TCS Daily

Bottom Feeders

By Pete Geddes - December 1, 2003 12:00 AM

Protesters were drawn to Miami late last month as negotiators worked on the Free Trade Area of the Americas pact. One of the protestors' concerns is that free trade is creating a "race to the bottom" in which developing countries lower their environmental standards to attract international business. But their fears are misplaced. Here's why.

At first blush, the race-to-the-bottom argument appears compelling. It claims that in the intense competition for foreign investment, developing nations will seek to entice industry by lowering their domestic environmental standards. Corporations can then "bid" for locations with the most relaxed standards, causing developing countries to become "pollution havens."

The only trouble with this theory is that the data refute it. All the empirical research to date has failed to find a meaningful correlation between the location decisions of firms and the environmental standards of host countries.

If the race to the bottom were actually happening, countries with low environmental standards would be attracting more foreign investment than those with higher standards. But we find just the opposite. Nations with the highest environmental standards, as measured by the World Economic Forum's 2001 Environmental Sustainability Index, attracted the most investment. In fact, the large majority of international trade flows among the world's advanced, high-standard economies.

Why don't corporations flee the developed world for poorer countries with lower standards? Because the cost of compliance with environmental standards -- even the most stringent -- is only a tiny portion of the total cost of doing business (typically around 2 percent for more pollution-intensive industries in developed countries).

Decisions to relocate based upon the potential savings from lowered environmental regulations are frequently offset by the increased risks of political instability, poor infrastructure, and weak enforcement of contracts and property rights.

Trade is actually good for the environment. Trade allows countries to attain goods they find hard to produce. This includes environmental protection. Social and environmental awareness travels just as commodities do. Thus, trade can lead to increased environmental consciousness. It fosters the adoption of environmental standards at ever faster rates.

But the greatest benefit of open trade is wealth creation. Once per-capita incomes cover the basics (e.g., food and shelter), the demand for environmental quality grows. Hungry folks don't have the luxury of investing in the preservation of endangered songbirds.

This explains why nations that are open to the global economy enjoy the highest incomes and also the highest levels of environmental quality. North Americans worry about minute levels of pesticide residues on vegetables, while the developing world seeks access to safe drinking water. They want alternatives to the horribly unhealthy cow dung used for cooking and heating fuel.

Embracing open trade allows developing countries to bypass dirtier phases of development. A World Bank study on globalization concluded, "[I]t is striking that many developing countries have already turned or are turning the corner in the fight against pollution at much lower levels of income than the rich countries did in their day."

A recent paper from the National Bureau of Economic Research, reinforces this reality, but adds an important caveat.

"As real incomes rise, demand for environmental quality rises. This translates into environmental progress under the right conditions -- democracy, effective regulation, and externalities that are largely confined within national borders and are therefore amenable to national regulation. Increasingly, however, environmental problems spill across borders. Global externalities include climate change and ozone depletion. Economic growth alone will not address such problems, in a system where each country acts individually...."

There is a close relationship between poverty and environmental degradation. And there's been real progress made debunking the persistent and fundamental error that modernization and affluence are the root causes of environmental problems.

Pew Center for the People and the Press recently surveyed 38,000 people in 44 nations, many in the developing world. The survey found that enthusiasm for foreign trade and investment was greater in developing countries than in rich ones. For example, in Sub-Saharan Africa, 75 percent of households thought multinational corporations had a positive influence on their country, compared to only 54 percent in rich countries.

The anti-globalization protesters carrying Nokia cell phones, wearing Nike sneakers, and smoking Marlboro cigarettes are hypocrites. Their incoherent utopian fantasies must be confronted, for the facts clearly refute their arguments.

Pete Geddes is Program Director of the Foundation for Research on Economics and the Environment (FREE) and
Gallatin Writers. Both are based in Bozeman, Montana.


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