K r i t i s c h e B e m e r k u n g e n

International Trade

and Environmental Controls: Comment By

Charles Pearson

I t is sometimes useful to view environmental quality as a "good" whose production requires real resources employed in environmental damage avoidance activities 1. Transformation functions relating levels of

environmental quality and production of conventional goods can then be constructed, and environmental control (EC) costs are viewed as opportunity costs measured in conventional goods forgone.

In this spirit Walter has attempted to show, using a modified Heckscher- Ohlin model with three goods (exportables, importables, environmental damage avoidance), the effects of EC activities on the pattern and volume of international trade. He concludes inter alia that assuming constant terms of trade between X and M goods, and a proportionate shrinkage of the production frontier between X and M as a result of drawing resources away from conventional goods into environmental damage avoidance activities, the production and consumption of tradables will decrease and the volume of trade will decline. Further, he argues that if EC itself is a capital intensive activity, and if the country is capital abundant in the Heckscher-Ohlin sense, the transformation function between X and M will shrink proportionately more for the X good. This leads to a major reduction in the volume of trade, reduced specialization, and smaller gains from trade. His analysis is described in Diagram I showing the initial transformation frontier XM, the proportionately shrunk function X'M', and the skewed shrinkage X'M", and the respective trade triangles (constant consumption proportions of X and M assumed) ~.

i Ingo Walter, "International Trade and Resource Divers ion: The Case of Environ- mental Management", Weltwirtschaflliches Archly, Bd. xzo, x974, PP-48~sqq. - - Horst Siebert, "Environmental Protection and Internat ional Specialization", ib/d, pp. 494sqq.

t As Walter correctly notes, consumption points in the XM plane no longer measure welfare, as output of the third good, environmental quality, is not indicated.

C h a r l e s P e a r s o n International Trade and Environmental Controls

Diagram I

565

x

x! ood

M' M" M Mgood

The serious objection to this treatment is that it fails completely to recognize that environmental resources simultaneously provide the con- sumption product, environmental quality (entering into utility functions), and are also producer's goods (entering into production functions). Accordingly, EC measures designed to reduce external diseconomies can and do increase the production of conventional goods. In the simplified flow matrix of external costs of an environmental nature:

To From ~ ~

Producers

Consumers

Producers Consumers

alI a12

a~l a22

EC measures to deal with all type externalities augment productive capacity of conventional goods (upstream waste treatment increasing productivity of downstream fisheries, or reducing downstream industrial

566 Kritische Bemerkungen

water purification costs) 1. Moreover, reduction in externali ty flows of the al~, a~ and az~ type may also improve the productivi ty of resources. For example, reduction of air pollution induced respiratory diseases arising from uncontrolled industrial emissions (alz) or auto exhausts (a22), will decrease work-time lost for sickness and generally improve labor productivity.

The shift in the transformation function between X and M will then be the result of two forces; the real resource effect described by Walter, and the productivity effect described above. We can say very little a priori about the net change, except the obvious - - if the product ivi ty effect is greater on the X good, either because the initial flow of external costs was from M production to X production, or because EC measures improve the productivity of X intensive input more than the M intensive

Diagram 2

X good

X'

M' M M good

This is necessary condition if the ]~C measure is economically rational - - i.e. marginal benefits of damages avoided equal or exceed marginal costs of pollution aba tement .

C h a r l e s P e a r s o n 5 6 7 Internat ional Trade and Environmental Controls

input, the shift will be biased in favor of the X good as illustrated in Diagram 2. The result could easily be the opposite of Waiter's con- clusions - - increased trade volume, specialization, and gains from trade.

The more important point, however, is tha t we should avoid accepting as conventional wisdom the view that EC measures necessarily have opportunity costs in terms of conventional goods forgone.

Weltwirtschaitliche$ Archly Bd. CXI. ,~,