GATT, Trade Liberalization, and the Environment:
An Economic Analysis

Arlene Wilson
Specialist in International Trade and Finance
Economics Division

April 5, 1994

94-291 E

CONTENTS

SUMMARY
OVERVIEW OF THE MULTILATERAL TRADING SYSTEM
-- ECONOMIC BENEFITS OF FREE TRADE
-- IMPORTANCE OF THE MULTILATERAL TRADING SYSTEM
THE EFFECT OF TRADE LIBERALIZATION ON THE ENVIRONMENT
-- ENVIRONMENTAL DEGRADATION: BASIC CAUSES AND CURES
-- HOW TRADE LIBERALIZATION AFFECTS THE ENVIRONMENT
IMPORT RESTRICTIONS FOR ENVIRONMENTAL PURPOSES
-- GATT PRINCIPLES
-- PRODUCT VERSUS PPM STANDARDS
-- MULTILATERAL COOPERATION
THE EFFECT OF DIFFERING ENVIRONMENTAL STANDARDS ON INDUSTRIAL LOCATION
CONCLUSION

SUMMARY

The primary cause of environmental degradation is market failure, not trade liberalization. One type of market failure occurs when, for example, production pollutes a nearby river, but the cost of the product produced does not include the cost of environmental degradation. The most efficient remedy is to address the market failure at its source, either by establishing or enforcing property rights, or with policies such as taxes, subsidies, or user fees.

In the presence of market failures, however, trade liberalization can exacerbate environmental problems. On the other hand, trade liberalization may reduce pollution by increasing economic growth; evidence suggests that countries with higher per capita income spend more on pollution control. Trade liberalization could also benefit the environment by eliminating restrictive trade policies, such as agricultural subsidies, that have contributed to higher pollution levels.

For economists, the general dislike for import restrictions is rooted in the economic importance of trade and the need for a viable multilateral trading system to sustain the commitment to free trade. Over the postwar period, the General Agreement on Tariffs and Trade (GATT) has been successful in liberalizing trade, and stimulating economic growth. Since pressures for protection from import competition always exist, however, many economists are concerned that trade restrictions for legitimate environmental or other social goals might be abused by protectionists.

Although trade restrictions are generally not the most efficient policy to resolve environmental problems, they could play a role in some limited cases. For example, it might be useful to amend GATT rules to permit trade restrictions to enforce multilateral environmental treaties. If GATT rules are amended, they need to be carefully defined to avoid being used as disguised barriers to trade.

In general, GATT rules permit a country to adopt any environmental standards it wants for domestic products, and to require that imported products meet the same standard. GATT rules have been interpreted to prohibit countries from unilaterally imposing trade restrictions because products were produced abroad by methods deemed unacceptable.

Some are concerned that firms in countries with high environmental standards may relocate to countries with lower standards. Suggestions to use subsidies or tariffs to offset the difference in standards are economically undesirable because they inhibit trade, investment, and economic growth. Moreover, it is argued that lower environmental standards are only one factor in the relocation decision; infrastructure, transport costs, access to markets, and the cost and quality of labor are much more important in most cases.

The interaction between trade and the environment in recent years has raised a number of important questions. For example, do environmental goals conflict with those of the multilateral trading system? If so, to what extent? How is the environment affected by trade liberalization, which increases the volume of trade, and spurs economic growth? In what circumstances are trade restrictions, historically monitored by the General Agreement on Tariffs and Trade (GATT), appropriate to enforce environmental goals?

Environmental concerns have been an important issue in negotiations towards the North American Free Trade Agreement (NAFTA) and in the Uruguay Round. After much discussion and compromise, the NAFTA and a side agreement addressed concerns such as safeguarding stricter U.S. standards, enforcement of environmental standards in Mexico, and border pollution.

Although some environmental modifications were made in the Uruguay Round, most substantive issues were left for future negotiations. At the conclusion of the Round, it was agreed that a work program on trade and the environment would be formulated by April 15, 1994, the date of the signing of the Final Act (which incorporates all the Uruguay Round Agreements). Thus, it is likely that the interaction between trade, GATT, and the environment will continue to be an important issue in the 1990s.

This report surveys the most important issues in the trade-environment-GATT debate from the perspective of economic analysis, assuming that environmental goals in society are a given. (1) Thus, the report focuses on the most efficient way to address environmental concerns. In particular, the use of trade restrictions to achieve environmental goals is analyzed.

The report begins with a section on the rationale for a strong multilateral trading system. The following three issues are then surveyed:

• The effect of trade liberalization on the environment,
• Import restrictions for environmental purposes, and
• The effect of differing environmental standards on industrial location.

Although the above issues are among the most prominent, they are not the only ones of concern. Other important issues, such as dispute settlement and subsidies, are beyond the scope of this report.

OVERVIEW OF THE MULTILATERAL TRADING SYSTEM

ECONOMIC BENEFITS OF FREE TRADE

The goal of free trade is to raise the economic well-being of trading countries by improving efficiency, productivity, and economic growth. One way in which free trade improves efficiency is through promoting specialization. According to the "comparative advantage" principle, if each country produces those products in which it is relatively more efficient, and trades for products it is relatively less efficient at, all countries gain. Another important source of efficiency gains is "economies of scale"; with a larger market, firms can lengthen production runs and lower costs. Consumers, in particular, benefit considerably from lower prices, higher quality, and a wider choice of products.

Free trade can also enhance the investment climate, improve the rate of technological development, and stimulate firms to become more competitive. These dynamic gains are often of greater long-term significance than the benefits of comparative advantage.

Economic growth is especially important to those at the lower end of the income scale in both developed and developing countries. By increasing economic growth, trade liberalization can help to reduce poverty. At present, more than 1 billion people live in poverty worldwide, and this number is expected to grow even if the rate of population growth declines. (2)

IMPORTANCE OF THE MULTILATERAL TRADING SYSTEM

While trade liberalization is almost always a net economic gain to the Nation, it often faces effective domestic resistance. In the face of domestic pressures for protection from foreign competition, maintaining a commitment to free trade has often been difficult. Even though consumers, many producers, and exporters benefit from free trade, consumers (and sometimes exporters) are usually not organized to defend it. At the same time, import-competing industries may actively encourage trade restrictions.

The experience of the 1930s illustrates the dangers of protectionism. The Tariff Act of 1930 (more widely known as the Smoot-Hawley Tariff) raised tariffs to an all-time high, amid strong protectionist pressures. President Hoover was (unsuccessfully) urged to veto the Act by 1,028 leading American economists. (3)

It is widely believed that the Smoot-Hawley Tariff served to deepen the worldwide depression of the 1930s. Within two years, 25 nations retaliated by raising tariffs in an attempt to protect their own industries. (4) Other measures followed, such as competitive currency depreciations, in which countries attempted to increase their exports by depreciating their currencies. Ultimately, all countries became worse off. Current fears of the "slippery slope" in which some trade restrictions quickly lead to other, more onerous, restrictions, is thus rooted in the history of the 1930s. Not only did trade restrictions exacerbate the depth and duration of the depression, but many believe they also contributed to worsening political relations among countries and the growing nationalism of the decade.

One motivation for negotiating the General Agreement on Tariffs and Trade (GATT) was to prevent a repetition of the trade restrictions of the early 1930s. The purpose of the GATT is to provide a stable and predictable basis for trade. In addition to a framework of principles to govern international trade, the GATT provides a forum for negotiating trade issues and a procedure to settle disputes among nations. The GATT system was a major factor in the postwar liberalization of world trade.

The GATT entered into force in January 1948. Since then, successive rounds of multilateral trade negotiations have reduced tariffs and quotas dramatically. More recently, negotiations have focused on developing rules for a variety of nontariff barriers, such as subsidies and inadequate protection of intellectual property rights.

With over 100 GATT contracting parties, liberalizing trade rules is a continuing, sometimes very contentious, process, especially since countries often have quite different goals. Although much progress has been made, trade is far from completely free. Moreover, pressure for trade restrictions is always present. A recent example is the use of voluntary export restraints (VERs), which were not covered by GATT rules in the 1980s. (5)

The postwar GATT process of trade liberalization has been accompanied by a large increase in world trade. Economists often compare the trade increase with the growth of world GDP (gross domestic product) over this period, and maintain that increasing trade contributed substantially to economic growth in the postwar period. From 1965 to 1980, the average annual percentage change was 6.6 percent for exports and 4 percent for GDP (See figure 1). Stated another way, world trade grew 65 percent faster than GDP from 1965 to 1980. From 1980 to 1990, the average annual growth rate of exports was 4.3 percent, 34 percent higher than the rate of growth of 3.2 percent for GDP.

insert figure 1 here

In the early postwar period, trade liberalization was a major factor in the economic growth of the industrial countries. (6) In more recent years, trade expansion was a central reason for the rapid economic growth of the emerging economies, such as Korea, Taiwan, Mexico, and Brazil. It is likely that trade liberalization will also play a key role in the economic prospects of the former Soviet bloc economies. (7)

THE EFFECT OF TRADE LIBERALIZATION ON THE ENVIRONMENT

Trade liberalization is generally not the major cause of environmental problems. Nevertheless, in some cases, trade liberalization can reduce environmental damage, and in some cases, it can exacerbate environmental problems.

ENVIRONMENTAL DEGRADATION: BASIC CAUSES AND CURES

The most important cause of environmental problems is thought to be the failure of markets to reflect environmental values. (8) A negative externality (or spillover) is a type of market failure that occurs when prices do not fully reflect all the costs involved in producing products. In other words, the private costs of production differ from the social costs. For example, if a factory pollutes a river, but neither the producer nor consumer pays for the environmental damage, the private cost of production is lower than the social cost. In a market economy, for a given level of demand, too much of the product will then be produced, along with too much pollution.

One reason such negative externalities arise is that no one owns many environmental assets. The air, the oceans, the ozone layer, as well as many lakes, rivers and forests are not privately owned. Property rights in these assets may never have been assigned, or may be disputed or ambiguous. If assigned, property rights may be difficult or costly to enforce. This means, however, that polluters have no incentive to take environmental degradation into account in their production process.

The most efficient way to address environmental problems is, according to a well-established economic principle, to address the market failure at its source. In other words, the total cost of the product should reflect both the private and social costs. In developed countries, the primary remedy has been environmental regulation, also known as a "command and control" policy. Mainstream economic analysis suggests that economic instruments such as assignment and enforcement of property rights, taxes, user fees and subsidies are usually more efficient and flexible (and sometimes more effective). (9)

Under most circumstances, trade restrictive measures do not directly address the source of the environmental problem, and are thus not the most efficient method of resolving environmental problems. In addition, they can distort trading relationships, and are easily evaded (by, for example, diverting exports through third countries). A role for trade restrictions can exist, however, when direct measures are politically or practically difficult to achieve, or to enforce multilateral environment treaties (discussed in more detail later).

HOW TRADE LIBERALIZATION AFFECTS THE ENVIRONMENT

Trade liberalization can affect the environment by increasing economic growth, which can, in the presence of environmental externalities, increase environmental problems. Referring to the example earlier of the factory polluting the river, it is easy to see that increased economic growth means more products and pollution are being produced. To the extent that the prices of traded goods do not reflect both the private and social costs of production, increased trade and demand for the product will then exacerbate environmental problems. A number of studies have shown that trade liberalization may reduce a country's overall welfare if environmental resources are incorrectly priced (which may depend on appropriate environmental policies being in place). (10)

On the other hand, increased economic growth provides resources and the will for addressing environmental problems. People in higher-income countries tend to be more educated about, more interested in, and more willing to spend resources on, environmental protection than those in less developed countries. Indeed, one often-cited study on sulphur dioxide pollution and GDP per capita by Grossman and Krueger supports this hypothesis (11). It concludes that countries with low GDP per capita show an increase in sulphur dioxide pollution as GDP per capita increases. However, once per capita GDP reaches $5,000, increases in GDP per capita are associated with declining sulphur dioxide pollution. In other words, as living standards increase, at some point sulphur dioxide pollution decreases.

The net environmental effects of trade liberalization through increased economic growth, whether positive or negative, are likely to be relatively small in the future. This is because, since trade is already quite free in most developed countries, additional trade liberalization has a relatively small effect on economic growth, and consequently on the environment. Moreover, trade still represents a relatively small share of economic activity in most countries.

Another way that trade liberalization may affect the environment is through the types of products traded. More trade in pollution-control products, for example, could improve the environment and spread new environmental technologies to trading partners. At the other extreme are increases in trade in products such as endangered species and hazardous waste, which damage the environment. (12)

An important benefit from trade liberalization would occur if it eliminates restrictive trade policies that contributed to market failures. In agriculture, for example, it is argued that reductions in domestic support policies and improved market access would cause some agricultural production to shift from high income countries to low income countries, where pollution might be less. one specific example is that of the use of chemical fertilizers and pesticides, which is about ten times per hectare greater in countries with higher producer prices than in those with lower producer prices. (13) It might be expected, then, that reductions in government price support policies in high producer price countries would reduce prices in those countries, and shift some production to low producer price countries. As a result, the use of chemicals and pesticides might decrease.

In summary, trade liberalization can benefit the environment by increasing economic growth and providing resources for resolving environmental problems, by increasing trade in pollution-control products, and by eliminating government policies that contribute to market failures. Trade liberalization can harm the environment by promoting economic growth under conditions of market failure, and by stimulating trade in environmentally-damaging products. Both the positive and negative environmental effects are likely to be small relative to total world trade.

IMPORT RESTRICTIONS FOR ENVIRONMENTAL PURPOSES

This issue is one of the most contentious and complicated in the trade-environment debate. For economists, the general dislike for import restrictions is rooted in the economic importance of trade and the need for a viable multilateral trading system to sustain the commitment to free trade.

A major concern is that trade restrictions for legitimate environmental or other social goals might be used by others as disguised barriers to trade, which has happened many times over the years. One recent example is that of the increase in an environmental tax on beer cans by the Canadian province of Ontario in 1992. Although the increase was applied to both domestic and imported beer cans, it was not applied to any other kinds of cans, such as soft drinks, juice, or soup. Moreover, most U.S. beer sold in Ontario is in beer cans, while 80 percent of domestic beer in Ontario is sold in bottles. (14) Some maintain that if it were primarily for environmental purposes, the tax would have been applied to all aluminum cans, not just beer cans. Since the increased tax mainly affects U.S. beer exports, it can be argued that it was designed mainly to protect Canadian beer producers from competition and not to protect the environment.

GATT PRINCIPLES

The GATT provisions most relevant to environmental import restrictions are the most-favored-nation (MFN) principle, the national treatment principle, and the general exceptions. (15) The most-favored nation principle, in Article I, requires each GATT contracting party to grant to each other contracting party treatment at least as favorable as it grants to its most favored trade partner. No country can discriminate among countries in applying tariffs or charges, unless an exemption is allowed.

The national treatment principle, in Article III, obligates each country not to discriminate between domestic and foreign products. Once an imported product has entered a country, the product must be treated no less favorably than "a like product" domestically produced. In other words, tax and regulatory treatment of the imported product must be the same as the domestic product. The term "a like product" has been interpreted to mean the characteristics of the product itself, not the method of producing the product. This distinction is important when considering whether or not trade restrictions for environmental purposes are consistent with the GATT.

Article XX (General Exceptions) of the GATT allows for some exceptions to the basic GATT rules, as long as they are not arbitrary or unjustifiable discrimination among countries and are not disguised barriers to trade. Those exceptions relevant to the environment are measures:

• necessary to protect human, animal or plant life or health; and
• relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.

Most environmental measures would be covered under the above two categories, even though the environment is not specifically mentioned. (16) A few legitimate environmental measures, however, such as recycling requirements, might not be covered.

Whether or not environmental trade restrictions violate GATT principles is a complex issue, and depends partly on the type and purpose of the restriction. Is the restriction imposed to enforce a product standard or a process and production method (PPM)? Does it involve a purely domestic environmental problem, or are there spillovers to other countries or to the global commons? Is the restriction unilaterally imposed by one country against others, or is it the result of a multilateral decision?

PRODUCT VERSUS PPM STANDARDS

Product standards differ from PPMs in that the former refer to the product itself, while the latter apply to the method by which a product is produced. There is no conflict between GATT rules and an import restriction to enforce an environmental regulation (product standard) on domestic sales of goods when there are no spillovers to other countries. GATT rules do not inhibit a country from using trade restrictions to impose a domestic product standard as long as national treatment and MFN requirements are fulfilled. Each country has the right to establish its own standards, such as emission controls for cars, and to require that all products, both domestic and imported, conform to its standards.

The use of import restrictions against countries whose PPMs differ is considerably more complicated. In the tuna-dolphin issue (see box on next page), a GATT panel concluded that the U.S. embargo was inconsistent with GATT rules because it involved a process, not a product, and because it was applied outside the country's territorial jurisdiction. The GATT panel suggested that it would be preferable to amend the rules or seek a waiver from the rules, which might prevent abuse of the trade restrictions. At the request of both Mexico and the United States, who subsequently resolved the issue bilaterally, the GATT panel report was never adopted by the contracting parties.

The GATT panel report in the tuna-dolphin case was very controversial. Some maintained that the GATT panel was unduly narrow in its interpretation of the rules, especially Article XX. It was also argued that obtaining a waiver would have been difficult because it only applies in "exceptional circumstances and requires a majority vote (and two-thirds of those present) of the contracting parties. Amending the GATT would also have been difficult and time consuming; some rule amendments require a two-thirds majority, while for others all contracting parties must agree.

The Tuna-Dolphin Issue

Since large yellowfin tuna often swim underneath schools of dolphins in the eastern tropical Pacific Ocean, when purse seine nets are used in tuna fishing, dolphins can also be caught. Pursuant to the U.S. Marine Mammal Protection Act (MMPA), dolphin protection standards for both the U.S. fishing fleet and for other countries fishing in the eastern tropical Pacific Ocean have been promulgated. If the standards are not met by a particular country, the MMPA requires an embargo of all yellowfin tuna and tuna products from that country. Imports of yellowfin tuna and tuna products from Mexico, and several other countries, have been prohibited under the MMPA.

In February 1991, Mexico argued that the U.S. prohibition was inconsistent with the GATT, and requested a GATT dispute settlement panel. The United States maintained that the import restriction on tuna was justified under the GATT's national treatment provision. The United States also argued that the prohibition was valid under Article XX of the GATT, which provides for exceptions for animal health or exhaustible natural resources.

The dispute settlement panel found that the prohibition violated the national treatment provision (Article III of the GATT) because it discriminated between the imported product and the like domestic product, which were identical even though the processing (fishing) method differed. The GATT panel also found that Article XX does not allow trade restrictions to enforce a country's own laws outside its jurisdiction. Thus, Mexico's position was upheld on both counts.

The panel, however, found the U.S. Dolphin Protection Consumer Information Act to be GATT consistent. This Act, which requires tuna products labeled "Dolphin safe" to meet certain dolphin protection standards, is applied to both domestic and imported tuna products.

Source: GATT, op. cit., p. 15.

Economists generally oppose import restrictions to enforce PPMs for two main reasons. First, PPMs represent one of many types of differences among economies that are the basis for trade. If such differences are eliminated, some or all of the expected economic gains from specialization could be lost. Second, the use of trade restrictions for environmental PPMs could quickly lead to a proliferation of trade restrictions due to differences in other kinds of policies.

Moreover, some economists argue that unilateral trade restrictions, such as that imposed in the tuna-dolphin case, violate the sovereignty of other nations. Attempts to force other countries to adopt the same production methods (or refrain from certain production methods) is based, to some extent, on judgment of what the appropriate policies are. Environmental policies appropriate for one country may not be appropriate for other countries, with different levels of environmental degradation, and more (or less) resources to devote to pollution control. Countries may evaluate the costs and benefits of environmental measures differently. The risks of specific environmental problems may be assessed as high by some countries and low by others. Furthermore, unilateral trade restrictions are "inherently asymmetric towards poor nations with less economic clout, implying that the economically strong nations are also morally superior and their governments must not be constrained by multilateral rules from coercing others into conversion." (17)

Economists generally oppose unilateral trade restrictions because they undermine the stability of the multilateral, rules-based GATT system. Some also argue that other, more appropriate ways can be found to address environmental problems caused by production methods in other countries. Products can be labelled to allow consumers to decide whether or not to purchase products produced in environmentally sound ways. Environmental organizations could undertake educational campaigns in, or provide financial or technical assistance to other countries, to encourage more environmental-friendly production methods.

MULTILATERAL COOPERATION

Many environmental problems are international in scope. Issues such as ozone depletion, climate change, and species protection and diversity are not limited to one country. In some cases, actions in one country result in higher pollution levels in one or more other countries; acid rain is an example. In other cases, actions of countries spill over into the global commons, such as the atmosphere and the oceans.

The resolution of environmental problems, even when they involve spillovers to other countries or the global commons, usually involves correcting the market failures that caused the problems. The same principle applies as with domestic environmental problems: the most efficient policies are those that directly address the externality. If property rights cannot be assigned or enforced, economic instruments, such as taxes, user fees, or subsidies, are the most efficient tool.

International environmental problems, however, require action by all concerned countries, not just one. Multilateral cooperation can produce consensus on the nature of a problem and agreed approaches to solving it. Moreover, multilateral action avoids imposing one country's values on another, perhaps economically or politically weaker, country.

In practice, however, it is difficult and time-consuming to negotiate multilateral agreements. An environmental problem may be so pressing that it needs to be resolved right away. one country may be more eager to negotiate than others if, for example, it gives a higher priority to an environmental issue. Some countries may wish to be a "free rider" by not participating in an agreement while still benefitting from the solution. One way of addressing this problem is to provide a "carrot," or an incentive, such as financial assistance, to encourage other countries to participate in a multilateral environmental agreement.

No supra-national body exists to enforce the provisions of multilateral environmental agreements. Consequently, some economists believe that trade restrictions are appropriate as a "stick" or an enforcement tool. Indeed, they have been used in this way, sometimes against countries that are not parties to the agreement. For example, under the Montreal Protocol on Substances That Deplete the Ozone Layer, parties ban the import and export of controlled substances from non-parties. The purpose of these embargoes is to prevent non-parties from undermining the goal of reducing emissions of ozone-depleting substances.

The use of trade restrictions to enforce environmental treaties has not come before a GATT panel. There is some question as to whether or not such restrictions would be consistent with the GATT. In particular, trade restrictions that discriminate among parties and non-parties to an environmental treaty could be interpreted as violating the MFN provisions of the GATT. On the other hand, some argue that an "implicit" GATT exception exists because one signatory to an environmental agreement would be unlikely to raise a GATT challenge against another signatory. (18) Moreover, trade restrictions to enforce multilateral environmental treaties are in principle more acceptable than unilateral actions.

Daniel C. Esty argues that a multilateral organization similar to the GATT should be established to protect environmental values. (19) Generally, international environmental issues are dealt with through national actions, international agencies, and multilateral environmental treaties (which usually involve specific issues). Unlike the GATT system, which has been quite successful in defending free trade principles in the postwar period, no multilateral umbrella environmental agreement exists. A multilateral environment organization could define environment principles, such as the "polluter pays" principle, in which pollution costs are internalized in the costs of producers and the prices paid by consumers. If accepted by a broad group of countries, a comprehensive environmental agreement could provide a better foundation for preserving environmental values than changing GATT rules.

THE EFFECT OF DIFFERING ENVIRONMENTAL STANDARDS
ON INDUSTRIAL LOCATION

The possibility that firms, especially those with relatively high pollution control costs, will relocate to a country with lower environmental standards has been raised in many discussions. It is argued that such relocation would increase environmental degradation in the country with lower standards. Some maintain that the comparative advantage of the country with the higher standards would be eroded. This might result in political pressure to restore comparative advantage by lowering environmental standards in the country with higher standards.

A number of suggestions have been made to address this concern. Imports from countries producing under lax environmental standards could be restricted. Standards could be harmonized to "level the playing field.'' Domestic subsidies might be used to offset lower environmental standards in other countries. If lower environmental standards in other countries are considered an implicit subsidy, countervailing duties to offset the subsidy could be applied.

Different environmental standards are, however, one of many variations that are the basis for international trade and investment. For example, levels of technology, labor skills, and the availability of natural resources vary among countries. Policies on taxes, education and immigration also differ. Trade is beneficial partly because of each country's "comparative advantage," which is based on differences among countries.

Standard economic analysis suggests that it would be inefficient to neutralize differing environmental standards by taxes, countervailing duties, or subsidies. Doing so would prevent the beneficial expansion of trade and investment. Such offsetting actions also might not cause other countries to change their environmental policies. Moreover, if such policies were adopted, it might be hard to prevent them from being used in other circumstances. For example, once countervailing duties were applied to offset lax environmental standards in another country, it would be easier to use them to offset other kinds of policy differences, running the risk of eroding the trading system.

It can be argued that lower environmental standards are not an important reason for relocation. Other factors, such as infrastructure, transport costs, taxes, access to markets, economies of scale, labor availability, and the cost and quality of labor are at least as important. When taken together, the other factors are probably more important than environmental standards in most cases. Evidence from several surveys of international firms that had built plants abroad supports this theory; market access, in particular is an important motivation for plant relocation abroad. (20) Another study indicates that, in the United States, pollution abatement and control expenditures are .54 percent of output for all industries, and 3 percent of output for the dirtiest industry (cement). (21)

CONCLUSION

Trade liberalization is generally not the main source of environmental problems. Since market failures are usually the cause of environmental degradation, policies directly addressing the failures are likely to be the most useful.

Nevertheless, in some cases GATT rules might be modified to be more "environment friendly." Of the issues reviewed in this paper, those cases might include:

• Adding the environment to Article XX to ensure that the exceptions include all potential environmental concerns, and
• Specifying where trade restrictions might be appropriate, such as to enforce multilateral environment treaties.

Modifying GATT rules would, however, be a difficult and complex undertaking. The rule changes would have to be flexible enough to meet environmental needs at present and in the future. At the same time, the GATT rule changes would need to include clearly specified procedures and criteria to minimize the chances of abuse by protectionists.

Endnotes

1. For other aspects of the trade-environment relationship, see Library of Congress. Congressional Research Service. Trade and Environment: Treatment in Recent Agreements--GATT and NAFTA, Report No. 94-165 ENR, by Susan R. Fletcher and Mary Tiemann. 11 p. and Environmental Regulation and the GATT, Report No. 91-285 A, by Jeanne J. Grimmett. 43 p.
2. The International Bank for Reconstruction and Development. World Development Report 1992: Development and the Environment. p. 25
3. U.S. Library of Congress. Congressional Research Service. The Smoot-Hawley Tariff Act of 1930: Its Effects on U.S. Trade and Its Role in the Great Depression of 1929-1933. Report No. 87-993 E, by George Holliday and Gail Makinen. Washington, November 27, 1987, p. 11.
4. Ibid.
5. In the 1980s, the United States negotiated VERs with Japan on automobiles, with Japan and the European Union (formerly called the European Community) on steel, and with Japan and Taiwan on machine tools.
6. See, for example, William R. Cline, Noboru Kawanabe, T.O.M. Kronsjo, and Thomas Williams. Trade Negotiations in the Tokyo Round: A Quantitative Assessment. Washington, D.C., The Brookings Institution, 1978. 314 p.
7. International Monetary Fund. World Economic Outlook. May 1993. p. 72-75.
8. For a more complete analysis, see Candice Stevens. The Environmental Effects of Trade. The World Economy. July 1993, Vol. 16, No. 4. p. 440-443.
9. See, for example, Organization for Economic Co-Operation and Development. Economic Instruments for Environmental Protection. Paris. 1989. 132 p. Some of these policies (subsidies and taxes, for example) could be GATT inconsistent or the basis for a GATT challenge if they discriminate between foreign and domestic products or affect trade.
10. Kym Anderson and Richard Blackhurst. Trade, the Environment and Public Policy. in The Greening of World Trade Issues. Kym Anderson and Richard Blackhurst, eds. 1992. p. 19.
11. Grossman, G.H. and A.B. Krueger. "Environmental Impacts of a North American Free Trade Agreement." Paper prepared for conference on the U.S.-Mexico Free Trade Agreement. Princeton University. October 1991. Cited in GATT. Trade and the Environment. February 1992. p. 18.
12. Trade in endangered species and hazardous waste are already controlled by U.S. law and multilateral environmental treaties.
13. GATT, op. cit., pp. 32-33.
14. Ontario's Can Tax Angers Aluminum, Beer Industries. Journal of Commerce. May 26, 1992, p. 1A, 2A.
15. Other GATT provisions that affect environmental measures are Articles II (Schedules of Concessions), VI (Anti-dumping and Countervailing Duties), XI (Elimination of Quantitative Restrictions), XVI (Subsidies) and the Subsidies and Standards Codes agreed to in the Tokyo Round in 1979.
16. The Uruguay Round agreement does not add environment to the Article XX exceptions.
17. Jagdish N. Bhagwati. Trade and the Environment: The False Conflict. Revised Text, Bradley Lecture, Feb. 9, 1993. p. 26.
18. Christopher Thomas and Greg A. Tereposky. The Evolving Relationship Between Trade and Environmental Regulation. Journal of World Trade, v. 27, August 1993. p. 43.
19. Daniel C. Esty. GATTing the Greens: Not Just Greening the GATT. Foreign Affairs, v. 72, Nov./Dec. 1993., p. 36.
20. Library of Congress. Congressional Research Service. Offshore Manufacturing: Why U.S. Firms Go Abroad. Report No. 92-438 E, by Mark Jickling. Washington, May 18, 1992. pp. 13-19.
21. Patrick Low. Trade Measures and Environmental Quality: The Implications for Mexico's Exports. In International Trade and the Environment. Patrick Low, ed., World Bank Discussion Paper 159. 1992. p. 106.