Environmental and Natural Resource Economics 3rd ed. Jonathan M Environmental and Natural Resource Economics 3rd ed. Jonathan M. Harris and Brian Roach Chapter 20 – World Trade and the Environment Copyright © 2013 Jonathan M. Harris

Figure 20.1: Gains and Losses from Importing Automobiles Price Domestic Supply P* A B Pw Standard trade theory suggests that there are net gains to both trading nations in a 2-nation model (and by extension to all trading nations in a multinational trading situation). Domestic producers of automobiles lose area A, since they are forced to compete with lower world prices (Pw) as compared to the domestic price P*, and also because they lose market share Q* - Q1 to imports. But domestic consumers gain areas A + B because they can afford more cars at lower prices. Thus there is a net national gain equal to area B. For an exporting country (not shown), domestic consumers lose because export demand drives up prices, but by a similar logic domestic producers gain a larger amount than domestic consumers lose. Domestic Demand Q1 Q* Q2 Quantity of Automobiles

Figure 20.2: Environmental Impacts of Importing Automobiles Price S’ Social Costs: Private + External S Private Costs of Supply C P* A B The addition of environmental effects complicates the pure theory of trade. In addition to the gains and losses to consumers and producers, there are also environmental gains and losses associated with trade. In this graph, the environmental costs associated with producing automobiles are partly shifted from the importing to the exporting country (area C). But the importing country gets increased environmental externalities associated with the consumption of automobiles, such as increased pollution and congestion (area F). These environmental gains and losses need to be weighed against the ordinary gains from trade. A further complication is that some of the environmental effects may be transboundary or global in nature, such as carbon emissions or water use when rivers cross national boundaries. Pw F D Demand D’ True MB Q1 Q* Q2 Quantity of Automobiles

Figure 20.3: Gains and Losses from Exporting Timber Price S’ Social Costs: Private + External S Private Costs of Supply C’ Pw B’ A’ P* This diagram shows the effects of trade from the point of view of an exporting country. The export of timber brings the usual national net benefits (B’), since domestic consumers lose A’ due to higher timber prices, but domestic producers gain A’ + B’ due to increased export revenues. But there are also environmental costs associated with the production of timber, which could include damage to watersheds, species loss, and degradation of soils through erosion, as well as global impacts such as net carbon release. If these environmental damages (C’) are large, they might outweigh the gains from trade. D Demand Q1 Q* Q2 Quantity of Timber

Figure 20.4: Carbon Flows in International Trade 112 52 81 297 16 23 16 139 185 16 48 48 67 61 26 43 395 Trade shifts the pattern of carbon emissions, with significant amounts of “exported pollution” – carbon emissions associated with production of imported goods. Goods produced for export in China and other countries of the global “South”, and consumed in the United States, Japan, and Europe (the global “North”), create millions of metric tons of carbon emissions. It seems that the responsibility for these emissions should lie with those who consume the goods, rather than with those who produce them. Source: Davis and Caldeira, 2010. Note: Figures are in million metric tons of CO2/year). Carbon flows to and from Western Europe are aggregated to include the United Kingdom, France, Germany, Switzerland, Italy, Spain, Luxembourg, the Netherlands, and Sweden.