Trade, strategic innovation and strategic environmental policy — a general analysis

Abstract

The recent debates over moves to extend trade liberalisation, such as the Uruguay Round, the Single European Market and, especially NAFTA, have featured a number of extreme claims. On the one hand there have been concerns expressed by environmentalists that such moves will damage the environment. One aspect is that the consequent expansion of consumption, production and trade will lead to increased pollution and use of scarce natural resources, unless corrective policies are taken. A second aspect, which will be the focus of this paper, is the fear that in the absence of trade policy instruments, governments may seek to distort their environmental policies in order to protect their domestic economies. In the case of pollution related to production processes and methods (PPM in the language of GATT), this could lead governments to impose too lax a regime of environmental regulation, (so-called “eco-dumping”), for fear that tougher environmental regulation may damage the competitiveness of their domestic economies. This leads to policy suggestions that there should be moves to harmonise environmental regulations across countries, or, if that is not achieved, that countries who impose tighter environmental regulations than their rivals should be able to impose countervailing tariffs on imports from countries with laxer environmental regulations, with tariffs being equal to the difference in abatement costs between the two countries. Not surprisingly, such policies frequently find favour with industries in the traded sector.