1. Trade, Development & Sustainability
  2. International Trade and Corporations
  3. Roadblocks to Development
  4. The Debt Crisis in Developing Countries
  5. Free Trade and the Environment
  6. Trade and National Boundaries
  7. A Case Study: the Bushmeat Crisis
  8. "Sundown on the Unions"
  9. What's Wrong with Fair Trade?
  10. A Peek at the US Tariff Schedule


Free Trade and the Environment*

If, 
however, international trade permits businesses to shirk the social costs of pollution by setting up shop in unregulated places, is this not a very serious ill effect of free trade?

A major problem with international trade is the unequal environmental policy among countries. For example, as US companies relocate south of the border in search of cheap labor, some companies have dumped toxic waste into the Rio Grande, causing serious health and water-supply problems in the area. But such pollution is not part of free trade. A truly free market consists of voluntary exchanges, and no one volunteers to have pollutants dumped in their water supply. Unless polluting is agreed to, it is an act of force. In a free market, polluters must be charged for the social costs. This charge is a type of rent for the use of land (including water and air as economic land) as a dump.

The problem in free trade is then to equalize such pollution charges, so that no countries will have an unjust advantage. Those with lower pollution charges will appear to have lower production costs, but in fact these are environmental costs being imposed on others. Free trade thus requires an international agreement on common charges for environmental destruction. (Such agreements are conspicuously absent from current multilateral "free trade" pacts.) A comprehensive agreement would include fees, fines, and other charges on any use and abuse of natural resources, including pollution, the destruction of wildlife, deforestation, and soil erosion.

This notion of the air, soil and water as "dumping ground" may seem far-fetched at first glance. But it is entirely consistent with the essential character of land as a factor of production. Essential to life, but not made by human beings, land exists as the birthright of all.

How Can the Costs of Pollution Be Assessed?

The oceans and the atmosphere are a type of common pool (although some local pollution can be separated out). Since those resources are part of our natural resources, or economic land, those who dump pollutants into the sea or the air are obtaining a benefit from the use of this land, and thus gain a rent. Humanity as the owner of the oceans and atmosphere is therefore entitled to collect this rent, which ideally would compensate all future generations for the damages.

However, it is difficult to estimate the amount of damage committed by the pollution of a large area such as the upper atmosphere or the oceans, especially since the damage lasts into the indefinite future.

Pollution has indeed affected the economy; the costs it imposes are easy to see: costs of health care, lost productivity, and degraded infrastructure, habitat and cropland. But, these costs have commonly been seen as "externalities" ó things outside the market process. The central problem is that government policy has not marketized most of our air and water, so users and abusers of the environment have not paid for the social cost. By treating the atmosphere and oceans as free goods, there has been no incentive to protect them. Municipalities also are able to use rivers and lakes as dumps for sewage.

The ideal solution is to have the polluter pay for the use of the environmental service. The "polluter pays principle" was adopted by the OECD, the Organization for Economic Cooperation and Development, as early as 1974. This intergovernmental organization recognized that the marketization of the environment requires an international agreement, so that firms which use costly anti-pollution devices do not suffer a competitive disadvantage. A pollution charge would also encourage inventions and investments in anti-pollution technology and in less-polluting techniques such as solar energy.

Some proposed environmental taxes do not directly charge for pollution, but for products whose usage is currently polluting. For example, "carbon tax" has been proposed, based on the carbon content of the fuel used: a higher charge for coal than for oil and a lower one still for natural gas. But this is more directly a tax on consumption. It is economically more efficient and morally less coercive to place a charge directly on the pollutant, such as carbon monoxide, in proportion to its damage. Such a charge would not be a tax on the consumption of carbon, but rather a fee for the use of air as a dumping place for the pollution created.

There are at least three ways to set such a pollution charge. The first method is to measure the economic impact of environmental damage, and set the charge equal to that cost. For example, air or noise pollution can reduce real-estate values. When direct measurements are not available, one can use the contingent valuation approach. People are asked either what they would pay for an environmental benefit and/or what they are willing to receive as compensation for some reduction in environmental quality.

The second method is to assume that the total damage from pollution is infinite (considering the effects on future generations for all time to come), so any amount charged will but compensate a little for the damage. The charge is then determined by budgetary desires. Assuming the charge were set high enough to make it worth the polluterís while to get rid of it, the effect of the charge would be to reduce the pollution, and so the fee per ton could be increased for the next period, which would then reduce pollution even more.

The third way to charge would be to treat the ocean or atmosphere as private property, and maximize the revenue for dumping into it. For example, suppose some corporation were assigned ownership of the North Atlantic ocean, with rights to collect fees for pollution dumping. The firm would set the rates per pollutant, given some list of pollutants and relative charges by a governing authority. It would try to maximize its profits and would set a rate that would most likely be so high it would substantially reduce the pollution. This company in turn would pay its rent, which would be most of its revenues, to a governing authority, such as the United Nations, providing it an independent source of revenues. (Surplus revenues could be distributed to the member nations.) To keep the process efficient and honest, provision should be made for members to be able to secede from the organization and form alternative international organizations which would also share this rent.

A combination of these methods would include the natural environment in a global market economy, so that the social costs of enterprise would be borne by those obtaining the benefits.



* These sections are adapted from The Science of Economics by Dr. Fred Foldvary.