Environmental regulation and international competitiveness.

AuthorStewart, Richard B.
PositionSymposium: Economic Competitiveness and the Law

CONTENTS

  1. INTRODUCTION: THE CONTEMPORARY DEBATE OVER TRADE,

    ENVIRONMENTAL MEASURES, AND COMPETITIVENESS 2041 A. Product Regulation 2043 B. Process Regulation 2044 C. The Policy Debate in the United States 2045 II. ENVIRONMENTAL PROCESS REGULATION, LIABILITY RULES, AND

    COMPETITIVENESS: A CONCEPTUAL ANALYSIS 2051 A. Explaining Differences in Environmental Standards Among Nations 2052 1. Differing Assimilative Capacities 2052 2. Political Failure 2054 3. Externalities 2054 B. Effects of Differing National Environmental Requirements

    on Competitiveness 2056 C. Desirability of International Competition in Assimilative Capacity 2057 III. PROCESS REGULATION AND INTERNATIONAL COMPETITIVENESS:

    EMPIRICAL STUDIES 2061

    1. Inherent Difficulties in Measuring the Costs of Environmental

      Regulations and Liability Rules 2062 1. The Invisible Costs of Investments and Innovations Forgone 2063 2. The Benefits of Environmental Regulation 2065 3. The Indirect Effects of Industry Regulation on the Economy

      as a Whole 2066 B. Special Problems in Comparative Studies 2067 1. Obsolescence of Data 2068 2. Different Regulatory and Enforcement Systems 2068 3. Industries Exceeding Minimum Standards 2070 C. Review of the Empirical Studies 2071 1. Productivity Studies 2072 2. Trade Studies 2074 3. Locational Studies 2077 4. "The Race to the Top" 2079 5. Long-run Impact on Innovation and Investment 2082 IV. EVALUATION 2084 A. The Competitiveness Impacts of National Differences in

      Environmental Regulation and Liability Rules 2084

    2. Reexamining U. S. Environmental Priorities and the Means for

      Achieving Them 2086 1. Environmental Contracting 2090 2. Market-based Incentives for Environmental Protection 2093 C. International Harmonization of Environmental Standards 2097 1. Justifications for Harmonization 2097 2. Precedents for International Harmonization 2100 3. Competitiveness Concerns as Impediments to

      International Agreement 2102 4. The Use of Economic Incentives in International Harmonization 2104 V. CONCLUSION: COMPETITIVENESS AS A POLITICAL HEURISTIC 2105 The world is simultaneously facing increasing economic interdependency and intensified demands for protecting the environment. The June 1992 United Nations Conference on Environment and Development (UNCED) in Rio(1) has stimulated awareness of the global character of many environmental problems and the impact of environmental regulation on economic growth.(2 At the same time, businesses and nations increasingly are concerned about their ability to compete in the international marketplace. Nations such as the U.S. that adopt stringent environmental protection measures fear that they will be disadvantaged in that competition. This Article examines the potential conflicts between environmental protection and international trade and competition and considers how they might be accommodated.

      The methodological premise of the Article is that nations are the primary actors in environmental policy. It is still premature to speak of a global political or social community. Nations are driven by economic self-interest and the search for strategic advantage in an international economy in which trade and capital mobility play an increasingly important role. It would, however, be wrong to focus solely on international competitiveness. National policies are also driven, in varying degrees, by environmental concerns. These concerns may include protection of the global ecosystem(3) and the well-being of future generations(4) as well as promotion of the local health and environmental concerns of present generations. Protecting the environment while meeting the worldwide demand for economic growth will in many instances require joint efforts among nations. The process of building these joint efforts will itself affect and perhaps strengthen national concerns with the global, long-run elements of environmental protection. Nevertheless, efforts to build cooperation must also deal with, and therefore require an understanding of, global economic rivalry and its impact on domestic and international politics.

      This Article argues that a nation's imposition of stringent environmental regulation and liability rules may harm its international competitiveness, even though most empirical studies have not established a strong causal association between the two. This threat is especially significant in the U.S., due to the exceptionally complex, burdensome and costly character of its regulatory and legal system. Focusing solely on competitiveness, however, is myopic. The contributions that a cleaner environment and resource conservation make to well-being must also be taken into account. What ultimately matters is the broad overall performance of the economy, including the environmental and health benefits generated by governmental programs for environmental protection. Issues of competitiveness and trade nonetheless have high political visibility, particularly when they are manifest in plant closings and relocations. The appropriate response to competitive concerns is not autarchy. The U.S. should not attempt to insulate itself by barring or imposing discriminatory duties on products from nations with less stringent standards. Rather, the solution is a combination of domestic policy changes to eliminate unnecessary regulatory and liability burdens, and international efforts to move toward partial harmonization of national environmental measures. These changes would also advance environmental objectives.

  2. INTRODUCTION: THE CONTEMPORARY DEBATE OVER TRADE, ENVIRONMENTAL MEASURES, AND COMPETITIVENES

    The accomplishments of the General Agreement on Tariffs and Trade (GATT) in lowering tariffs and other barriers to trade have helped create a global marketplace in goods and services. The GATT was adopted in 1947 in order to promote trade liberalization.(5) Trade advances global welfare by promoting specialization in accordance with comparative advantage, expanding opportunities to realize scale economies, tightening the discipline of competition, and stimulating wide dissemination of knowledge and technological innovation.(6) Empirical studies confirm that trade liberalization promotes economic growth; the liberalization spurred by GATT has been an important factor in global post-world War II prosperity.(7) As a result of these and other developments, investment capital has become internationally mobile. Multinational manufacturing companies seeking to cut costs in the "struggle for the world product"(8) have divided their operations into separate units: raw materials processing, manufacture of components, assembly, and distribution. On the basis of worldwide searches, they have sought to situate units in locations that will yield the lowest total production costs. Nations are struggling to attract investment and operations that will add value to their economies and strengthen their position in international trade.(9)

    In order to understand the relationship between these developments and governmental measures for environmental protection, one must distinguish between measures aimed at products and those aimed at processes. Examples of product measures include the regulation of pesticide residues in food, taxes on the lead content of fuels, and product liability rules. Examples of process measures include water pollution discharge regulation, mining reclamation laws, tradeable permit programs designed to limit sulfur emissions from utilities, and liability for hazardous waste damage and cleanup.(10)

    Distinguishing between the two is important for several reasons. First, the relationships among trade, competitiveness, and variations in national environmental measures are quite different in the two contexts. In the case of product regulation, a nation that adopts relatively stringent standards can prevent some of the adverse impacts on the competitiveness of its industry by restricting import competition. In the case of process standards, a nation with more stringent standards cannot unilaterally neutralize its industry's disadvantage in international competition. Second, it is inherently easier for nations to harmonize their product regulations than their process regulations, in part because nations have stronger economic incentives to do so, as will be argued in the following Section.

    1. Product Regulation

      Products trade in world markets. A nation that adopts comparatively stringent and costly product regulations can, however, prevent international competition from harming its industry by excluding or prohibiting the sale of noncomplying imports. Even if the same standards are applied to domestic and imported products, producers in nations with more stringent standards are likely to enjoy scale economies in complying with their nation's more stringent regulatory requirements and thus obtain a competitive advantage over importers.(11) For example, German producers have complained that Danish container recycling requirements undercut their ability to compete with Danish brewers in the Danish market.(12) To the extent that a global market for "green" products and technologies emerges, a nation that adopts stringent standards may also confer an eventual competitive advantage on its industry by giving it incentives to develop such technologies.(13) On the other hand, to the extent that other nations do not adopt stringent standards, that nation's industry may suffer a cost disadvantage in foreign markets.(14)

      In addition, facially nondiscriminatory product regulations are often designed in such a way as to give a competitive advantage to local firms. For example, the U.S. banned imports of Canadian lobsters that did not meet the minimum size requirements imposed on lobsters harvested in the U.S., despite evidence that Canadian lobsters are naturally smaller because Canadian waters are colder.(15) The disputes between the U.S. and the European Community (EC) over the U.S. ban on EC wine containing trace residues of...

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