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

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

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 ii)Composition – shift in consumption preferences towards cleaner goods iii)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 GATT Article 20 has trade excluded under certain circumstances relating to environmental reasons Shrimp-turtle case (GATT): India, Malaysia, Pakistan and Thailand vs USA 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. 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. CO 2 emissions Kyoto Accord was an effort to control CO2 emissions as they suffer from “transboundary externalities” US refused to sign Kyoto – why?

7. 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

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

9. Outsourcing What is it? What is it? It is where companies close down US parts of their business and locate that part of their business overseas 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 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 Could even affect US tax policy under Obama administration

10. Economic effects of outsourcing Case studies Case studies - credit card industry - credit card industry - support for electronics - support for electronics - publishing - publishing - software - software

11. Outsourcing Obviously certain factors drive offshoring abroad: educated but cheaper labor force, english language, time zone, lack of skilled labor in home country. 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. 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? 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) A: US$ exchange rate, time zone and overtime, language, increased quantity of labor required (lower productivity, more functions required)

12. 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 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 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! In theory should have same effect as migration of labor…except that the labor doesn’t relocate!