Effect of environmental regulations on trade - Essay Example

Table of Contents Table of Contents 1 Introduction 2 2 Effect of Environmental Regulations on Trade 3 2 Trade Volumes 3 2.2 Trade Patterns 4 3 Chemical Policies 6 3.1 EU Chemical Regulations 6 3.2 US Chemical Regulation 7 4 Consequence of Differences 9 5 References 11 1 Introduction Numerous definitions have been forwarded for globalisation, from the integration of global capital to the unification of national economies for the purposes of creating a global political economy (Dicken, 2002). Held and McGrew (2002) review several definitions for globalisation and emphasise that while all are accurate, few capture the complexity of the phenomenon and therefore, do not comprehensively define globalisation. From their perspective, while it is virtually impossible to define globalisation in a single sentence, it can best be described as an economic phenomenon whose primary motivation is the imposition of the capitalism and economic liberalisation upon the global economy and, in brief, the globalisation of capital (Held and McGrew, 2002). According to this definition, globalisation is the removal of obstacles towards the movement of goods and services across national borders, such as import and export taxes, customs and tariffs, resulting in reduced state control over economies and markets (Soros, 1998; Held and McGrew, 2002). As may be inferred from the foregoing definition, globalisation has facilitated the movement of capital goods across national borders, with little, if any, state intervention. Within the context of this understanding, globalisation has expanded markets and, importantly, has provided producers, manufacturers and business entities both with access to foreign markets and the ability to compete with domestic goods on relatively equal terms. Even while emphasising the validity of the aforementioned and stressing that trade liberalisation has, to a very large extent, achieved all of the stated, it is important to concede to the fact that environmental regulations have countered the trend towards the free movement of goods and services across national boundaries. Indeed, as this research will argue, environmental regulations have functioned to somewhat stem the flow of capital goods across national boundaries and, to an extent, have afforded domestic producers an advantage over their foreign counterparts. 2 Effect of Environmental Regulations on Trade As may have been deduced from the introduction, environmental regulations affect international trade volumes and patterns. The extent to which it may do so will be examined in this section. 2.1 Trade Volumes Several studies have upheld the argument that environmental regulations have the potential to function as obstacles to the movement of capital goods and services across national boundaries and, in so doing, afford domestic producers an advantage over foreign ones. These same studies have also found that countries which have comparatively lax environmental regulations have a comparative advantage over those which have more stringent regulations, insofar as attracting foreign direct investment is concerned (McCormick, 2001; Anweiler, Copeland and Taylor, 2002). On the basis of empirical evidence, however, Anweiler, Copeland and Taylor (2002) find that the aforementioned comparative advantage is not sustainable. For example, Mexico's lax environmental regulations may have afforded it a comparative advantage where US foreign direct investment is concerned but it has hardly contributed to the growth of Mexican international trade and exports since operative environmental regulations in other countries act as an obstacle to the entry of Mexican exports. Similarly, the comparatively low standards of domestic environmental regulations in the United States have adversely impacted US international trade volumes (McCormick, 2001). Indeed, in his study of US international trade from 1958-1994, McCormick (2001) found that environmental regulations functioned as a serious obstacles to US exports and trade, especially to Europe and Southeast Asia. The implication here is that even within the context of trade liberalisation, as facilitated by globalisation, environmental regulations can be an obstacle to international trade and, importantly, appears to afford domestic producers an advantage over their foreign competitors since the former are invariably in compliance with the environmental regulations operative in their country while the latter may not be. 2.2 Trade Patterns Environmental regulations do not simply impact trade volumes but affect international trade patterns and, significantly, it is within these patterns that further evidence for the stated argument can be found: environmental regulations afford domestic producers a competitive edge over their foreign counterparts. A number of studies on international trade patterns within the context of environmental regulations found that significant changes have occurred over the past two decades. Quite simply stated, as environmental awareness increases and environmental regulations become more stringent, countries and regions adopt policies to ensure that their home industries comply with the established standards and, importantly, that goods entering their markets are also compliant with the said standards (Andrews, 1999; Anweiler, Copeland and Taylor, 2002). As environmental regulations are not consistent across countries, the consequence has been the redirection of trade from some countries and regions towards specific countries and regions and away from others. According to the evidence presented by McCormick (2001), the imposition of stringent environmental regulations in the European union and other regions has driven pollution-intensive US goods and a large array of Asian ones, including Chinese, out of the European market and towards the African and South American ones. Further confirming these findings, Anweiler, Copeland and Taylor (2002) also found that a critical analysis of trade patterns indicates that US and Southeast Asian pollution-intensive industrial goods confront innumerable obstacles in their bid to enter the EU, among other regions and countries and if granted entry, have to pay a pollution tax. This means that domestic, or in the case of the EU, regional and national goods possess a competitive advantage. Indeed, according to Anweiler, Copeland and Taylor (2002), the said advantage is such that it has effectively driven some types of US and Asian goods away from the EU market. Proceeding from the above stated, it is evident that trade patterns, as affected by environmental regulations, support the notion that environmental regulations have given domestic goods a competitive advantage over foreign ones. To a significant extent, this is partly due to the absence of an international environmental policy framework. 3 Chemical Policies The preceding argument has relied on studies to establish that the validity of the argument presented at the outset: environmental regulations have given domestic producers a competitive edge over their foreign counterparts. The implication inherent in this argument is that environmental regulations have, to a certain degree and up to some level, countered globalisation's annihilation of national boundaries as an obstacle to the movement of capital goods. In other words, environmental regulations have somewhat fettered international trade flows. This will now be established through reference to a specific case: EU chemical regulations versus US ones and the consequence of differences in this particular set of environmental regulations on bilateral trade. 3.1 EU Chemical Regulations In the EU the legislation on chemical substances is one of the oldest and most complex bodies of environmental regulations. It regulates the classification packaging and labelling of more than 1000 substances. These regulations constitute a comprehensive system for the safe production, use, and disposal of hazardous substances (McCormick, 2001). EU directives also establish a system for notification on the import and export of dangerous chemicals to third countries, and for the management of risk from industrial accidents (McCormick, 2001). More recently, the chemical industry embraced a range of informal environmental codes such as the Responsible Care Program (RCP) of the International Council of Chemical Associations (ICCA) and IS0 14000 and the environmental standards of the International Standardization Organization (ISO). The RCP is the chemical industry's voluntary initiative for improvements of the environmental health, and safety performance of chemical enterprises. The program is administered through a network of chemical industry associations. It emphasizes the adoption of a set of environmental practices as well as communication and exchange of' information on implementing the principles of Responsible care (McCormick, 2001). The EU chemical regulatory policies has given domestic producers an advantage over foreign ones. As both McCormick (2001) and Golub (2001) contend, policy makers, both on the national and the regional levels have embraced the industry itself in the decision-making process and in the design and implementation of chemical regulatory policies. In other words, policy makers included the targeted industry in the formulation of the regulatory framework, for two reasons. In the first place, the industry functioned as a source of information on that which needed to be regulated. In the second place, it furnished the guidelines for the mechanisms and strategies of non-costly regulation (McCormick, 2001; Golub, 2001). In other words, the policy in question is founded upon an understanding of the industry and the strategies for regulation which fulfil environmental requirements while, at the same time, do not pose as a threat to the economic base of the chemical industry. 3.2 US Chemical Regulation The United States' chemical regulation policy framework, as its environmental policies, was supposed to have emerged from the Kyoto Protocol guidelines and recommendations. However, unlike the European Union which begun the implementation of the Kyoto Protocols according to schedule, the United States announced that "the contention of most economists and the conclusion of most economic assessments is that reducing carbon emissions, according to the terms of Kyoto is highly costly" (Barker and Ekins,2004, p. 53). Therefore, arguing sovereignty and national economic interests, the United States simply decided that it was not going to follow the terms of the Kyoto Protocol even though it had earlier agreed to. In other words, unlike the European Union, the United States refused to comply with the guidelines for the regulation of the chemical industry. Unlike the European Union, the United States does not have a uniform and comprehensive framework for the regulation of the chemical industry and chemical substances. The outcome is that the Environmental Protection Act lists 62,000 chemicals that are used commercially in the United States but only a very small percentage of these chemicals have been tested as regards the effect and consequences of their use. On the one hand the Toxic Substance Control Act states that the Environmental Protection Agency has to test these chemicals according to priority but states that no more than 50 high priority chemicals can be tested in a single year. This means that there are now 48,000 chemicals in commercial use which have not been tested. Added to that, there is no information on the toxic effect of 79% of the chemicals that are used commercially in the United States (Delmass and Terlaak, 2001). The chemical regulatory policy in the United States is problematic for two reasons. In the first place, there is no single policy but several, each of which has its own aims and objectives. In the second place, the agency that are supposed to monitor and test the chemicals that are released into commercial use and so come into contact with the public, cannot keep up with the volume and number of chemicals that are already in use, not to mention the new ones that are being released into use. So, the consequence is that over two-thirds of the chemicals that are used for commercial purposes in the United States have not been tested and this means that there is not sufficient information on their toxic nature and the consequences of their use (Andrews, 1990; Delmass and Terlaak, 2001). 4 Consequence of Differences The above case explains both why and how environmental regulations can function as an obstacle to international trade and favour domestic producers over foreign ones. As seen in the above, the United States does not adhere to the same environmental regulatory framework as does the EU where chemical manufacturing and products are concerned. Indeed, many of the chemicals which enter into manufacturing in the United States are disallowed from entering the EU due to insufficient research and information on their effects. Within the context of this particular case, therefore, the advantage which domestic producers hold over foreign competitors is not confined to the latter's having to pay a pollution tax but emanates from the fact that the latter's products are disallowed from entry. This means to say that because domestic manufacturers have contributed to the formulation of environmental regulatory policies and adhere to them, while foreign ones have not and may not, domestic manufacturers have the advantage. In the final analysis, the above research and case study example have established the validity of the proposed argument. The very nature of environmental regulatory policies and the fact that they are not uniform across countries has definitely led to a competitive advantage for domestic producers over foreign ones. 5 References Andrews, R.N.L. (1999) Managing the environment, managing ourselves: A history of American environmental policy. New Haven: Yale University Press. Antweiler, W., Copeland, B. R., and Taylor, M.S. (2001) Is Free Trade good for the environment NBER, Working Paper No. 6707. Barker, T. and Ekins, P. (2004). The costs of Kyoto for the US economy. Energy Journal, 25(30). Dicken, P. (2002) A new Geo-Economy,' in The Global Transformation Reader. eds., David Held and Anthony McGrew. Cambridge: Polity Press. Golub, J. (2001) Global competition and E.U. environmental policy. New York: Routledge. Held, D. and McGrew, A. (2002) "A Global Economy" in The Global Transformation Reader. eds., David Held and Anthony McGrew. Cambridge: Polity Press. McCormick, J. (2001) Environmental policy in the European Union. New York: Palgrave McMillan. Soros, G. (1998) The crisis of global capitalism." Newsweek, 132(23). Read More