Environmental Impacts of Trade Liberalization: A Quantitative Analysis for the United States Using TEAM, The

Agricultural and Resource Economics Review, Apr 2005 by Creason, Jared, Fisher, Michael, Semenova, Svetlana, Stone, Susan F

A highly disaggregated emissions factor model is presented. The model generates changes in emissions and resource use by state and 6-digit NAICS sector. Removal of all U.S. import restrictions is examined. Results for agriculture show that composition effects explain highly varied regional patterns of emission changes. Scale effects are also important for expanding sectors. Quantitative assessments such as this may prove useful in conducting full environmental reviews of U.S. trade agreements consistent with Executive Order 13141 and the Free Trade Act of 2002.

Key Words: trade, emissions, input-output, residuals

Beginning with the North American Free Trade Agreement (NAFTA), continuing with Chile and, more recently, the Central American Free Trade Agreement (CAFTA), there has been growing concern in the United States over the possible environmental effects of increasing trade. This concern was explicitly addressed in Executive Order 13141 signed in 1999 and the 2002 Free Trade Act, both of which committed the United States to undertake formal environmental reviews for all future trade agreements. Since the Executive Order was signed, there have been six completed environmental reviews (for free trade agreements with Chile, Singapore, Jordan, Bahrain, Morocco, and Australia) and four interim reviews pending completion (for agreements with the Dominican Republic, CAFTA, Thailand, and Panama).

Most environmental analyses of large economywide events, such as trade liberalization, focus on global pollutants such as changes in carbon dioxide emissions or on policy concerns such as the sovereignty of domestic regulation and its consistency with internationally negotiated agreements.1 The studies that have reported more sectorspecific environmental effects, such as environmental effects of agricultural reform, still often have a national focus. For the most part, these studies have shown that, at the national level, trade does not have a detrimental effect on the environment. This paper attempts to go beyond existing studies by examining the regional effect of trade liberalization, both economic and environmental, to see if these results still hold. We do this by taking sector-specific economic changes from a trade liberalization scenario and applying them to a highly disaggregated environmental emissions model. This way we can determine whether, when examined at a more detailed level, the changes brought about by trade are indeed environmentally benign or whether, as some have suggested, environmental "hot spots" develop.

In 2000, the U.S. Environmental Protection Agency (EPA) commissioned Abt Associates to build a trade and environmental assessment model, or TEAM (Abt Associates 2004). While the acronym refers to "trade" as the source of change, the model can be used to analyze environmental impacts from any economic change. TEAM follows the method pioneered by Ayres and Kneese ( 1969), Kneese, Ayres, and d'Arge (1970), and Leontief (1970). This literature takes the view that pollution emissions are a fundamental part of production processes, just like raw materials, and can thus be treated as an input in the input-output framework. This early work was an effort to bring economic analysis more in line with the fundamental law of conservation of mass by showing that pollution "externalities" were intrinsic to economic processes, not an exceptional case easily addressed through a partial equilibrium analysis of economic welfare (Ayres and Kneese 1969).

Background

The effects of trade on the environment have often been placed into three categories: scale, composition, and technique (Grossman and Krueger 1993). The scale effect predicts that an economic expansion due to an increase in trade will increase pollution because, all things equal, more output means more pollution. However, while trade may increase overall levels of pollution in a country, its effect is not uniform across all industries. Trade liberalization will likely cause some industries to expand and others to contract. Put simply, this compositional effect reduces pollution if the output from "dirty" industries falls while the output from "clean" industries expands. Finally, increases in output that are a result of technology (Grossman and Krueger's "technique" effects) are usually associated with decreases in pollution, as modern methods of production tend to be cleaner. However, technology can also have a negative impact on pollution. Capital-intensive industries are often associated with large pollution emissions, so that increases in capital-intensive industries will raise pollution levels. Which effect ultimately dominates is an empirical question.

Antweiler, Copeland, and Taylor (2001) investigate the relative contribution of each of these effects by modeling how openness to international trade affects sulfur dioxide (SO^sub 2^) concentrations. They conclude that freer trade is good for the environment. They find, overall, little change in SO^sub 2^ emissions from changes in the composition of national output. Estimates of trade-induced technology and scale effects imply a net reduction in pollution. The authors estimate that for every one percent increase in national income resulting from trade liberalization, there is a 0.8 to 0.9 percent reduction in concentrations of SO^sub 2^. They also find that income gains brought about by further trade or neutral technical progress tend to lower pollution, whereas income gains from capital accumulation raise pollution. They attribute this to the fact that capital accumulation tends to favor the production of pollution-intensive goods, whereas neutral technical progress does not.