1. ECON3315 International Economic Issues
Instructor: Patrick M. Crowley
Issue 5: Trade, the environment and outsourcing

2. Overview Environment and trade
Some cases of environmental concerns in trade decisions
WTO and the environment
A race to the bottom?
Case studies
Outsourcing: what is it?
Who does it?

3. Environment and trade
Trade and environmental concerns are inevitably linked
Kuznets curve – U-shaped
Environmental worsens as GDP per capita increases, and then improves beyond a certain point
3 effects with increased trade:
i) Technique – better practices with globalization as technology transfers to poorer nations
Composition – shift in consumption preferences towards cleaner goods
Scale – expansion in activity with development leads to degradation of environment
Argument is that i) and ii) will eventually outweigh iii)
Where is China right now?
Trade and Environment Committee in WTO does study these issues

4. Trade-environmental cases: I
GATT Article 20 has trade excluded under certain circumstances relating to environmental reasons
Shrimp-turtle case (GATT): India, Malaysia, Pakistan and Thailand vs USA
- US Endangered Species Act (1973) protects turtles as endangered species
- US requires turtle excluder devices (TEDs) when shrimp fishing
- US lost case because it discriminated against certain countries, giving Caribbean countries loans to buy TEDs

5. Trade-environmental cases: II
In Eastern pacific, yellow-fin tuna often swim underneath dolphins
In fishing for tuna, dolphins are often also trapped in the nets – particularly when using "purse seine" fishing methods.
US Marine Mammal Protection Act (1988) does not allow US to import tuna from countries or intermediaries that cannot prove that they follow the same rules as the US
Mexico appealed against ban of imports of tuna by US to GATT (1991)
Mexico won, but only because of “extra-territoriality” – US not allowed to impose it’s environmental laws on other countries
It can make sure that “Dolphin-friendly” labelling appears when non- “purse seine” fishing methods employed

6. Trade-environmental case: III
Chrysotile asbestos is generally considered to be a highly toxic material, exposure to which poses significant threats to human health (such as asbestosis, lung cancer and mesothelioma).
However, due to certain qualities (such as resistance to very high temperature), chrysotile asbestos has been widely used in various industrial sectors.
To control the health risks associated with asbestos, the French Government, which had previously been an importer of large quantities of chrysotile asbestos, imposed a ban on the substance as well as on products that contained it.
EU justified ban on basis that asbestos was damaging to workers and to the population as a whole

7. Trade-environmental case: III
Canada claimed that the Decree violated GATT Articles III:4 and XI, and Articles 2.1, 2.2, 2.4 and 2.8 of the TBT Agreement.
Canada argued that a distinction should be made between chrysotile fibres and chrysotile encapsulated in a cement matrix. The latter, it argued, prevented release of fibres and did not endanger human health. 
Despite finding a violation of Article III, the Panel ruled in favour of the EU. Under Article III (which requires countries to grant equivalent treatment to like products) the Panel found that the EU ban constituted a violation since asbestos and asbestos substitutes had to be considered “like products” within the meaning of that Article.
Panel found that the French ban could be justified under Article XX(b). In other words, the measure could be regarded as one which was “necessary to protect animal, human, plant life or health.” 

8. The WTO and the environment
Problems with trade and environmental issues:
Environmental issues have “transboundary externalities”
Environmentalists seen as “closet” protectionists by many economists
Bhagwati (1999) makes the point that WTO should deal with trade issues, and environmental policies should be dealt with elsewhere or in separate international agreement
Kuznet’s curve doesn’t work for some forms of environmental degradation: e.g. CO2 emissions
Kyoto Accord was an effort to control CO2 emissions as they suffer from “transboundary externalities”
US refused to sign Kyoto – why?

9. A race to the bottom?
Economists dismiss the argument that different levels of environmental protection promote a “race to the bottom”: whole point of comparative advantage
But as environmental issues are transboundary, bound to eventually be harmonizing effect – but when?
US environmental standards certainly did not drop after WTO or NAFTA were introduced
But in real world developing countries often have weak regulatory bodies, which might not have capacity or ability to properly regulate

10. Suggestions for WTO reform
Distinguish between product standards and production process
No free-riding on global environmental commitments
Allow protections for environmental reasons if justifiable
Blend environmental concerns into the GATT agreements

11. Outsourcing
What is it?
It is where companies close down US parts of their business and locate that part of their business overseas
Outsourcing has become a very controversial topic – raised by US politicians of all stripes as a concern
Could even affect US tax policy under Obama administration

12. Economic effects of outsourcing
Case studies
- credit card industry
- support for electronics
- publishing
- software
Offshoring vs Onshoring

13. Outsourcing
Obviously certain factors drive offshoring abroad: educated but cheaper labor force, english language, time zone, lack of skilled labor in home country.
Numerous surveys indicate that anywhere between 17 percent and 53 percent of customers have not realized business value/return on investment from offshore outsourcing.
So in some cases savings have been underestimated from offshoring – Q: but why?
A: US$ exchange rate, time zone and overtime, language, increased quantity of labor required (lower productivity, more functions required)

14. Economic effects of outsourcing
In country that receives outsourcing, demand for labor increases, increasing wages in those sectors, and thereby changing relative wages
In country that outsources, demand for labor falls in that sector, lowering wages, and also changing relative wages.
In theory should have same effect as migration of labor…except that the labor doesn’t relocate!