Controversies in Trade Policy

Trade and Other Topics
Trade and Labor
An increase manufactured exports from low and middle
income countries has been a major change in the world
economy over the last generation.
Compared to rich country standards, workers who
produce these goods are paid low wages and work
under poor conditions.
There is significant opposition to free trade because of
this fact. One example of this situation is the export
processing zones in, for example, the Philippines or
Opponents of the NAFTA have argued that it is now
easier for employers to replace high wage workers in the
US with low wage workers in Mexico.
Trade and Labor
Trade theory:
– A Ricardian model predicts that while wages
in the exporting country should remain lower
than those in the US because of low
productivity there, they will rise relative to their
pre-trade level.
– A Heckscher-Ohlin model predicts that
unskilled workers in the US will lose from free
trade, but the unskilled workers in the
exporting country will gain.
Trade and Labor
Despite the low wages earned by workers in
Mexico, both theories predict that those workers
are better off than they would be if trade had not
taken place.
– Evidence consistent with these predictions would
show that wages in the export processing zones have
risen relative to wages in other sectors.
– We could also compare working conditions in EPZs
with the working conditions in other sectors.
Trade and Labor Standards
Labor activists (labor unions, and the ILO) want to
include labor standards in trade negotiations.
– These labor standards are typically opposed by the
target governments of low and middle income
countries. They see the standards’ use as a
protectionist policy.
– Standards set by high income countries would be
expensive for low and middle income producers.
– Another alternative is a system that monitors wages
and working conditions and makes this information
available to consumers through certification (example:
fair trade coffee).
– This policy might have a very limited effect since it is
likely the certified products will be sold at a premium.
– The question of child labor (any difference?).
Trade and the Environment
Compared to rich country standards,
environmental standard in low and middle
income countries are lax.
The environmental Kuznets curve (EKC):
– Pollution increases in early stages of development but
decreases in later stages.
– Technique, scale, and composition effects.
– The later decrease in pollution is due to higher
demand for a clean environment, better abatement
technology and the ability to mobilize more resources
toward that end.
While the EKC idea is popular, it is not
necessarily true!
Trade and the Environment
Even if trade leads to higher income, there might
be other ways in which trade directly (and
possibly negatively) affects the environment.
– The ‘pollution haven’ effect – do polluting industries
change their locations as a result of changes in
environmental regulations?
– The ‘pollution haven’ hypothesis – do polluting
industries change their locations as a result of
changes in trade policies?
Trade and the Environment
Two policy questions:
– Should international trade law constrain domestic
environmental policies
This might be done to prevent a ‘race to the bottom’ in
environmental regulation?
Put differently, should we allow countries to use
environmental policy to achieve desired trade outcomes (like
a desire to protect domestic industries – example: hormonefree beef in Europe)
– Should trade policy be used as a tool to achieve
desired environmental outcomes?
The case of ‘dolphin-free’ tuna or ‘turtle-free’ shrimps.
Cases of natural resource extraction (like tropical
Cases of trans-boundary pollutants (like the ozone layer or
global warming).
Trade and the Environmental Standards
Some environmental activists want to
include environmental standards in
trade negotiations within the WTO:
– However, universal environmental standards are
generally opposed by governments of low and middle
income countries.
– International standards could be used as a
protectionist policy or a basis for lawsuits when
domestic producers did not meet them.
– Standards set by high income countries would be
expensive for low and middle income producers.
GM Crops
Trade in
Multilateral Environmental Agreements
Types of trade measures in MEAs:
– Trade bans.
– Export/import licensing requirements.
– Notification requirements.
– Packaging and labeling requirements.
The Environment and TRIPS
Patents on environmental findings:
– The case of blue jeans.
– Bio-medical uses of plants and wildlife.
– Using indigenous knowledge.