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GTAP Resource #1076

"How to Assess the Environment Impacts of Trade Liberalization"
by Tsigas, Marinos, Denice Gray and Thomas Hertel

Linkages between trade liberalization and the environment, which first surfaced as a major source of concern in the NAFTA, have become a topic of heated debate. Many environmental advocates argue that trade harms the environment and, by fostering more trade, liberalization is environmentally unfriendly. Others argue that, on the contrary, trade liberalization is beneficial to the environment. By reducing market distortions, which protect dirty industries and encourage excessive intensification of production, trade liberalization would improve environmental quality. In this paper we argue that linkages between trade liberalization and the environment are complex, the net result is fundamentally an empirical question, and in order to make efficient progress towards informing this dialogue, a clear analytical framework is needed.

The objectives of this paper are to review the emerging trade and environment policy agendas; survey relevant analytical approaches; identify needed data, parameters, and models; lay out a quantitative framework; use it to analyze the interactions between trade liberalization and the environment; and discuss the strengths and weaknesses of our approach.

We identify four groups of economic mechanisms through which trade policy can affect the environment. These include: (1) the international location of production, (2) inter-sectoral competition for national resources, (3) the intensification of production and pollution abatement efforts, and (4) the substitution of environmental quality for market goods on the part of households. We then proceed to develop a quantitative framework which enables us to capture these four mechanisms and evaluate their net economic impacts under trade liberalization.

In order to capture all four of these mechanisms linking trade and the environment, we need a framework which: (1) is global in coverage, (2) captures economy-wide resource competition, (3) has an explicit treatment of the production functions underlying the input-output relationships in each sector, and (4) explicitly incorporates environmental quality into consumers’ utility functions. The model which we use is the Global Trade Analysis Project (GTAP) framework. Since GTAP does not account for non-market activity, and pollution abatement expenditures are not explicitly broken out, modifications are required to make it appropriate for analysis of environmental issues. In particular, the benefits of environmental quality and the costs of pollution abatement need to be included.

Our empirical example involves trade liberalization in the Western Hemisphere – a topic which has received considerable discussion in the past decade, and one which raises many environmental concerns. We find that trade liberalization in the Western Hemisphere is likely to benefit all participating countries, however, it guarantees neither improved environment nor more degradation. We thus examine the implications of coupling trade liberalization with more stringent environmental controls in some countries. We find that additional environmental regulations are likely to augment the gains from trade liberalization for these countries, provided they are not too stringent.

Resource Details (Export Citation) GTAP Keywords
Category: GTAP Application
2002 Conference Paper
Status: Published
By/In: Presented at the 5th Annual Conference on Global Economic Analysis, Taipei, Taiwan
Date: 2002
Created: Tsigas, M. (5/2/2002)
Updated: Bacou, M. (7/16/2002)
Visits: 4,675
No keywords have been specified.

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