International Trade and Environmental Regulations

I particularly enjoyed reading Blinder as I found his writing clear and humorous, and I generally agreed with the ideas he presented. However, I would have liked to have seen him address the issues that arise from the intersection of environmental policy and international trade. Particularly, differences in environmental policies between countries could cause shifts in international trade that are inefficient and hurt the country adopting the “right” environmental approach according to Blinder. Theoretically, stringent domestic regulations (whether a pollution tax or otherwise) could incentivize heavy-polluting industries to move production abroad, where regulations are weaker and less costly. In other words, countries with lighter environmental regulations could become “pollution havens”. (Presumably, one could make this argument for many other issues as well, such as when there exist differences in protection of intellectual property rights, minimum wage laws, and so on.)

Of course, the first question is whether or not differences in environmental regulations affect competitiveness of a given country or industry. One study that analyzed manufacturing industries in Germany, the United States, and the Netherlands from 1977 to 1992 found that the stringency of environmental regulation impacted exports in all three countries, but with different impacts. In the US, which had the most stringent environmental regulations and greatest percentage of industry spending on pollution control and abatement, the impacts of regulations on exports were most clear (particularly when considering crucial factors such as the relative abundance of production factors intensively used by a given industry – under Heckscher-Ohlin theory, industries that are intensive in production factors (e.g. labor) that are relatively abundant in the country have a comparative advantage and thus become exporters with international trade). However, Germany also demonstrated a significant impact of environmental regulation within pollution intensive industries, as did the Netherlands for specific industries (e.g. wood and fabricated metal) when allowing for sectoral variation. Thus, relatively stringent environmental regulations seem to provide some competitive disadvantage, at the least for certain pollution intensive industries, which conforms to theory.

Obviously this is a very limited literature review, but presuming that this assessment of environmental regulations is correct – that they present a competitive disadvantage – what is the proper choice for a country to make? Forgoing environmental regulations allows significant negative externalities to persist, but implementing them could present significant costs for pollution-intensive exporters. Subsidies for pollution-intensive industries are one option, but they could prove costly. Use of international regulatory/governmental bodies to attempt to impose uniform regulations is another option, but not a particularly viable one. Alternatively, it does seem like the countries most lax about environmental regulations are also those least developed – perhaps in the long run, countries will adopt environmental regulations as they develop and the issue will resolve itself. (Or, at least, there may be an argument from equity to ignore the temporary inefficiency of different regulations.) Countries could also take the approach of using or threatening restrictions on trade to punish countries with weaker environmental regulations, but that seems to present issues like the issues with the use of threats in strategic protectionism that Blinder describes. In any event, regulatory differences across countries (with regard to the environment or otherwise) and their impacts on international trade are an interesting and complicated issue; I wish Blinder would have offered a solution or at the least some insight as to how to navigate these differences.