Eric Neumayer
GY 423: Environment and Development
Lecture Notes – Michaelmas Term
Lecture 5: Investment, Trade and the Environment
What you should learn in this lecture:
 The basic links between investment, trade and the environment
 The ‘loss of competitiveness’- and the ‘pollution haven’-hypothesis
 The ‘level playing field’-argument with respect to differing environmental standards
INVESTMENT
Pollution havens: Do dirty industries migrate towards the ‘South’?
Ambiguous evidence. So far no strong and consistent evidence in support of this claim
Why do dirty industries not migrate much more to developing countries?
 Some just cannot migrate: Example electricity production
 High transport costs: Example cement production
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Low share of environmental regulation costs (usually less than 3% of total costs)
Dirty industries are usually partly exempt from environmental regulation
Manufactured capital and skilled labour force important
Why do might MNCs behave more environmentally friendly than their domestic competitors in developing countries?
 It is usually cheaper to copy advanced production processes from the developed country origin
 Multinationals fear loss in reputation
Regulatory chill: Do Developed Countries Fail to Raise Environmental Standards Because of Feared Capital Flight?
TRADE
Distinguish the following effects of liberalising trade:
 Scale: economic growth and the environment
 Sectoral Composition: primary, secondary, tertiary sector
 Transport Creation
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Allocative efficiency: most efficient resource use
Dynamic efficiency: constant pressure for technical and institutional progress
-> Daly stresses the negative (dominating) impact of the first and third effect
-> Bhagwati stresses the positive impact of all factors, possibly with the exception of the
third
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Daly: Different environmental regulations lead to downward pressure on environmental standards (race to the bottom). ‘Free competition between different costinternalising regimes is utterly unfair.’
Bhagwati: Different environmental regulations are merely an expression of differing
preferences with respect to environmental quality
-> Distinguish production externalities (externality caused by production of consumption
good) and consumption externalities (e.g. European ban of beef from cattle that was treated with growth hormons)?
-> Distinguish production that causes local, national, international or global pollution?
-> Distinguish ‘normal’ pollution from hazardous waste and toxins?
-> Distinguish production that causes ‘real’ pollution versus production that hurts ‘environmental sentiments’ (Bhagwati: ‘Environmentalists favour dolphins. Indians have their
sacred cows. Animal rights activists will object to our slaughterhouses.’)?
Does the WTO’s dispute settlement system put environmental regulation at risk?
 Regulation of consumption externalities allowed in principle subject to nondiscrimination of foreign producers
=> Qualification: WTO allows regulation of consumption externalities with respect to sanitary and phytosanitary measures only subject to a ‘risk assessment’
EC measures concerning meat and meat products (Hormones) & GMO case
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Regulation of production externalities outside a country’s own jurisdiction in general
not allowed, but upheld in certain circumstances:
United States - Restrictions on imports of tuna
United States - Import prohibition of certain shrimp and shrimp products
WTO rules and Multilateral Environmental Agreements
Should trade sanctions be employed against countries with ‘lax’ environmental standards?
 Developing countries are united against such a possibility: Environmental imperialism
 In developed countries trade unions, environmentalists, nationalists, protectionists and
some businesses are in favour
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Currently WTO rules do not allow for unilateral trade sanctions. Unlikely that this will
change.