Environmental Risk and the World Economy

Health and the environment are no longer purely matters of domestic policy. In the 1980s air pollution, acid rain, and global warming became major items on the international agenda. That shift reflects growing recognition of the global impact of economic development and the rising problem of international "externalities," as hazards spill over national borders and affect the oceans, air, and climate.

But just as health risks flow through the world's physical environment, so they also flow through the world economy -- and threaten to disrupt it. Risk tends to move to countries with the least regulation, in some cases because the advanced economies are directly exporting to the less advanced various products and production methods no longer considered safe at home. Ironically, the higher the advanced countries set their regulatory standards, the more they create incentives for a kind of "environmental arbitrage," that is, for making a profit by producing goods cheaply where regulation is lax and selling them dearly where regulation is strict. Some regulatory differences exist among countries at the same stage of development, but in the world as a whole the flow of environmental and health risks runs from the advanced North to the developing nations of the South.

At the same time, growing consumer concerns about health in the advanced countries are prompting more attention to health hazards from imported products, particularly food. As a result, domestic agricultural interests and other producers seeking protection from foreign competition are finding a new source of support in the environmental and consumer movements. Import restrictions, when presented as a public health measure, gain a legitimacy that they might not otherwise enjoy.

Consider these developments, all during 1989.

  • On January 1, the European Community announced a ban on all beef imports from the United States containing hormones used to help increase cattle growth. Citing health risks, the Europeans touched off retaliation by the United States on $100 million of European imports. Last September the European Commission began discussing further import restrictions on cattle or dairy products produced with the bovine growth hormone BST. Although U.S. interests have offered to sell Europe hormone-free beef, the issue remains a source of trade tension.
  • In February a scare in the United States over grapes imported from Chile resulted in a temporary import ban on all Chilean fruit. About the same time, the Natural Resources Defense Council released a report citing significant health risks from Alar, a chemical used to prevent blemishes on apples. U.S. regulatory agencies may ultimately ban its use, but no controls are in force elsewhere.
  • In December, Senator Pete Wilson introduced federal legislation to ban exports of pesticides that are illegal in the United States. While he expressed concern over their health impact, Wilson's major point was the economic impact. Of course, unless other exporting nations also stopped such sales, the ban would have little effect on what Wilson referred to as "a competitive inequity between foreign and American farmers and growers."

These events underscore the new realities created by uneven environmental and health regulation. When nations exchange goods and services, they also trade environmental and health risks. These risks are the opposite of services -- they are environmental and health disservices traded across national borders.

This trade in disservices is an emerging source of tension in the world. The United States and other signatories to the General Agreement on Tariffs and Trade (GATT) are committed to pursuing more open borders in the ongoing Uruguay Round of trade negotiations. But as national health, safety, and environmental regulations grow in importance, different national regulatory priorities pose several related problems for trade and development. First, groups in some countries will seek to gain competitive advantage over foreign producers by opposing strong environmental regulation at home. Alternatively, other groups may try to use health risks as an excuse to keep out imported products. Producers may also try to export products that threaten the health of consumers in foreign countries. All such actions could do unnecessary harm to both environmental quality and world trade, unless we devise new international arrangements to resolve the problems.

Food Policy and Environmental Risk
Food policy is a natural meeting point for the issues of trade and the environment. Since World War 11, agriculture throughout the world has increasingly depended on chemicals and fertilizers. Their use has dramatically increased yields but has also created new environmental hazards. As in other areas, the differences between rich and poor nations create a two-tiered structure of regulation and an incentive to export restricted production methods from North to South.

An occasional environmental calamity highlights the pattern. In 1987, for example, tons of fertilizers and chemicals from the Sandoz chemical plant in Basel, Switzerland, spilled into the Rhine River, killing fish and aquatic life for hundreds of miles. But many of the toxic products spilled were not actually destined for Europe, where their use is restricted; they were being produced for export to developing countries.

The North-South gap in regulatory standards results in part from different values that rich and poor countries (or at least their governments) attach to food and environmental quality Low-income developing countries generally regard environmental quality and occupational health risks as concerns of the rich. The income levels of poor countries also generally do not permit as high a standard of environmental regulation as in the North. In agricultural policy, their chief concern is food supply. But as a nation's income increases, the share it spends on food declines. In North America and Western Europe, the "food problem" arises not from too little food, but generally from too much. In contrast, as income rises, environmental quality and health become more insistent public concerns.

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The transfer of agricultural technology to the developing nations illustrates the changing distribution of environmental risk. In the early postwar decades, the production and use of pesticides and related chemicals grew sharply in the United States. For example, application rates for corn which now receives the highest levels of pesticide treatment, increased from 1.2 to 3.1 pounds per acre between 1966 and 1982. However, the reaction against the use of pesticides also increased during the same period. In 1972 the United States banned the insecticide DDT, developed during World War II to control the spread of malaria, typhus, and other insect-borne diseases. Yet DDT continues to be widely available in the Third World.

Economic pressures have also encouraged the makers of agricultural chemicals to seek markets abroad. In the 1980s, as farm financial conditions deteriorated in the United States, domestic pesticide sales fell. Softening demand and falling margins stimulated a search for foreign marketing opportunities. In 1965 the American pesticide industry exported one fourth of its total sales value; by 1986 it exported one third. High fixed costs in the United States, due partly to research and development expenses and environmental regulations, have encouraged firms to expand sales abroad in search of long-term markets.

The increased use of fertilizers and chemicals has had environmental costs. For example, according to a study by Robert Repetto of the World Resources Institute, the rapid increase in rice production in Indonesia -- 5 percent a year between 1968 and 1984 -- has resulted in water pollution, destruction of breeding habitats for coastal fish populations, and the elimination of natural predators. These effects have led in turn to insect infestations and subsequent overapplication of pesticides, at levels which have actually harmed crop harvests.

While bringing new environmental hazards, agricultural chemicals have been highly beneficial. Indonesia now exports rice instead of importing it. If pesticides and fertilizers were not available to raise the food supply, billions of people would be both poorer and more hungry than they are today. Fertilizer use, which increased tenfold in developing countries over the 25 years beginning in 1961, is "possibly the most potent single factor in raising productivity," according to the U.N. Food and Agriculture Organization.

The aim of policy, therefore, should not be to ban these chemicals, but to encourage knowledgeable and responsible use. Traditional farmers in developing countries, however, often lack the information to use modem fertilizers and pesticides safely and effectively. While agricultural chemicals are aggressively marketed and subsidized, farm-level education, including basic literacy necessary to read instructions, seldom receives comparable attention. High levels of human poisoning in developing countries due to overapplication of pesticides are common. For example, per capita pesticide poisonings in Central America are 1,800 times higher than in the United States, according to Jeffrey Leonard of the Conservation Foundation.

In the United States, critics of current agricultural methods worry not only that agricultural chemicals may harm consumers and farm workers. They also argue that current agricultural patterns are not sustainable. Sustainable agriculture, often described as an idea in search of a definition, generally refers to models of agriculture that are biologically, economically, and politically viable over generations. The long-term interest of agriculture itself suffers when fertilizers, pesticides, and herbicides are applied at levels that exceed the best management practices, contaminating soil and water. Nor are crop rotations sustainable that lead to wind and water erosion or deplete fertility Equally ill-conceived are government policies promoting these practices.

Some advocates of "sustainable agriculture" would like to take American agriculture entirely out of the export market by imposing mandatory supply controls and raising prices. Yet the environmental implications of these policies are far from clear: mandatory controls and high prices would raise the intensity of cropping on acres left in production, increasing environmental damage. And wholesale acreage retirement would drastically reduce rural employment. Thus many advocates of sustainable agriculture oppose these policies.

Despite these tensions, sustainable agriculture is a social movement of considerable force. In its most extreme versions, it calls for a "return to Eden" in the tradition of American utopian movements, led by a spiritual faction set in direct opposition to the scientific and management culture of the university and business sector. However, there is a middle ground.

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Both environmental quality and export competitiveness are consensus objectives, and they are not necessarily incompatible. One key step is to reform agricultural price-support policies that encourage unsustainable practices. For example, under current policy, the federal government pays well above the market price for corn compared with soybeans, so farmers are naturally inclined to plant corn, a highly erosive crop. As a result, U.S. soybean exports have steadily fallen. Since government price supports encourage continuous cropping, farmers forego more traditional rotations with other crops. And because government payments until recently were based on a farm's or a county's average yields, farmers raised yields to levels that market forces would not have produced. Thus by distorting all three basic judgments -- what to plant, how often to plant in rotation with other crops, and how far to push yields -- federal policy seems to have damaged both environmental quality and trade competitiveness. An alternative program would not only change these incentives; it would involve a broad program of environmental affirmative action so that farmers benefit from protecting fragile lands and avoiding harmful cultivation practices.

The Impact on Trade Policy
Environmental and health concerns are a two-edged sword from the standpoint of domestic agricultural interests. On the one hand, U.S. producers fear that environmental regulations might put them at a competitive disadvantage with farmers and growers abroad. On the other hand, if higher regulatory standards are enacted at home but not abroad, farmers may gain an argument for protection from foreign imports produced under more lax standards. The consumer and environmental movements might then enlarge the constituency for nontariff barriers to trade, justified in the name of health and safety. That has already happened in Europe. It is doubtful that beef producers in the European Community could have blocked competitive U.S. imports without the support of a vocal, health-oriented consumer constituency.

A clear set of policy responses will require the coordination of domestic environmental and trade policies. Seymour J. Rubin, writing nearly a decade ago, called for standards to clarify when domestic environmental policies act as "unnecessary obstacles to international trade." The U.N. Food and Agriculture Organization has sought to develop a comprehensive code of rules for food and agricultural health and safety A special technical working group at the GATT Secretariat in Geneva is attempting to use this "Codex Alimentarius" as the basis for harmonizing member countries' regulations. But only a few standards have been agreed upon, and none are binding in law.

Given the complexity of formulating international policies, some call for loosening the environmental regulatory constraints affecting American industry. That, however, would be bad policy, inconsistent with the value that Americans attach to the environment and health. At home and internationally, environmental standards need to be strengthened, country by country, as well as through international conventions such as the recent agreement by seventy nations in November 1989 to reduce C02 emissions contributing to global climate change. Sadly, despite the supposed commitment of the administration to environmental reforms, neither the United States nor Japan agreed to sign the convention, even though it merely set goals, not standards. While nations can act unilaterally, the role of multilateral institutions, such as the World Bank, the OECD, and U.N. agencies, will be crucial to prevent environmental beggar-thy-neighbor policies, in which countries seek trade advantages by maintaining weak health standards.

The key is to recognize the inherently international character of environmental quality and health, but to design standards that are sensitive to the different ways in which nations may wish to balance these concerns with global competitiveness. To the extent that consumers and farmers in developing nations can make informed judgments about the use of agricultural products, and such use affects their citizens only, international standards need not be wholly uniform. In The Economics of New Technology in Developing Countries, Jeffrey James argues that while developing nations should improve health and environmental regulation, they may find intermediate standards, like intermediate technology, to be more appropriate. However, where their use of agricultural products affects other nations either through pollution or trade more uniform standards will be needed.

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Only the force of international standards defining the duties of nations, corporations, and individuals can hope to resolve these difficult issues. The United States ought to take the lead in multilateral institutions to coordinate these efforts. A first condition for success is a broad-based effort from the agencies of the U. N., OECD, the GATT, and the World Bank, which already have considerable expertise. We should also pursue an international accord on environmental and health regulations, similar in nature to the 1988 Montreal Protocol. Under the protocol, forty nations agreed to reduce emissions shown harmful to the ozone layer. While enforcing such international agreements is always difficult, they tend to establish a code of conduct that assists in bringing moral suasion to bear on countries that fail to live up to international standards. Without such agreements, some groups will continue to pursue protectionist measures in the guise of public health, while others will advocate loosening standards of environmental quality in the name of greater competitiveness. To avoid that outcome, we need a framework of policy that safeguards both global trade and the global environment.

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A different version of this article, written with Richard Nolan, appears as "Trade in Disservices: Environmental Regulation and Agricultural Trade," in Food Policy (London), February, 1990. A chapter on the same theme appears in Agriculture and Water Quality: International Perspectives, eds. John B. Braden and Stephen B. Lovejoy (Lynne Riener, 1990).

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