Greener Acres or Greener Waters? Potential U.S. Impacts of Agricultural Trade Liberalization

Agricultural and Resource Economics Review,  Apr 2005  by Johansson, Robert C,  Cooper, Joseph,  Vasavada, Utpal

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This paper examines the elimination of all agricultural policy distortions in all trading countries and agricultural production decisions in the United States, as well as subsequent environmental quality in the presence and absence of nondegradation environmental standards. The results suggest that trade liberalization has the potential to increase domestic production and boost agricultural returns by as much as 8.5 percent. Consumer surplus would likely fall, and the discharge of nutrients, sediment, and pesticides would likely increase. However, environmental policies can limit these adverse environmental impacts and mute the potential decrease in consumer surplus, while leaving increased returns to agricultural production.

Key Words: agriculture, trade reform, environment, nondegradation

Legislation of the United States requiring formal environmental reviews, or environmental assessments, of major federal activities significantly affecting the environment dates back thirty years. Within the last decade, nongovernmental organizations (NGOs) and other interested parties have called for extending these environmental reviews to trade agreements (e.g., World Wildlife Federation 2001). In fact, U.S. law requires an environmental review of all new trade agreements beginning in 2001 (U.S. Executive Order 13141, 1999). Such an environmental review would likely be required for multilateral trade liberalization in the context of the World Trade Organization (WTO) negotiations in Doha, Qatar, in 2001. There the WTO affirmed its commitment to "correct and prevent restrictions and distortions in world agricultural markets." Further, the WTO committed itself to "comprehensive negotiations aimed at...substantial improvements in market access; reductions of, with a view to phasing out, all forms of export subsidies; and substantial reductions in trade-distorting domestic support" (WTO 2001).

While it is not clear what consequences might result from the environmental review of such trade agreements, they may include multilateral environmental agreements. There are approximately 200 multilateral environmental agreements (MEAs) in place today, of which 20 contain trade provisions (United Nations Environment Programme 2000). Trade agreements may themselves raise environmental quality by increasing income-environmental quality is income elastic. However, linking environmental side-agreements to trade agreements may be an economically efficient method for avoiding adverse environmental impacts of trade or for minimizing the impacts of trade on environmental agreements. For example, the Office of the U.S. Trade Representative (USTR) states in its first environmental review of a free trade agreement that "trade agreements can provide positive opportunities for enhancing environmental protection" (USTR 2003). However, even without MEAs linked to trade policy, environmental reviews of policy will also consider the impacts of trade policy on current and future environmental policies. In the aforementioned environmental review, the USTR states that a core obligation of free trade agreements is a "commitment not to weaken or reduce the protections afforded by environmental laws in order to attract trade or investment." In light of the 2001 DohaWTO trade talks, we consider how adjustments to agricultural trade liberalization might influence or be influenced by national or regional environmental policies such as the Clean Water Act.

Background

Economic theory typically concludes that trade liberalization increases overall economic welfare. Although free trade is optimal from the viewpoint of world welfare, it is not necessarily so from the viewpoint of a single country unless the country is small (Bhagwati and Panagariya 1996). For a large country, with appropriate taxes and subsidies, a welfare level higher than that associated with autarky can be attained. Devising Paretoimproving policy becomes difficult, though, in the presence of negative externalities associated with production, especially in the absence of well-defined property rights, which can lead to the underpricing of natural resources. In such situations, the policymaker must balance welfare improvements from trade against its environmental consequences when setting taxes, subsidies, or standards.

The question posed in this paper is, what are the agri-environmental outcomes of liberalization, since outcomes can be positive (decreased environmental damage and increased producer and consumer surplus) or negative (increased environmental damage and decreased surplus)? While a broad theoretical and empirical literature examines trade and the environment, this literature focuses primarily on the manufacturing sector (Frankel and Rose 2002, Antweiler, Copeland, and Taylor 2001). Fewer quantitative studies have examined the environmental implications of agricultural trade liberalization (Abler and Shortle 1992, Williams and Shumway 2000). These analyses typically assume a change in the underlying trade conditions as a given, and estimate potential production and input changes for a subset(s) of the agricultural sector. As environmental impacts are not explicitly modeled in these studies, environmental inferences are extrapolated from the estimated changes in production and input use.