SPECIALSTUDIES4

TRADEAND　ENVIRONMENT

Hakan Nordstrom　and ScottVaughan

This study was initiated by Hakan Nordstrom of the Economic Research and Analysis　Division of theWTO and ScottVaughan while he was at theTrade and Finance Division　of the UN Environment Programme (UNEP).Mr. Vaughan has since left UNEP to join the　NAFTA Commission for Environmental Cooperation. The annexes have been prepared by　the Trade and Environment Division of theWTO. The authors would like to thank Samir　Abhyankar, Ali Dehlavi,Daniel Esty, Karl-Michael Finger, Christina Hartler, Henrik Horn,

Alexander Keck, Patrick Low, Doaa Abdel Mottaal,Lydia Rumphorst,Sabrina Shaw,　Jan-Eirik Sorensen and an anonymous commentator for v aluable inputs and comments,　as well as Lidia Carlos Silvetti and J anet Spettel for secretarial services . The opinions expressed　in this report should be attributed to the authors and not to the institutions they represent.

Table of contents

Executive S ummary 1

I. Introduction 9

II. Causes of Environmental Degradation and the Interaction with Trade 13

A. Chemical-intensive agriculture 14

B. Deforestation 16

C. Global warming 18

D. Acid rain 20

E. Overfishing 21

F. Concluding remarks 26

III. General Equilibrium Linkages Between Trade and the Environment 29

A. Theoretical overview 29

B. Empirical overview 31

C. Applied models 33

D. Concluding remarks 34

IV. Does Economic Integration Undermine Environmental Policies? 35

A. The competitive consequences of environmental regulations 36

B. Do environmental regulations induce the relocation of firms? 38

C. International evidence 39

D. Restraining factors that prevent the migration of polluting industries 40

E. A race-to-the-bottom, a race-to-the top, or no race? 41

F. Empirical evidence of regulatory races and chills 44

G. Concluding remarks 46

V. The Relationship Between Trade, Economic Growth, and the Environment 47

A. Theoretical overview 49

B. Is economic growth sufficient to induce environmental improvements? 51

C. Empirical evidence 52

D. International trade and the EKC 54

E. Concluding remarks 57

VI. Concluding Remarks 59

Bibliography 61

Annex I: Trade and environment in the GATT/WTO 67

Annex II: Report by Ambassador H. Ukawa (Japan), Chairman of the Group Environmental

Measures and International Trade, to the 49th Session of the Contracting Parties, L/7402 (without annexes) 87

Annex III: Report (1996) of the Committee on Trade and Environment, WT/CTE/1,

(Section III, Conclusions and Recommendations) 97

Annex IV: List of derestricted CTE documents 103

Annex V: Marrakesh Decision on Trade and Environment 107

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List of tables

Table 1: The prisoners' dilemma of global warming 18

Table 2: Cumulative CO2 emissions, 1950-1995 19

Table 3: Growing demand and overfishing 23

Table 4: The impact of the Uruguay Round on air pollution 33

Table 5: Pollution abatement operating costs by US industry 37

Table 6: Surveys of the importance of environmental regulations to plant location in the United States 39

Table 7: Race-to-the-bottom, race-to-the-top, or race-to-efficiency? 44

Table 8: Estimated turning points for the environmental Kuznets curve 53

Table 9: The relationship between income and various environmental indicators 55

Table 10: Decomposition of commercial SO2 emissions between 1980 and 1990 57

List of figures

Figure 1: Divergence between social and private costs and environmental degradation 15

Figure 2: An opportunity cost analysis of deforestation 16

Figure 3: Growing demand and overfishing 22

Figure 4: Subsidies and overfishing 24

Figure 5: The double-dividend of efficient environmental polices 27

Figure 6: Export-import ratio in pollution-intensive goods 32

Figure 7: The environmental Kuznets curve 48

Figure 8: Structural changes in the US economy, 1960-1994 51

List of boxes

Box 1: Selected environmental trends 2

Box 2: The law of the sea 25