ECON3315
International Economic Issues
Instructor: Patrick M. Crowley
Issue 5: Trade, the environment and outsourcing
Overview
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Environment and trade
Some cases of environmental concerns in trade
decisions
WTO and the environment
A race to the bottom?
Case studies
Outsourcing: what is it?
Who does it?
Case studies
Environment and trade
Trade and environmental concerns are inevitably linked
Kuznets curve – U-shaped
Environmental worsens as GDP per capita increases, and then improves
beyond a certain point
3 effects with increased trade:
i) Technique – better practices with globalization as technology
transfers to poorer nations
ii) Composition – shift in consumption preferences towards cleaner
goods
iii) Scale – expansion in activity with development leads to degradation
of environment
Argument is that i) and ii) will eventually outweigh iii)
Where is China right now?
Trade and Environment Committee in WTO does study these issues
Trade-environmental cases: I
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GATT Article 20 has trade excluded under certain circumstances
relating to environmental reasons
Shrimp-turtle case (GATT): India, Malaysia, Pakistan and
Thailand vs USA
- US Endangered Species Act (1973) protects turtles as
endangered species
- US requires turtle excluder devices (TEDs) when shrimp
fishing
- US lost case because it discriminated against certain
countries, giving Caribbean countries loans to buy
TEDs
Trade-environmental cases: II
In Eastern pacific, yellow-fin tuna often swim underneath dolphins
In fishing for tuna, dolphins are often also trapped in the nets –
particularly when using "purse seine" fishing methods.
US Marine Mammal Protection Act (1988) does not allow US to import
tuna from countries or intermediaries that cannot prove that they follow
the same rules as the US
Mexico appealed against ban of imports of tuna by US to GATT (1991)
Mexico won, but only because of “extra-territoriality” – US not allowed
to impose it’s environmental laws on other countries
It can make sure that “Dolphin-friendly” labelling appears when non“purse seine” fishing methods employed
Trade-environmental case: III
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Chrysotile asbestos is generally considered to be a highly
toxic material, exposure to which poses significant threats
to human health (such as asbestosis, lung cancer and
mesothelioma).
However, due to certain qualities (such as resistance to
very high temperature), chrysotile asbestos has been
widely used in various industrial sectors.
To control the health risks associated with asbestos, the
French Government, which had previously been an importer
of large quantities of chrysotile asbestos, imposed a ban on
the substance as well as on products that contained it.
EU justified ban on basis that asbestos was damaging to
workers and to the population as a whole
Trade-environmental case: III
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Canada claimed that the Decree violated GATT Articles III:4
and XI, and Articles 2.1, 2.2, 2.4 and 2.8 of the TBT
Agreement.
Canada argued that a distinction should be made between
chrysotile fibres and chrysotile encapsulated in a cement
matrix. The latter, it argued, prevented release of fibres
and did not endanger human health.
Despite finding a violation of Article III, the Panel ruled in
favour of the EU. Under Article III (which requires countries
to grant equivalent treatment to like products) the Panel
found that the EU ban constituted a violation since asbestos
and asbestos substitutes had to be considered “like
products” within the meaning of that Article.
Panel found that the French ban could be justified under
Article XX(b). In other words, the measure could be
regarded as one which was “necessary to protect animal,
human, plant life or health.”
The WTO and the environment
Problems with trade and environmental issues:
Environmental issues have “transboundary externalities”
Environmentalists seen as “closet” protectionists by many
economists
Bhagwati (1999) makes the point that WTO should deal
with trade issues, and environmental policies should be
dealt with elsewhere or in separate international agreement
Kuznet’s curve doesn’t work for some forms of
environmental degradation: e.g. CO2 emissions
Kyoto Accord was an effort to control CO2 emissions as they
suffer from “transboundary externalities”
US refused to sign Kyoto – why?
A race to the bottom?
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Economists dismiss the argument that different
levels of environmental protection promote a
“race to the bottom”: whole point of comparative
advantage
But as environmental issues are transboundary,
bound to eventually be harmonizing effect – but
when?
US environmental standards certainly did not
drop after WTO or NAFTA were introduced
But in real world developing countries often have
weak regulatory bodies, which might not have
capacity or ability to properly regulate
Suggestions for WTO reform
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Distinguish between product standards
and production process
No free-riding on global environmental
commitments
Allow protections for environmental
reasons if justifiable
Blend environmental concerns into the
GATT agreements
Outsourcing
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What is it?
It is where companies close down US parts of
their business and locate that part of their
business overseas
Outsourcing has become a very controversial
topic – raised by US politicians of all stripes as a
concern
Could even affect US tax policy under Obama
administration
Economic effects of outsourcing
Case studies
- credit card industry
- support for electronics
- publishing
- software
Offshoring vs Onshoring
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Outsourcing
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Obviously certain factors drive offshoring abroad:
educated but cheaper labor force, english
language, time zone, lack of skilled labor in home
country.
Numerous surveys indicate that anywhere between
17 percent and 53 percent of customers have not
realized business value/return on investment from
offshore outsourcing.
So in some cases savings have been
underestimated from offshoring – Q: but why?
A: US$ exchange rate, time zone and overtime,
language, increased quantity of labor required
(lower productivity, more functions required)
Economic effects of outsourcing
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In country that receives outsourcing, demand for
labor increases, increasing wages in those
sectors, and thereby changing relative wages
In country that outsources, demand for labor falls
in that sector, lowering wages, and also changing
relative wages.
In theory should have same effect as migration of
labor…except that the labor doesn’t relocate!