Memorandum submitted by Professor Eric
Globalisation has many facets. Most people have
economic aspects in mind when they talk about globalisation, particularly
the increased openness of countries to foreign trade (both imports
and exports) and foreign investment (both inward and outward).
I will concentrate on these, giving only brief thought to the
political dimension of globalisation (policy convergence, spread
of multilateral environmental agreements, concerted action by
civil society groups).
Environmentalists are mainly concerned about
two issues related to investment and environment: pollution havens
and regulatory chill.
Public opinion seems to have it that any country
with less strict environmental standards than one's own country
is guilty of providing a pollution haven. But such a definition
would be misleading as countries cannot, in general, be expected
to have the same environmental standards all over the worldindependently
of whether or not they want to attract foreign capital. What is
clear is that countries are guilty of providing pollution havens
if they either deliberately set inefficiently low environmental
standards in order to attract foreign capital or set efficient
standards, but fail to enforce them. (Loosely speaking, efficient
environmental standards are those in accordance with the preferences
of people living in a country.) There are several reasons why,
on average, this may be the case in some, particularly developing,
First, pollution beneficiaries can influence
the political process and will be able to do so the more undemocratic
the country. All developed countries are democracies, whereas
many developing countries are not. Second, if the political system
is characterised by corruption and is easily amenable to manipulation
by powerful and wealthy special interest groups, then the beneficiaries
of pollution are likely to be more influential than the comparatively
less wealthy environmental pressure or consumer groups. On average,
developing countries are more corrupt than developed ones. Third,
bias against environmental preferences can stem from political-institutional
failure of a country. There is evidence that a country's overall
institutional environmental performance as measured by environmental
awareness, scope of policies adopted, scope of legislation enacted,
control mechanisms in place and the degree of success in implementation
is positively correlated with its income per capita and the development
of its legal and regulatory system.
Surprisingly, despite the expectation that pollution
havens should be a widespread phenomenon, there is very limited
empirical evidence that they are. Why? Possible reasons include:
1. Some of the dirtiest industries cannot
migrate as they are dependent on being close to their consumer
markets, for example, electricity generation.
2. The costs of environmental compliance
might be too low to play a significant role in investment decisions.
Potential environmental cost savings might very well be too small
to induce foreign investors to move to pollution havens for two
reasons. First, because migration itself is costly because of
dismantling, transportation and new establishment costs. This
applies much less to new investment, however. Second, because
the recipient country might have disadvantages in other respects,
for example, poor infrastructure, political instability, badly
trained workforce and so on. Doing business carries many more
risks in developing as opposed to developed countries. However,
there are two caveats to keep in mind. First, how high pollution
abatement expenditures are varies substantially from sector to
sector. Second, should environmental compliance costs in high
standards countries rise further in the future, then things could
dramatically change from what they were before.
3. Even where environmental compliance costs
are significant, international investors might not be deterred,
as long as the environmental standards provide clear and reliable
rules that apply equally to everybody. What investors dislike
most is uncertainty about the future and unreliability of policy
4. Rational forward looking investors might
anticipate that environmental standards in currently low standards
countries might very well increase over time.
5. If MNCs have similar plants in both high
standards and low standards countries, then it might be cheaper
to install the same pollution abatement technology as in the high
standards countries everywhere.
6. Foreign investors might fear for their
international reputation if they are perceived as cenvironmental
villains exploiting low standards in developing countries. In
investing in these countries, it might therefore be worth while
to voluntarily exceed local environmental standards.
There are several policy options for dealing
with the elusive phenomenon of (potential) pollution havens: Harmonization
of environmental standards; minimum environmental standards; enforcement
agreements; trade and capital restrictions; eco-labels; non-binding
declarations; assistance for political-institutional capacity-building
and local empowerment. Judged against a set of criteria (measures
should be effective, politically realistic, development friendly,
closed to abuse and not unnecessarily restrictive), Neumayer (2001:
56-66) argues that efforts at promoting capacity-building and
local empowerment come on top.
If policy makers in developed countries fear
that high environmental standards will induce internationally
mobile capital to move to low standards countries then they might
themselves lower their standards to keep this capital orperhaps
more realisticallyat least fail to raise environmental
standards by as much as they would otherwise do over time. This
is the "regulatory chill"hypothesis: developed
countries fail to raise standards over time because of feared
capital flight. Four points to note:
1. For the "regulatory chill"-hypothesis
to hold it does not matter whether pollution havens in developing
countries are real phenomena. It is sufficient that policy makers
in developed countries believe that pollution havens exist
to potentially scare them away from raising environmental standardsand
in spite of its shaky evidence they actually do seem to believe
in pollution havens.
2. Policy makers in developed countries might
see capital flight into other developed countries to be the much
more relevant danger. Therefore they might fail to raise environmental
standards if other developed countries do not also raise environmental
3. One would expect "regulatory chill"
to be more prevalent with respect to environmental standards concerning
pollutants affecting the so-called global commons, such as the
global climate, the ozone layer, and biodiversity.
4. Because the hypothesis refers to the absence
of something that would otherwise have happened (namely, the raising
of environmental standards) it makes in effect a counter-factual
claim for which systematic statistical evidence is, almost by
definition, difficult, if not impossible, to gather. There is
anecdotal evidence, however, that regulatory chill prevents policy
makers from taking more decisive action against climate change.
There are several policy options for dealing
with (potential) regulatory chill problems: Harmonization of environmental
standards; minimum environmental standards; enforcement agreements;
multilateral trade restrictions; border tax adjustements; subsidies.
On the basis of the same set of criteria as introduced above regarding
pollution havens, Neumayer (2001: 72-78) argues that no policy
option comes out clearly on top, but harmonization and multilateral
trade sanctions are relatively preferred.
Environmentalists are mainly concerned about
two points with respect to the links between trade and the environment.
The first one is that trade liberalisation might lead to an increase
in environmental degradation if strong environmental policies
are not in place. The second one is that the multilateral trade
regime is insensitive to environmental concerns and makes the
enactment of strong environmental policies impossible as they
would clash with countries' obligations under the multilateral
Trade liberalisation and the environment
Both theoretical reasoning and empirical evidence
show that trade liberalisation can lead to a global increase in
resource depletion and to a global increase in environmental pollution.
These effects are more likely to occur and are more likely to
be stronger if property rights over resources are ill defined
and if the environment is not optimally managed (ie standards
are inefficient or efficient, but not enforced). There is ample
evidence that, especially in many developing, but also in developed
countries, environmental management is non-optimal and property
rights over natural resources are ill defined. As concerns the
so-called global commons (for example, the climate), property
rights are practically non-existent and open access prevails leading
to excessive resource depletion and pollution. In sum, trade liberalisation
can indeed exacerbate the existing high levels of environmental
The World Trade Organisation (WTO) and the environment
The WTO has done much less to hinder or damage
environmental protection policies than its critics believe. WTO
jurisprudence has become increasingly environmentally friendly
1. The WTO agreements put few restrictions
on environmental regulation of consumption externalities, which
refer to damage to the environment or human health connected to
the consumption of goods. The one important exception is if the
damage is highly uncertain and somewhat speculative. Otherwise
as long as these restrictions are applied fairly, even-handedly
and without discrimination against foreign producers, they are
compatible with WTO agreements even if they completely ban a certain
product. Where WTO disputes have decided against measures aimed
at consumption-externalities, this has been because the measures
served more to protect domestic industries than the environment.
2. Production externalities refer to damage
to the environment or human health connected to the production
of goods. Panels used to decide against regulations aimed at so-called
process and production methods (PPMs) outside the regulating
country's own proper jurisdiction. The latest jurisprudence changed
things fundamentally, however, in ruling that regulations aimed
at PPMs in foreign countries need not necessarily violate WTO
rules as long as the country imposing the restrictions has undertaken
good-faith efforts at reaching a multilateral agreement, has applied
the restrictions in a fair, non-arbitrary and non-discriminatory
manner, giving affected countries some flexibility in how to achieve
the aim of natural resource protection.
3. WTO rules have so far not hindered, let
alone blocked, any multilateral environmental agreement (MEA).
4. Where trade exacerbates environmental
degradation, the fault lies with non-existing or insufficiently
ambitious environmental protection measures. However, the WTO
cannot be blamed for this. Much of the anger and frustration of
environmentalists is wrongly channelled at the WTO and its representatives,
whereas policy makers in the WTO member countries are truly to
5. Two valid criticisms raised against the
WTO is that it currently does little to actually promote environmental
protection and that it fails to adequately integrate the precautionary
principle into its agreements. This is unlikely to change due
to political resistance by developing countries and the United
Non-economic aspects of globalisation have typically
received less attention, despite the fact that many of these are
likely to have a positive impact on the environment. There is,
for example, policy convergence typically toward the better practice
types as policy makers find it easier to learn from the experience
of other countries. There is a trend toward dealing with international
environmental problem with the help of multilateral environmental
agreements, even though their effectiveness is somewhat questionable.
Lastly, civil society groups can communicate and co-operate with
each other, thus exerting concerted pressure on policy makers
and business groups. Arguably, civil society pressure has had
a major impact on the WTO's willingness to take environmental
considerations more seriously.
Eric Neumayer (2001): Greening Trade and
Investment: Environmental Protection without Protectionism.