the Earth.” Scientific American 286 (January): 61.
Schneider, Stephen. 2002. “Global Warming: Neglecting the complexities.” Scientific American 286 (January): 62--65.
Williams, Marc. 2002. “Trade and Environment in the World Trading System: A Decade of Stalemate?” Global Environmental Politics 1(4): 1—9.
Wilson, Edward O. 2002. “The Bottleneck.” Scientific American 286 (February): 82—91.