Global competition: the environmental dimension

Business Economics, April, 1995 by Bill L. Long

One of the byproducts of the negotiations on the Uruguay Round and North American Free Trade Agreement (NAFTA) was the elevation and sharpening of a long-standing debate on the impact of environmental policies on industrial competitiveness and international trade. The implications of trade liberalization for the environment were also disputed.

CONCERNS AND ALLEGATIONS

A spectrum of concerns was heard during the negotiations, emanating from three principal interest groups: the business community; environmental organizations; and central governments. Representatives of industrialized nations and developing countries differed sharply, however, on the nature and source of the problems.

For the business community, the concerns flow from the fear that rising costs of environmental protection are placing firms at a disadvantage vis-a-vis competitors who do not have to bear similar costs. Some OECD industrial leaders claim that lower environmental standards in developing countries, and in Eastern and Central Europe, constitute de facto subsidies, and should be corrected through border tax adjustments, or by other measures. They also raise the specter of substantial job losses as firms located in countries with high environmental standards are forced, or enticed, to migrate to nations where the standards are lower, or not enforced.

For environmentalists, liberalized trade and increased competition in a "globalizing" world community are often perceived to be a threat to hard-won environmental successes. They voice concern about the incentive this provides for firms to reduce the costs by cutting back on environmental performance, and for industry otherwise to resist government efforts to strengthen environmental standards. Environmental activists also suggest that intensified global competition will trigger protectionist actions by OECD countries, further depriving developing countries of markets, and that government efforts to "harmonize" environmental standards at either the regional or international levels will result in compromises in favor of nations with lower standards.

As for central governments, finance and economic policymakers in industrialized countries express concern about possible adverse impacts of rising environmental costs on national competitiveness in global markets, and about distortions of trade and investment patterns. They join business leaders in worrying about domestic firms moving "offshore," where environmental compliance costs may be lower, taking with them jobs and investment potential. Meanwhile, developing country officials express concern that efforts by wealthier nations to introduce more stringent environmental standards are usually governments acting strategically to protect markets, and they allege a growth of "green protectionism."

FACT OR FICTION?

The OECD has been keeping many aspects of the environment-trade-competitiveness relationship under fairly close examination for some three decades. Further, events since the beginning of this decade have caused us to broaden and intensify our analyses.

What conclusions can be drawn with respect to the range of concerns and allegations of business, environmental interest groups and governments? OECD's general conclusion is that none of the worries and contentions has much basis in fact.

Research by the OECD and elsewhere indicates that, at the macro level, the costs of compliance with environmental regulations have had little or no impact on the overall competitiveness of nations, as measured by trade balances and effects on trade patterns. Empirical studies show that the costs of pollution control are a small part of total costs in most sectors, and that nearly all the OECD countries have introduced similar environmental measures at roughly the same time. Further, the effects on overall trade between OECD and non-OECD countries have been minimal. (See OECD Survey Report of the Workshop on Environmental Policies and Industrial Competitiveness, January 28-29, 1993.)

Environment-related competitiveness effects may also have been dampened by the fact that the more stringent regulations have often been offset precisely to minimize negative competition impact through, e.g., the granting of exemptions, subsidies, rebates or time differentials.

Some analysts also point to the economic benefits derived from both environmental regulations that have stimulated technological changes and new investments by firms attracted by the growing world market for "green" products.

Environmental activists turn the business community' s competitiveness argument around. They contend that the lack of noticeable impacts on competition is a perfect indicator of just how weak and ineffective environmental regulations have been in internalizing environmental costs, in promoting industrial restructuring, and in achieving national environmental policy goals.

At the micro level - the level of the firm or sector - the picture is obviously more mixed. For most sectors and firms, the environmental compliance costs have been manageable to date, and their competitiveness positions relatively unaffected. On the other hand, certain pollution-intensive and resource-oriented sectors (chemicals, mining, oil refining, pulp and paper) have been impacted quite heavily by environmental compliance costs that can significantly exceed the overall OECD industry average of around 2 percent of total costs. Adverse economic effects have also been experienced by some small and medium-sized firms otherwise operating on the margin of profitability.