Environmental and Natural Resource Economics 2nd ed. Jonathan M. Harris Updates for 2012 Chapter 19: Trade and the Environment Copyright © 2012 Jonathan M. Harris

Figure 19.1: Gains and Losses from Importing Autos Standard trade theory suggests that there are net gains to both trading nations in a 2-nation model (and by extension to all trading nations in a multinational trading situation). The gains from trade in automobiles can be shown by comparing the effects of importing automobiles for domestic consumers and producers. Domestic producers lose area A, since they are forced to compete with lower world prices (Pw) as compared to the domestic price P*, and also because they lose market share Q* - Q1 to imports. But domestic consumers gain areas A + B because they can afford more cars at lower prices. Thus there is a net national gain equal to area B. For the exporting country (not shown), domestic consumers lose because export demand drives up prices, but by a similar graphical logic domestic producers gain a larger amount than domestic consumers lose.

Figure 19.2: Environmental Impacts of Importing Automobiles The addition of environmental effects complicates the pure theory of trade. In addition to the gains and losses to consumers and producers, there are also environmental gains and losses associated with trade. In this graph, the environmental costs associated with producing automobiles are partly shifted from the importing to the exporting country (area C). But the importing country gets increased environmental externalities associated with the consumption of automobiles, such as increased pollution and congestion (area F). These environmental gains and losses need to be weighed against the ordinary gains from trade. A further complication is that some of the environmental effects may be transboundary or global in nature, such as carbon emissions or water use when rivers cross national boundaries.

Figure 19.3: Environmental Impacts of Exporting Timber This diagram shows the effects of trade from the point of view of an exporting country. The export of timber brings the usual national net benefits (B’), since domestic consumers lose A’ due to higher timber prices, but domestic producers gain A’ + B’ due to increased export revenues. But there are also environmental costs associated with the production of timber, which could include damage to watersheds, species loss, and degradation of soils through erosion, as well as global impacts such as net carbon release. If these environmental damages are large, they might outweigh the gains from trade.

Figure 19.4: Environmental Kuznets Curve for Sulfur Dioxide Emission The Environmental Kuznets Curve theory suggests that as nations develop, they will tend to experience increased pollution, but after a certain stage in development (here indicated as about $4,000 per capita GDP) pollution levels will decline due to improved technology and better policy measures to control pollution. Evidence suggests that this may be true for certain pollutants, such as Sulfur Dioxide, but not for others such as carbon emissions. In addition, very large volumes of pollutants, including pollutants with cumulative or irreversible effects, could be emitted before the turning point is reached. This suggests that we cannot simply draw the conclusion that expanded trade, by increasing GDP, will eventually lower pollution levels. Rather, specific policies are needed to address the environmental impacts of expanded trade.