IMPACTS OF INTERNATIONAL TRADE TO ENVIRONMENTAL QUALITY
The World Gross Domestic Product (GDP) per capita has always experienced a gradual increase over time with the exception of between the year 2006 and 2008 when a sharp decline was witnessed as shown in figure 1.1 below. This increase has been linked to the advancement in technology while the decline majorly being blamed on the worldwide fiscal crisis experienced between the years 2007 to 2009. Since then, many developing nations have experienced a surge of economic globalization occasioned by the advancement in technology and the worlds concerted effort towards working together to address major concerns such as future market crashes. Economic globalization can be defined as the integration of the world’s economy via increased arrays of multi-lateral and bi-lateral, regional investment and trade pacts (Gallagher 2009). The overall agenda of such economic globalization being on creating an increase in flow of information, products and services around the world.
Figure: 1.1: Annual World GDP Growth
Source: IMF (2019)
In the wake of this increased economic globalization, the environment has also experiencing negative and positive effects. According to the UNEP (2007), these environmental impacts are caused by human actions that occur in an increasingly interconnected, industrialized, and globalized world.
The influence of international trade and economic growth on the quality of the environment has been expansively discussed relying on the Environmental Kuznet Curve (EKC) which theorizes existence of an inverted U-shaped relation between per capita income and environmental degradation. EKC asserts that during the initial stages of economic growth, pollution and environmental degradation increases until a certain level when they eventual start to decline. This indicates that richer nations are cleaner and greener in comparison to the developing or poor countries (Dinda 2004). While this pattern is shown by many pollutants, peak levels of pollution are experienced at various levels of income for each pollutant, time, and nation. The link between pollution and income cannot be ignored since it is also coordinated by both efficiency and inefficiency paths of economic growth. Environmental Kuznet Curve though highlights that environmental dilapidation is not an investable effect of economic growth. This paper aims to examine the impacts of international trade to the quality of the environment, particularly for the developing countries, and considering that international trade prioritizes on economic growth. It examines the theories of international trade and environmental quality, the influence of Environmental Kuznet Curve, Race to the bottom and pollution havens as effects of trade to environmental quality.
1.2.Quality of the Environmental and Trade Openness
Trade openness affects the environment in a variety of ways. Many nations encourage international trade, particularly in exports. This though has inspired many multi-national companies to move to the third world countries, with less rigid environmental laws and regulations. They pay lower wages and pollute the environment more than they could in their parent nations. Generally, international trade affects environmental quality through pollution in one nation and reduces it in another nation. This idea is described under pollution havens hypothesis in section 5 of this paper.
2. Theories of Environmental Quality and International Trade
Theoretically, environmental quality and international trade can be equally compatible and reinforcing. On the other hand, based on the theories of environmental economics and international trade, ease of trade among different nations can create economic benefits, which can be distributed to help shield the environment. According to the Stolper-Samuelson theorem, international trade is highly beneficial for products and services in which a nation has a greater comparative advantage (Michael 2016). Consequently, foreign direct investment (FDI) occurring whenever multi-national companies move their set-ups to other nations causes development through increased employment and spread-out of technological effect and human capital. In this case, the presence of foreign investments hastens the introduction of new investments and technology. In theory therefore, the benefits made from international trade enlarge the wining nations freed to maximize their proportional advantages have the Pareto possibilities to reimburse the failures of trade liberalization. Furthermore, there are more funds to sustain a quality environment if the profits made from the trade are high (Krugman 2008). These theories can clearly be beneficial to all the nations involved, and they have been extended to explain environment and trade relationships.
The Heckscher-Ohlin (H-O) theory highlights that countries have higher comparative advantage in trade fields where they have abundance (Agrawal 2017). When this theory is applied to environmental quality or specifically pollution, it is noted that nations with less strict environmental standards will be affected by pollution and thus the quality of their environment will be compromised. This means that trade liberalization between developing and developed countries when the stable nations are strict to the quality of their environment will cause growth in pollution intensive economic activities in nations with lower environmental standards.
The impact of international trade to environmental quality can be direct or indirect. Direct impacts include the transportation means that are used to conduct the trade. An increased transportation as a means of trading can negatively impact on the environment and vice versa. This means that unless the means are altered, the environment is directly impacted by trade.
According to Grossman and Krueger (1991) indirect impacts of international trade to the environment are mainly, composition, scale effect and technique effect.
3.1.Economic Growth and Environmental Quality
Environmental quality is an extensive term that is used to refer to the state of the existence of natural environment (Field and Field 2016). It is measured by Ecological Footprints (EF) to determine the amount of damage to the natural environment. A low EF denotes a cleaner environment and vice versa. In determining environmental quality, the EF measures the effect of human activities in terms of land and biological useful undertakings that are required to produce products and separate the waste created.
The importance of the relationship between the quality of the environment and economic growth is that it permits policy makers to determine environmental response to economic changes and thus creating the foundation for a sustainable planning. Various researches like Brajer et al (2007) and Fodha and Zaghdoud (2010) have noted the existence of environmental kuznet curve for different environmental degradation measurements while others like Akbostanci et al. (2009) have reported a decreasing relationship between per capita income and pollution. Consequently other studies have reported N-shaped relationship. The underlying idea in all these studies is that the quality of the environment deteriorates in the initial stages of economic growth before improving as the economy continues to grow to create the inverted U-shaped correlation referred to as the Environmental Kuznets Curve.
3.2.Environmental Policy and Comparative Advantage
Developing nations have real and disclose reasonable advantage in greatly polluting trades, which have locational impact of the production standard of these industries. This also happens because other factors like the intensity of labor, natural resource availability and high capital return also influence movement of multi-national companies from developed nations to the third world countries.
There are many other reasons for the existence of higher polluting power and weak environmental standards in developing nations. First, in developing countries, environmental services are normal products. There is a higher demand for safer environment at higher income levels and vice versa. Rich individuals in these countries always demand safe environments, use expensive green products and support stringent environmental laws while poor population depend extensively on the environment and therefore do not demand for better environmental standards.
The cost of maintaining and monitoring environmental standards in less developed nations is high because of their low financial strength. Coupled with the scarcity of trained personnel and equipment, the nations have to prioritize on economic growth at the expense of environmental quality first, and therefore proving EKC hypothesis.
There is also high pollution in developing nations since the economic growth in these countries is based on a shift to manufacturing from subsistence agriculture. This development together with increased infrastructural investment and urbanization contribute to depletion of the environment. Additionally, lack, un-enforced or fragile environmental standards due to vices like corruption, and lack of human capital or low knowledge base contributes greatly to pollution of the environment in these countries.
4. Environmental Kuznet Curve
4.1.Theoretical Concept of EKC
Environmental Kuznet Curve is a theorized relation between income per capita and several pointers of environmental dilapidation. The theory explains that during the early stages of economic growth, there is an increased environmental pollution and degradation until a certain level of income per capita, which varies based on various pointers, the development reverses to an improved and well maintained environment at higher income per capita of the economy (Stern 2004, and Al-Mulali, et al. 2016). It means therefore that the environmental effect indicator produces a U-shaped function of the economic growth of a nation. This is because many nations at their initial development stage, prioritizes on material output since the demand for higher income and job opportunities is higher than the demand for clean water and clean air. Developing countries thus considers a clean environ as a luxury. Normally, the environmental indicator’s logarithm is shown as a quadratic function of the income’s logarithm.
International trade has caused rapid economic development, which has resulted in extensive utilization of natural resources and production of a higher percentage of pollutants. In the developing countries, many people are poor to afford pollution abatements while in the developed nations, people are more cautions and value the environment and thus maintaining higher levels of environmental quality (Dinda 2004).
The concept first originated from the research by Kuznets (1955) when he investigated the relation between income per capita and income inequality. It was then referred to as EKC after the study by Grossman and Krueger (1991), and was popularized by the World Bank Development Report of 1992. The report noted that the view that higher economic activity certainly has negative effects on the environment is based on the assumptions on technology, environmental activities and tastes (Mundial 1992). Additionally, it highlight that an increase in income leads to a higher demand to improve and maintain environmental quality. Cole (2003a) understand that many developing nations are in their early stages of economic growth, a factor that he links to the theoretical concept that economic growth leads to environmental degradation mainly at the early stages. According to Cole, the best and only solution to maintaining higher standards of environmental quality is by becoming rich.
4.2.How Economic Growth Affects Environmental Quality
There are various channels through which economic growth impacts environmental quality. These include; the scale effect, technology effect, the composition and an increased pollution with the growth of the economy (McAusland 2010).
4.2.1. The Scale Effect
The idea behind the scale effect is that higher per capita income economies consume and produce huge amount of goods and services and thus holding the production technique and mix constant. An increased scale effect increases pollution (Brock and Taylor 2005). It simply occurs when there is growth of economic activities caused by liberalization. In the scale effect, pollution and other forms of environmental degradation occurs when the nature of the international trade remains constant, though there is an increase in its scale. This means that as developing nations engage in international trade, their economy grows through increased production, which in turn increases their scale effect.
4.2.2. The Technology Effect
This is mainly the impact in resource production and extraction technologies. As economies of developing nations grow, there is the possibility of environmentally-friendly technologies replacing old dirtier technologies in production of goods and services. This leads to reduction of the pollution per unit output at a constant output mix (Brock and Taylor 2005). The technology effect can be divided into two sub-divisions, which include induced and the autonomous technology effect. In the autonomous effect, the introduction of cleaner technological processes into the production of goods and services automatically occurs while in induced effect the demand for a quality environment is induced into the private and public decisions to help reduce pollution.
4.2.3. Composition Effect
This impact occurs when increased international trade leads a developing nation to specialize in industries or sectors that they enjoy higher competitive advantage (McAusland 2010). When the competitive advantage is derived from the differences in environmental quality, then the composition effect of the trade will worsen the existing environmental challenges in developing nations.
5. Race to the Bottom
This is the competitive state where a country, or a company reduces the prices of the competition by scarifying its quality standards, providing lower levels of wages and disregarding laws and regulations. Revolution in the global economy has led to social, economic and political changes in many countries worldwide. The increased movement to an open market has improved many developed and developing nations, while at the same time negatively affecting others (YIMPRASERT and HVEEM 2005). International trade, flow of technology, capital and information are among the activities that have hugely impacted on the economy and environmental quality of many developing countries within the last two decades.
The fact that there has been an increase in income inequality between and within nations does not support the claim that trade liberalization leads to an improved livelihood for citizens in developing countries (Shankardass S., and Hassan Z. n.d). According to the UN-HABITAT report, it suggests for instance, that many losers in the race to the bottom are mainly female employees particularly in East Asia, whose working conditions and income levels have dropped because of the ‘dropping of barriers to footless industries’ (YIMPRASERT and HVEEM 2005). This same pattern is also evident in African nations, leaving many citizens not in a position to achieve stable income and jobs.
Developing countries have been involved in the race to the bottom to attract more trades, and multi-national businesses by altering their taxation laws (Amaro and Miles 2006). This aims at offering favorable taxation rates to achieve improved economic growth. Taxation standards of a nation supports its environmental regulations, for instance, when a company pollutes the soil during its production process, the public pays through taxes no matter the boost the company offers the nation’s economy.
Through globalization, countries now have a fertile market for the exchange of ideas, information, products and services, though it has also created a fierce competition between these nations in attracting better trade options. This mainly affects low income nations that are in desperate need of foreign investment. This has made the nations to create weak environmental, labor, tax laws and regulations in order to attract foreign investments. A plausible example of the effects of race to the bottom to the environment is the 2013 Rana Plaza disaster in Bangladesh that killed 1,000 workers (Haque and Azmat 2015).
6. Pollution Havens and Foreign Direct Investment (FDI)
Developing nations have experienced a dramatic increase in FDI in the past few decades. For example in 2012, they received more than 50% of the global foreign direct investment with a major part of these investments being in the manufacturing industry. DIIP (2015) indicate that between the years 200 and 2015, foreign direct investment in the manufacturing sector represented approximately $123,069 million or 50% of Indian investment.
FDI presents a lot of benefits for the investing and hosting nations. They range from the transfer of technology and technical knowledge base, introduction of effective productions patterns, and definitely economic growth. Despite the advantages involved, the reasons for FDI can also be controversial. The availability of ineffective regulations and the pollution haven hypothesis (PHH) can be some controversial reasons to invest abroad.
Cole (2004) indicate that PHH is the idea where industries that heavily pollute the environment migrate to the developing nations to maximize on lower standards of environmental regulations. Consequently, other nations deliberately lower their environmental standards to lure many foreign investments.
Substantial increase in income and environmental dilapidation leads to imposition of severe environmental standards within an economy, which include transfer of pollution intensive industries to the developing nations with weak environmental laws. Bu et al. (2013) note that this leads to a ‘race to the bottom’, where the developing countries lower their social and environmental standards to increase their competitive advantage leading to a greater environmental pollution, though with an increase in economic growth.
The inception of World Trade Organization (WTO) and increased globalization narrowed down the variance between developing and developed nations, and increased pressure on the developed countries to lower their emissions. Murthy and Bhasin (2016) highlight that this created a leeway for the developed nations to relocate production to other nations in order to lower their emissions.
This paper focuses on examining the impacts of international trade to the environmental quality, considering the fact that developing nations prioritize on economic growth at the expense of the environment. There are numerous regulations that have been put in place to help in the campaign for the creation of sustainable environment, and thus the developing countries just like the developed nations should put more emphasis on maintaining a high quality of environment. The topic is motivated by the lower standards of environmental quality shown by the less developed nations, despite the increasing affluence. Moreover, under-developed countries are under high pressure to attain high economic growth.
Despite the high pressure to achieve economic growth from developing nations, developed nations have also taken advantage of their pressure to reduce emissions to migrate pollution intensive industries abroad, take advantage of less stringent environmental policies and low wages provided by the developing nations. This further affects the environmental quality as the developing countries are desperate to grow economically, and thus will do anything including race to the bottom in order to achieve economic growth.
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