Environmental Effects of Trade:
Empirical Econometric Analysis of Panel Data for Central Africa
Etienne YEMEK
Draft Version: 16 December 2004
Correspondence Address:
P.O. Box 27190
Sunnyside 0132
South Africa
Tel. +27 82 636 3244
eyemek@yahoo.com

PhD Candidate (University of Pretoria) & Senior Researcher/Trainer (ABP)
Environmental Effects of Trade:
Empirical Econometric Analysis of Panel Data for Central Africa
Abstract.
There is an established theoretical and empirical case-study literature arguing that domestic and
international trade have a real impact on environment and consequently on the pollution levels.
Minimizing the environmental externalities of economic activities has become a central public
policy, to which national and supra-national authorities are devoting attention. Being able to
estimate the pollution production function between economic outputs, resources inputs and the
level of emission can help in settling ex-ante policy formation and ex-post effectiveness in
monitoring environment protection. It is within this context that this paper would contribute to
this literature in providing a systematic quantitative test of environmental effects of trade. Using
the supply-side concept of the pollution production function and the demand-side relationships
affecting the trade both regional and international trade in central African countries, we derive the
regional model of pollution, by which we test for the scale, product and technological effects of
trade. We use econometric panel data approach to test the fixed and random effects of the trade
on the level of pollution, the country specific natural endowment are also tested to assess the
impact the trading system on environment.
Panel data econometric tests of the economic
pollution model show that trade exerts statistically significant product, technological, scale and
structural effects on environment. These results can be true both for the fixed-effects and
random-effects estimation. For a regional trade policy, it would be useful to control for the
potential endogeneity of these effects with an instrumental variables aiming to correct the
economic and social damage of trade on environment by setting a coordinated environmental
policies. These effects are also substantively important depending on the country specific
economic and natural specificities. Sound environmental based trade policy represents an
important strategy by which the trading partners can try to achieve lower pollution levels around
the world.
Keywords: trade, environment, trade policies, environmental policies, demand-supply model of
pollution.
1
1. INTRODUCTION
1.1 Overview of the study
The world economy has not yet experienced a global environmental crisis. In the context of
economic globalisation, countries are becoming much more interdependent either for goods and
services produced or resources used. Environment has many of the economic characteristics of
public goods, being typically provided by public authorities and international agreements.
Pollution is produced at different levels of the consumption and production processes both
domestically and internationally, with these different levels of production impacting upon
environment on which people lives depend on. In trading for outputs and inputs, the markets
yield levels of pollution that cost on global environment and harm future generation. In
recognizing that environment is a public good, many countries have become increasingly aware
of the threats of global pollution problems. Nationally governments are setting policies correcting
and limiting for the environmental negative externalities. International negotiations and
agreements are devoted to aligning domestic policies towards the environment and to reaching
international targets for pollution abatement. Two sets of instruments are needed for these two
sets of goals, internalising environmental externalities and removing trade restrictions. Domestic
environmental taxes and other instruments aim at ensuring that private costs and benefits of
domestic activity reflect social costs of pollution and benefits of environmental quality
improvements. The removal of tariff and non-tariff barriers to international trade should ensure
that domestic activity fully exploits comparative advantages. When prices reflect the social
marginal damage, liberalizing trade is always welfare improving.
However, trade and trade liberalization aim to increase the welfare. In the context of small open
economy without a consistent system of production and depending on exportations of raw
resources, trade is a source of revenues for government and trade liberalization seems to have
distortionary effects on domestic economy as it means explicitly a reduction of revenues while
binding several sectors of production on infant industries. Empirical studies have proved that
there is a strong positive correlation between trade and economic growth. The production system
generates pollution through the production process and output. This means that trade and growth
2
affect the environment negatively, therefore there is a need to protect environment by fiscal
policies.
1.2 Objective of study
The purpose of this article is estimate an econometric model of pollution by which three
environmental effects of trade are tested. The model per se is derived from the supply-side and
demand-side of pollution. Using a proxy of the pollution as both input and output, the level of
pollution is estimated as function of factor prices, factors, abatement cost and emission. The
derived model pollution captures the product, scale and technical effects of trade. The magnitude
of these effects are controlled through an instrumental variable1 which provide a way of setting
both national and regional trade policies aiming to protect natural resources while correcting the
distortionary effects of trade.
1.3 Scope of the study
The study will focus on the theoretical foundations of a pollution-trade model and assume that
the causality the supply and demand of the economic system affect the level of pollution. In
regard, the question is what is the socially desirable level of pollution demand and supply of a
small open economy sustainable which the competitiveness of the production system.
The study will be limited to a simple analysis of the environmental effects of trade and trade
liberalization, and will not covers the environmental policies. Our model of the economy of
pollution will be simply to illustrate the magnitude of the effects of trade on environment.
Environmental taxation is use to correct the negative externalities by minimizing the magnitude
of these effects. We will extent this analysis to assess the impact of multilateral agreements on
environment with respect to the size and the economic structure of central African economies,
which are characterized by infant industries depending on the exploitation of the raw materials.
Such international agreement seems to do not be consistent without a environmental fiscal
policies.
1
Fredriksson, P.G. (1997 & 1999)
3
1.4 Methodology
In this section, we will describe methodology used to assess the environmental impact of trade in
a small open economy. To assess the impact, we will build a framework analysis that captures the
interaction of a trading economy by linking the inputs and outputs markets to the demand and
production of pollution. The related general equilibrium model aims to define the pollution
demand and supply system determining equilibrium pollution as a function of world prices,
endowments, technology and preferences. This system can then be used to examine to examine
the environmental consequences of trade as part of economy growth and trade liberalization.
On the supply side of the model, pollution threats pollution as an input into the production of
goods, it is also considered as a joint2 output. The supply equation will define the joint production
technology and introduce abatement3 in order to perceive the difference between the potential and
the net output. The pollution abatement costs will be set as a function of emissions per unit
output. Having pollution, as an input will facilitates the use of national income or GNP functions
in comparative static exercises.
On the demand side of the model, pollution is threatened as an input leading to link the price of
pollution4 to the level of emissions. The private sector faces a limit on emissions. Under efficient
policy and no distortions, the choice of a pollution tax or an allowable emissions limit, the
indirect demand represents the marginal benefit of pollution. Assuming that the economy has N
identical individuals, we will aggregate the demand of pollution at nation level. Depending on
whether pollution is endogenously or exogenously determine in the model, we will determine the
relationship between the level of pollution and the national income produce in the economy.
Treating pollution as an input makes its inclusion into general equilibrium analysis easier, The
model allow relative prices to reflect the abundance of two primary factors (capital and labor) and
maintain a role for pollution regulations to matter. The model can be useful for examining trade
2
Pollution is a negative externality therefore is undesirable output.
To account and correct the negative externalities.
4
Taxes or permits
3
4
and trade policy. In this order, we assume that the abatement activity employs factors in the same
manner, as does production of the dirty good; and we assume a specific form for the abatement
production function.
With these two assumptions, the model has three factors (capital, labor and pollution). For
example, if we hold emissions per unit output in the dirty industry constant, the model inherits all
the comparative static properties of the Heckscher-Ohlin model. Specifically, the StolperSamuelson theorem holds: an increase in the relative price of the dirty good raises the real return
to capital and lowers it to labor. The Rybczinski theorem holds as well: therefore, an increase in
capital raises the output of the capital-intensive dirty good and lowers the output of the laborintensive clean good.
The government’s policy rule (income, prices and pollution levels into pollution policy) with the
private sector’s demand for pollution is used to solve for the equilibrium level of pollution and its
price. Therefore, the model use the concept of a national income or GNP function and then apply
it in an environmental economics context.
The model represents the entire supply side via a national income function and we define the
Scale, Production and Technique effects. We will then demonstrate how changes in pollution
caused by shocks to the economy can be decomposed into these three effects.
Finally, we will determine the efficient level of pollution using our pollution supply-and-demand
framework. The pollution supply and demand can be interpreted as general equilibrium marginal
damage and marginal abatement cost schedules, and so this section clearly links our approach to
standard textbook treatments of pollution in environmental economics.
1.5 Organization of the study
This study is organized as follows. In section 2, we will explain the theoretical foundations of the
analytical model assessing the environmental impact of trade; we will develop the supply model
and demand model of pollution, which will be used to define the equilibrium level of inputs and
5
outputs. In section 3, we begin with the theoretical formulations of the environmental effects on
trade before an extensive explanation of each; we extend our discussion
the environmental
effects on trade liberalization. Determine the main environmental effects on trade and trade
liberalization. Finally, the section 4 will conclude our study with a brief simulation of effects of
exogenous increase of pollution in a small open economy due to the revenue motives of the
government.
2. THEORETICAL FOUNDATIONS
In this section, we will develop a simple general equilibrium model that may provide a
foundation for analysis of trade and environmental policy. We develop a framework of the
general equilibrium pollution and trade model, which allows defining the Scale, Composition and
Technique effects of the environment on trade.
The model contains a case the Heckscher-Ohlin model of International Trade and a version of a
desirable pollution5. Both factor endowments and pollution regulations play a role in determining
relative prices and hence comparative advantage6.
2.1 Economic model of the production of pollution
The supply-side economics stresses the necessity of understanding the structure production
process and the effect of each of the production factors on the level of output. According to
Hailstones, supply-side economics can be defined of policies designed to stimulate economic
growth and promote price stability through various measures that affect the supply of goods and
services. At macro-level the production function may be used to explain economic growth, the
price of various factors of production and the extent to which these factors are utilised.
The production of output Yi is specified as function of capital input, Ki, labour input, Li, and
emissions, Ei.
5
6
In the literature, emissions of pollution are modelled as an input into the
Pollution Haven model [Copeland and Taylor (1994)].
This ensures that the model can be used for demonstration of the Heckscher-Ohlin theorems.
6
production process. Emissions are interpreted as that part of the environmental-resources input,
which is used up in the production process and discharged into the environment as pollutants.
The production function of an industry i,
Yi  F i ( K i , Li , Z i )
(2.1)
This production function has usual properties: positive partial derivatives, negative second
derivatives, positive cross derivatives, and concavity. This production function implicitly models
capital- and labour-intensive pollution abatement: to reduce emissions at a given output level,
other inputs must be increased.
The industry i jointly produces two outputs: good Yi and emissions Zi. However, abatement is
possible, and so emission intensity is a choice variable. We consider that an industry can allocate
an endogenous fraction  of its inputs to abatement activity. Increases in 
at the cost of diverting primary factors from Yi production. The joint production technology is
given by:
Yi  (1   ) g ( K i , Li )
(2.2)
Z i   ( ) g ( K x , Lx )
(2.3)
Where
 ( )  1
ġ
is
increasing,
 (1)  0
concave
and
linearly
homogeneous,
 f
  0 .



0    1,
(2.4)
In fact if   0 , there is no abatement and by choice of units, each unit of output
generates one unit of pollution. g ( K i , Li ) is the potential output; this is the output of Yi that
would be generated if there were no pollution abatement. That is, without abatement activity, we
have:
Yi  g ( K x , Lx )
(2.5)
Z i  Yi
(2.6)
If industry choose   0 , then some resources are allocated towards abatement. If a vector
( K i , Li ) of inputs is allocated to the industry i, then K i units of capital and Li units of labor
7
are allocated to abatement7. Equivalently, the industry produces a gross or potential output of
g ( K i , Li ) , and using a fraction 
net output (1   ) g ( K i , Li ) , which is available for consumption and export.
Considering the following functional form for abatement:
 ( )  (1   )
1

(2.7)
Where 0    1 ,
By transforming (2.3) – (2.7) the joint production technology is:

1
Yi  Z i g ( K i , Li )
(2.8)
With Z i  g . Hence, pollution is a joint output, which can be threatened as an input. The
pollution produced is ziP, and pollution emitted is z. given the fact that when there is no
abatement production of ġ produces pollution in direct proportion; then Z i  g . But if
p
abatement occurs the pollution emissions z is a difference between pollution produced and
pollution abated. Considering the quantity abated A, we have:
Zi  Zi  A
p
(2.9)
Abatement is like any other activity the firm undertakes in the industry. The quantity abated
depends on the amount of resources allocated to abatement, which we denote YA, and the amount
of pollution potentially abated, ziP. Assuming abatement is a constant returns activity the
pollution emissions is transformed as
Z i  Z i  A( Z i , Yi )
p
p
A
Definition
A

p
p  Y
 Z i  Z i A1, i
CRS
p 
Z i 

 1  a ( ) g ( K i , Li )
Because a ( )  A(1, )
  ( ) g ( K i , Li )
(2.10)
2.2 Economic model of the demand for pollution
7
We assume that the abatement technology uses the same factor intensity as the production of the
final good X. This is a simple way to capture the notion that abatement is costly, but avoids the
complexity of modeling three activities (each with different factor intensities) in a general
equilibrium model.
8
We assume there are N identical individuals who have time and resources they can sell in the
market to earn income that can be used to buy goods and services. Each consumer cares about
both consumption and environmental quality. Each of these individuals seeks to maximize utility
defined over clean goods, dirty goods, leisure, environmental quality and government public
goods. Several kinds of policies will shift the domestic economy to the same social-optimum
allocations of resources.
Assuming goods Yi are produced for domestic and foreign market, the dirty goods are the ones
that create externalities through consumption of the good (gasoline), or are the ones that create
externalities during the production process (electricity and manganese). Dirty goods are purely
public bad (all consumers experience the same level of pollution).
Income is defined as the value of payments to all factors, including any pollution charges; or
equivalently, it is the value of net goods production. Therefore, income depends on the economy
production, the goods prices and environmental policy.
When the government regulates pollution using an emission permit system, the emission level Z
is treated as exogenous when solving the optimization problem (1.37). In this case the
government specifies the overall supply of pollution permits, and the private sector maximizing
the value of national income, given the fixed available aggregate supply of emission permits.
However, if there is no regulation, or if there is a fixed pollution tax in place, then we do not want
to treat Z as exogenous.
Considering the joint production technology producing three outputs (X,Y,Z) and an exogenous
pollution tax t, in competitive economy the private sector maximize the value of output given the
prices of X, Y, and Z. The price of pollution is negative from the point of view of firms, because
they must pay a tax on emissions. Therefore, we can define:
G( Pi , , K i , Li , Z )  max x, y , z
 PY  z : x, y   T (K , L , Z )
i
i i
i
i
i
(2.11)
This is the value of net revenue generated by the private sector; however, national income also
includes pollution tax revenue. Consequently, total national income is:
9
YĞ ( Pi, τ, Ki,Li )  τ Zi .
(2.12)
But notice that when we add pollution tax revenue to Ğ , we are left with:
YPiYi,
(2.13)
and the equilibrium pollution Zo that solved our problem (2.11), and confronted the economy
with a fixed number of pollution permits Zo, then we would have:
G(p,K,L,Zo)  Ğ(p,,K,L) + Zo .
(2.14)
The function Ğ satisfies all the same properties as G that we outlined above, with the exception
of (2.11) because it is a function of instead of Z. Instead, we have the following envelope
property
Ğ(p,,K,L) /  -Z( p,,K,L).
(2.15)
That is, we can obtain the derived demand for pollution by differentiating the national income
function Ğ with respect to the pollution tax. Moreover, because Ğ is convex in all prices
(including ), we have Ğ 0 , which implies: Z /  0.
The derived demand for the right to pollute is decreasing in the pollution tax.
2.3 Abatement cost
The derivative of the national income function with respect to pollution emissions is equal to the
price the firms have to pay for the right to pollute:
δG(px,py,K,L,z) / δz = τ.
(2.16)
If the private sector is allowed to release one more unit of emissions, national income will rise by
the value of the marginal product of emissions, which in a competitive market is equal to the
price paid by the firm for the right to pollute. Considering the environmental services as an input,
then the logic is exactly the same as that we exploited in discussing factor returns above. The
expression δG / δz can be interpreted as a general equilibrium marginal abatement cost. If
emissions z, are reduced z, then the fall in national income due to a drop in allowable emissions
Reduced emissions will be achieved by the private sector in two ways: by investing more in
abatement activity, and by producing less of the dirty good X and more of the clean good Y. In
the latter case, the cost to the economy of abatement is the cost of moving along the production
frontier from X towards Y. With either a market for emission permits or a pollution tax, the
10
private sector will choose the most efficient combination of these two strategies. The derivative
δG / δz measures the cost to the economy of reducing emissions when the emission reduction is
achieved at lowest possible cost.
2.4 Specification of environmental effects of trade
The relationship between trade and environment is complex. Depending on the sector, the
markets and prevailing policies, trade and trade liberalization may be good or bad for the
environment. The linkages that bind trade and environment consist of the impacts of trade on
environment. Trade flows and trade liberalization have at least three types of physical and
economic impacts on environment: product, technology effects, scale effects.
Trade and growth both stimulate economic activity, and therefore both increase the economy's
scale. The measure of a scale economy is an index of output. Let set the value of net output at a
given level of world prices as a measure of the scale economy,
S i j  ij Pi Yij
0
(2.17)
Given this definition of the scale, and choosing units to set base-period of world prices prior to
any shocks to unity, that is Pi o  1 the pollution is
 Pi 0Yij 
 S  ei ij S ij
Z ij  ei Yij  ei 
S ij  ij


(2.18)
 P 0Y

Where  i ij    ij is the value share of net output of Yij in total output
S ij


evaluated at the base-period price. Hence pollution emissions depend on the emissions intensity
of production, e i , the importance of the dirty good industry in the economy,  ij and the scale of
the economy, S ij .
Z
~
z  ij
Z ij
~
 e~ij  ~ij  S ij
(2.19)
11

~
The scale effect, S ij measures the increase in pollution that would be generated if the
economy were simply scaled up, holding constant the mix of goods produced and
production techniques. As an example, if there were constant returns to scale and all of
the endowments of the economy grew by 20%, and if there were no change in relative
prices or emissions intensities, then we should expect to see a 20% increase in
pollution.

The product effect ~ij is captured by the change in the share of the dirty good in
national income. If we hold the scale of the economy and emissions intensities constant,
then an economy that devotes more of its resources to producing the polluting good will
pollute more.

The technique effect, e~i is captured by the emissions intensity which imply that holding
all else constant, a reduction in the emissions intensity will reduce pollution.
3 Empirical evidence of the environmental effects of trade
3.1 international trade
Any exchange of goods or services will have some environmental impact. The environmental
effects of trade can be broken down into three basic categories: product effects, scale effects and
technical effects.
Product Effects
Product effects occur when the traded products themselves have an impact on the environment or
development. The product effects of trade on the environment8 can be both positive and negative.
On the positive side, trade may lead to spreading of new technologies for protecting the
environment, such as microbial techniques for cleaning up oil spills. Or it may more rapidly
spread goods or technologies that have less environmental impact—for example, solar power
8
What happens as trade in certain goods expands
12
technology or more fuel-efficient automobiles—than those currently used. Openness to trade and
investment can also help contribute to development objectives, by facilitating transfer of new and
improved technologies and management systems.
On the negative side, trade can facilitate international movement of goods that, from an
environmental perspective, would best never be traded. With hazardous wastes and toxic
materials, the environmental risks increase the further the goods are transported, since spillage is
always possible. As well, such “goods” may end up being dumped in countries without the
technical or administrative capacity to properly dispose of them, or even assess whether they
should be accepted. Trade also makes possible the over-exploitation of species to the point of
extinction—there is rarely enough domestic demand to create such pressure. The Basel
Convention and CITES, are MEAs that restrict such trade because of its negative direct effects.
Technology effects
Subsets of product effects, sometimes termed “technology effects,” are associated with changes
in the way products are made depending on the technology used. Technology effects stem from
the way in which trade liberalization affects technology transfer and the production processes
used to make traded goods. Positive technology effects result when the output of pollution per
unit of economic product is reduced. Foreign producers may transfer cleaner technologies abroad
when a trade measure or agreement results in a more open market and a business climate more
conducive to investment. Trade-induced growth and competitive market pressures generated by
liberalization can have ten processes of capital and technological modernization for all firms.
Newly opened markets can provide the revenue and the income to allow firms to accelerate
capital turnover, and invest in cleaner, more efficient plants, technologies and processes.
On the other hand trade liberalization and an expanded marketplace may harm more
environmentally friendly and socially valuable traditional production methods. Trade
liberalization can also promote the spread and use of harmful, less-environmentally friendly
technologies. Whether technology effects stemming from liberalization have an overall positive
or negative effect on the environment will depend considerably on other conditions and policies
13
in the marketplace that determine availability and choice of those technologies (for example,
price and national environmental regulation). These effects are reflected again under the heading
“imported efficiency”9
Scale Effects
Trade-related impact on the environment, which comes from production process as producers
increase their output to meet expanded demand from overseas markets, is known as “scale
effects”. The scale effects may be either positive or negative.
On the positive side, Trade and trade liberalization can expand the level of economic activity
possible by making that activity more efficient. In this way, trade may lead to a greater accrual of
wealth, some portion of which may be devoted to environmental investments. Moreover, scale
economies in the production of the environmentally sound goods may lower their price and
expand their market. This expansion—essentially creating additional wealth can have positive
effects on the environment and development. It has obvious development benefits; although
development is more than economic growth, such growth is essential for development in most
Southern countries. We should note, however, three important qualifications to this positive link
between trade and development:

First, distributional considerations matter. That is, if trade increases inequity by creating
wealth that is mostly concentrated in the hands of the wealthy, then it works against important
development objectives.

Second, not everyone will benefit from trade liberalization; inherent in the wealth creating
process is destruction of inefficient firms and sectors.

Third, the potential of trade to increase wealth is just that: potential. To enjoy trade’s full
potential countries may need to devote, for example, a large amount of resources to building
capacity in their export sectors.
Where trade creates wealth two types of environmental benefits may follow. First, increased
efficiency can directly benefit the environment, since efficient firms need fewer natural resource
9
Trade and wealth: efficiency improvement
14
inputs and produce less polluting waste. In this sense, the basis of comparative advantage 10 also
underlies the goal of sustainable development.
Second, efficiency can benefit the environment indirectly by making people wealthier, and thus
more likely to demand stronger environmental protection. This is not to say that the poor do not
value the environment; indeed, their poverty may mean they depend on it more directly than do
the rich. But it may be a lower priority than it would for those with stable employment and
adequate income, food and housing. Much evidence suggests that richer economies will likely
have lower levels of some harmful emissions than poorer ones (though this relationship does not
hold for pollution and environmental degradation whose effects are felt far away in time or in
space, such as green-house gas emissions). Where trade alleviates extreme poverty, it may save
people from a vicious cycle whereby they are forced to degrade their environment to survive, in
the process becoming increasingly impoverished. An increased scale of economic activity can
also have negative environmental effects. Most economic activity damages the environment,
whether in extracting raw materials, harvesting renewable resources, or in creating waste and
pollution. Increasing the scale of economic activity means increasing the levels of environmental
damage, unless regulations are in place to ensure that the additional activities cause no harm—an
unlikely scenario. Another possible negative effect stems from the additional wealth created by
trade—the same wealth that, as noted above, can benefit the environment and development. For
some types of pollution, increased wealth may mean more, not less pollution. The richer
countries of the world, for example, have far higher per capita emissions of all types of
greenhouse gases than do developing countries, and far higher per capita emissions of such toxins
as PCBs, dioxins and furans. With enough wealth comes the opportunity to consume at levels and
in ways that are worse for the environment.
3.2 Environmental effects of trade liberalization
One problem with trade liberalization is that, to the extent that trade itself creates environmental
problems, increased trade creates more problems. Any effort to promote trade liberalization will
be viewed with suspicion by some environmentalists. Those who adhere to a “limits to growth”
10
Efficient use of resources
15
philosophy perceive any attempt to expand trade as likely to lead to further industrialization and
thus to additional environmental problems. From this perspective, trade liberalization translates
into economic growth that results in increased pollution, the consumption of non-renewable
resources at increased speeds, and the unsustainable consumption of renewable resources.
Even environmentalists who do not adhere to a strict “no growth” point of view fear that trade
liberalization, undertaken in the absence of a strategy to address the environmental effects of
expanded trade, will lead to environmental degradation rather than sustainable development.
They argue for the incorporation of environmental policy commitments into trade liberalization
efforts.
Free-trade advocates often take an opposite perspective. They see trade liberalization providing
not only expanded access to environmental goods but also to more efficient (less resourceintensive) production. In addition, they argue that expanded trade generates wealth and financial
resources, some of which will be spent on environmental protection. Moreover, they note that
poverty is one of the greatest causes of environmental degradation. Therefore, to the extent that
trade helps to alleviate poverty, it is also environmentally rewarding.
The issues can be divided into a number of categories. First, the product effects of trade
liberalization may be positive if the expansion of trade leads to greater access by people in
markets around the world to environmentally friendly technologies and services. On the other
hand, expanded trade may simply mean more circulation of environmentally harmful products
such as hazardous waste.
The scale effects of trade liberalization are also a source of concern to many environmentalists.
Specifically, while freer trade may increase the amount of resources available for environmental
investments, it may also encourage production under circumstances where environmental damage
is left “uninternalized”. That is, the costs of environmental problems are not borne by those who
create the problem. Again, the issue is the magnifier effect of trade. The activities in which they
are engaged will be expanded inappropriately if environmental costs are not fully internalized in
the prices that producers or consumers see and pay, creating environmental degradation.
16
Two sets of harmful effects deserve particular mention in this context. First, when the
degradation in question is global in scale, it is very likely that currently there is no appropriate
internalization of these environmental costs. This lack of internalization reflects the fact that there
are few established rules regarding global emissions and very limited enforcement of them.
Because of this, expanded trade creates an incentive for producers to make more globally
polluting goods. Producers recognize that they themselves do not pay the full costs for the
environmental effects of their products. For example, to the extent that the ozone-layer-depleting
chemicals are not controlled, those who produce goods using these chemicals will benefit from
being able to “externalize” part of their cost of production to society at large. With freer trade, the
opportunities for sales under these environmentally damaging circumstances expand.
Second, to the extent that environmental degradation arises because some resources constitute a
“commons” or a “public good”, trade will exacerbate overuse of common property resources.
Due to the absence of collective action to control how much of the common resource an
individual is allowed to consume, users of a commons or a public good lack incentives to restrain
their behavior. With opportunities for export sales increasing their markets, producers using
public goods often find they are able to increase profits in the context of freer trade, keeping their
costs down by not paying for environmental controls in their production processes. Thus, the
incentive to produce in a manner that externalizes environmental harms can be considerable and
increases under the circumstances of trade liberalization.
Another set of “structural” or “indirect” environmental effects of trade liberalization should also
be mentioned. In a positive sense, the elimination of trade- (and environment) distorting public
policies can be broadly beneficial. When trade liberalization eliminates subsidies, for example,
both trade flows and environmental quality often improve. Thus, lower agricultural subsidies
reduce the farmer’s incentive to farm marginal land, which often requires large doses of
environmentally harmful chemicals. On the other hand, the structural or indirect effects of freer
trade may be negative. For example, opportunities for expanded exports may induce
environmentally damaging changes in land use. In many countries, the opportunities for export
earnings have led to the increased production of commodity crops that often involves
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environmentally harmful farming practices. An example of this is deforestation for the purposes
of clearing the land or monoculture for commodity crop production.
The technological effects of trade liberalization may also be either environmentally helpful or
harmful. When the expansion of trade brings cleaner technologies to countries that otherwise
might not have access to them, the effects will be positive. In fact, one of the very significant
potential environmental gains from trade is the encouragement it provides to multinational
companies to set up environmentally sound operations in developing countries. For many of these
developing countries, access to the environmental technologies and management systems of
multinational corporations is an enormous environmental boon. In some circumstances, however,
trade may promote the dissemination of products that are made using outdated technologies or
less environmentally friendly (cheaper) technologies.
Final sets of effects that deserve mention are the “regulatory” effects of trade liberalization. In
some respects, this can be seen as a separate category of environmental effects of trade
agreements per se. Environmentalists often fear that the conclusion of a trade agreement will
result in the downward “harmonization” of standards: they worry that harmonization of laws and
regulations will result in the lowering of environmental standards to an average or, even worse, to
a baseline level. Other environmentalists fear that a harmonization process will deprive local
(state, or even national) communities of the right to make their own environmental regulatory
decisions. Specifically, they see the “market access” obligations, which are generally part of trade
agreements, as a mechanism by which trade goals trump environmental principles if these two
realms clash. This perceived loss of sovereignty is considered by some observers to be the central
issue in the goal of trade liberalization with improved environmental protection. Liberal traders
argue that the commitments undertaken to open markets in the context of trade agreements need
not be seen as environmentally harmful. They note that there would be no tension between freer
trade and environmental protection if environmental regulatory strategies relied on an appropriate
pricing of environmental harms. They argue that if the environmental community were to adopt
the “polluter pays principle” and seek full implementation of “cost internalization”, there would
be no negative environmental effect of freer trade. Those supporting free trade also note that
some trade agreements limiting a nation’s freedom of choice in other realms can be positive. For
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example, as trade agreements move countries towards eliminating agricultural subsidies, behavior
that is damaging in both the trade and environmental contexts is discouraged.
One of the biggest concerns about trade and trade liberalization relates not to the economic effect
of freer trade, but to its political impacts. Many environmentalists fear that movement toward
freer trade will make it harder to adopt optimal environmental standards. Specifically, they note
that internalizing environmental costs often raises prices and can competitively disadvantage
industries if their competitors in the global marketplace are not similarly required to internalize
the costs of the environmental harms they are causing. Thus, one of the most prominent concerns
in the NAFTA debate centred on the fear that Mexico would become a “pollution haven” (French
1993).
Those supporting liberalized trade argue that fears about environmental degradation arising from
freer trade are wrong. In addition, they suggest that if environmental regulation were cast in
economic incentive terms there would be no tension between environmental protection and the
economic growth brought about by trade liberalization. Furthermore, free-traders note a number
of other reasons to be optimistic about the role of freer trade in protecting the environment. They
suggest that because the short-term thinking that comes with poverty causes much environmental
harm, the prospect of economic growth arising out of freer trade can be seen as an
environmentally positive development. Moreover, free traders and their economist allies often
note that as the wealth of a society goes up, its commitment of resources to environmental
protection generally increases as well (Grossman and Krueger 1994). Thus, to the extent that
freer trade promotes economic growth, the efforts at trade liberalization will be environmentally
positive. How trade liberalization will effect particular sectors may, of course, be hard to forecast
at a broad degree of generality. The Organization for Economic Cooperation and Development
(OECD 1994) undertook a series of case studies looking at the environmental effects of freer
trade in a range of sectors. The authors explored a variety of trade-environment hypotheses. For
example, in his study of the transport sector, Landis Gabel identifies five possible impacts from
trade and trade liberalization in the transport sector:
1. Direct impacts related to liberalization of the transport sector;
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2. Effects of trade liberalization in areas of particular significance to the transport sector,
including the potential effects on energy supply and transport equipment;
3. Increased use of transport as a result of the specialization of international production;
4. Effects of increased growth rates on production and per capita incomes that may lead to more
aggregate consumption and/or investment in the transport sector; and
5. The impact of trade liberalization on environmental standards, including pressure for
harmonization of these standards and the surrender of control over their regulation to such
international bodies as the World Trade Organization (WTO).
Gabel notes that expanded use of transport is likely to create air pollution since most cars, trains,
ships and airplanes burn fossil fuels of one sort or another. In addition, Gabel observes that
expanded transport may result in the following: increased emissions of greenhouse gases; the
contamination of surface or ground water due to oil spills; the modification of hydrological
systems as a result of the construction of roads, canals, or airports; the promotion of excavation
and use of minerals such as gravel during road construction; and an increase in pollution
(emissions) and the generation of wastes (e.g., old vehicles). Gabel concludes that environmental
degradation may well be associated with any trade liberalization that expands the transport sector.
There is much greater optimism that expanded trade will be environmentally benign or even
helpful in the agricultural sector. By reducing trade-distorting agricultural subsidies, governments
discourage farmers from over-producing on marginal land — a process that usually requires
environmentally harmful, chemically-intensive production processes.
Similarly, trade agreements may be very helpful in the context of protecting fisheries. In the
absence of a regime that coordinates behaviour for the benefit of all, individual countries and
fishermen are likely to over-exploit common resources such as the oceans. Indeed, recent
problems in managing the fisheries of Georges Bank and other areas of the North Atlantic
demonstrate the potential benefit of a coordinated regime. Trade agreements may be able to
provide a mechanism for addressing “the tragedy of the commons” in that many environmental
problems may benefit from collective action through the trade liberalization process. Thus, one of
the most promising areas for positive environmental effects from trade liberalization is in the
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context of “public goods” or resources that lie in a “commons”. These resources are susceptible
to over-exploitation in the absence of an agreement controlling their access and consumption, and
trade agreements may provide the needed control mechanism.
4. CONCLUSIONS
In paper test the effect of trade on environment in order to drive a correcting measure that lead
protect the environment in central Africa. we have tried to build a framework analysis to assess
the environmental impacts of trade. This has lead to develop demand-supply model of pollution
as it joint output and input. The model has been solving to give the desirable level of pollution
and define the concept of abatement that aims to correct the negative externality of dirty
technology and/or output.
The question of central interest is the effect of international trade on the environment, for a given
level of GDP. Openness has a positive effect on countries’ real income per capita. Output has a
positive effect on pollution through the physical scale of production, but at the same time at
higher levels of income per capita, growth raises the public’s demand for environmental quality,
which, given the right institutions, can translate into environmental regulation.
People value both their economic standard of living as measured by GDP and the environment as
well. Effective environmental regulation achieves a clean environment. There is a negative effect
of growth on environmental quality, which dominates at low levels of income, while the positive
effect may dominate at higher levels.
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