Pollution Control and the Pattern of Trade

Germany and the United States

Sezai Demiral

• Publisher: Taylor & Francis
• Year: 2017
• eBook ISBN: 9781351587105
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This title, first published in 1990, is intended to assess the impact of national environmental control policies on international trade and competitiveness in general, and, in particular, the impact of differential environmental control policies on the international trade and competiveness of the two industrialized nations, Germany and the United States. To assess the impact of differential environmental control policies on trade, this study applies a comparative analysis of the two countries.

CHAPTER I

INTRODUCTION

Development in Environmental Control

The problem of pollution or environmental deterioration is not new, but the necessity to take appropriate measures against pollution and for preservation of natural resources has gained momentum since the late sixties. Until the 1960s, degraded conditions of environment went comparatively unnoticed by much of the population. Since then, public interest in environmental deterioration increased, and the discussion of environmental problems, especially in industrialized countries, generated a certain “environmental consciousness” in all segments of the society. During the early 1970s, this concern over environment was running especially high, and a wide-spread concern for environmental quality developed. Governments and all levels of administrative authorities in advanced countries faced with pressure to take effective measures to control pollution and tc improve environmental quality. Environmental protection thus became a major socio-economic concern of government, industry and the public.

The general public, political organizations and industries made efforts to understand and to solve environmental problems. Policy studies and analyses were conducted at different levels to provide alternative strategies for dealing with the problem of pollution that affects the quality of life. The governments of most developed countries in recognizing the significance of environmental despoilation among other determinants of social welfare have searched for solutions to minimize the level of pollution (externality) and distribute the social cost of these externalities.

For this purpose, in many countries, environmental protection has been embodied in laws, regulations, and governmental organizations. Today, a number of countries such as Belgium, France, Germany, Great Britain, Japan, Sweden and the United States among others have already set up a principal environmental agency and established a national environmental control policy. As a result, in order to internalize environmental externalities, nations have utilized one or a combination of several remedial-policy instruments which include voluntary agreements, tax-subsidy solution, prohibition and imposition of governmental regulations.

However, dealing with environmental control is a complex and difficult task. As the term “environment” involves many special fields (water, air, waste, radiation and urban renewal), so does the environmental control (EC). Its comprehensive character makes it to coordinate a variety of special activities. Indeed, one of the essential problems of our environmental control policy is to apply an appropriate approach of effective coordination and cooperation, within the nation and among the nations, because, whatever the policy tool is chosen, it involves some social and economic effects reflected in prices of goods and services, on returns for production factors, and at the level of national output and employment.

Economic Implications of Environmental Control

The limited capacity of our environment to assimilate pollutants serves as a productive resource similar to other resources, but unlike labor and capital, it represents an immobile supply factor.¹ Hence, economic activities at national and international level, on one hand, are influenced by environmental assimilative capacity and pollution which reflects the degree of utilization of this immobile supply factor. On the other hand, these economic activities are also influenced by national EC policies which aim at the reduced pollution or the efficient utilization of the environment. Indeed, while pollution is a by-product of production, consumption or both, implementation of an EC policy also produces consequences (by-products) and affects the various segments of economies. It may influence the composition of production, consumption, level of national output and employment, distribution of income, allocation of resources, and the competitive position of industries and countries.

Since some resources will be shifted to environmental control, level of GNP, capital formation, employment, and the general price level may differ from what they might have been without an environmental control policy. Thus, implementation of an environmental control policy may produce a variety of interrelated economic effects in various sectors. The magnitude of these effects however will be determined by (1) the stringency level, and enforcement of EC regulations, (2) the method of financing EC, and (3) whether or not the patterns of production and consumption are toward more pollution-intensive goods.

In the short term, environmental control policy will have an immediate effect on the cost structure of industrial production. The production cost will increase partly as a result of environmental control efforts undertaken by an individual firm or industry (direct effect) and partly because of its inputs which will carry the environmental control costs of other firms or industries (indirect effect). Therefore, the more polluting the industry or firm, the higher will be its EC costs.

Naturally, the increased costs of a firm resulting from EC will be passed on to consumers because pollution control costs are translated into changes in consumption expenditures by various income groups. However, a firm’s ability to do so is limited to the firm’s strategic position in the market, profit margin, and demand and supply conditions. Furthermore, firms and industries whose prices rise because of EC may lose out in competition with less polluting and lower priced products. However, in medium and long-term, firms affected by EC will try to economize on EC borne costs. Thus, depending on the immediate direct effect and the substitutability of production factors, EC may lead to the introduction of new technologies.²

Moreover, changes in price system including fiscal charges may affect sectoral structure of final demand for final goods and for investment. Specific industries like electric utilities may face serious capital shortages, and the investment required for EC may displace investments to expand or to modernize production. If such displacements are widespread, the productivity may fall since the firms will be employing less efficient equipment. This low growth in production may slow down the national economic growth. Thus, a change in levels of production and employment will follow the restructuring of the final demand and industrial cost systems, because a rise in prices and consequent loss in real purchasing power would lead to a reduction in national expenditures available for consumption and to a long-term reduction in industrial output. In essence, environmental control is not opposed to economic development, but it influences economic growth by imposing certain limits on it and making certain structural changes.³

In brief, EC efforts will have both favorable and unfavorable effects on the economy. EC financed either by industry or by government will reduce the real disposable incomes of the private sector. An important macroeconomic impact from this resource shift will be some inflationary effect resulting from either demand pressure or from higher costs, i.e., no matter how EC policy is implemented, a general price-level increase will occur.

However, from the welfare point of view, this price increase derived from environmental control efforts may not be considered an actual inflation, because the buyer is receiving a higher quality of environment than otherwise. The price differential may be considered as a payment for ‘quality improvement.’⁴ Nevertheless, whether the price differential is considered as an inflationary increase or a payment for quality improvement, EC efforts will raise the production costs of goods and services, and affect the competitive positions of industries in national and international markets.

Indeed, with respect to international relations and international economics, the significance of EC policies is broader than just raising the cost of goods and services produced. Because of differences in cultures, tastes, income levels, and environmental assimilative capacity, national priorities differ among countries. In addition, EC is primarily a normative concept and the pollution control standards have a “moving target” nature. Hence, at the international level, EC involves greater uncertainty which exists both in the establishment and implementation stages of environmental standards. Furthermore, there may be differences in timing and intensity in environmental control policies. Consequently, intercountry differences in EC policies arise, and it is difficult to obtain an international harmonization of environmental control standards. Although efforts to co-ordinate EC policies are in progress, it is very unlikely that these differences among countries will vanish in the near future, especially in the case of developed and developing nations.

The presence of these differences in national EC efforts has great significance for international economics because divergent EC policies may affect the volume, direction and commodity content of trade flows. The terms of trade, the balance of payments, exchange rates, the comparative advantage and economic structures of nations might be influenced as well as international specialization, international investment and capital flows.

Moreover, as differential EC policies will influence the economic structure, international trade and commercial policies of the countries, their impact will depend largely upon the degree of international uniformity applied. The extent of this impact will be limited to intercountry differences in (1) degree of stringency of standards applied and their enforcement, (2) induced uncertainties, (3) magnitude of EC costs, (4) industry and trade structure, (5) timing, and (6) relevant elasticities of traded goods. Consequently, international economic impact of EC will vary among the countries. However, as this study will try to demonstrate, the magnitude of this impact will be influenced by different economic and trade structures of the countries.

Objective of the Study

As discussed above, international relations and international trade are affected by different EC policies and methods of enforcement adopted by countries. In addition, for the policy—makers, it is essential to have sufficient knowledge of the overall actual or potential impact of environmental control on individual industries and countries regarding international trade and competitiveness. Therefore, governments, as well as business sectors, need to have more information about the way environmental control policies influence the domestic and international markets. Indeed, this is a matter of importance, especially for countries with large trade sectors.

At present, our knowledge of the implications of differential EC policies and EC costs for international trade and competitiveness is limited. Some studies have identified the expected direction of changes in aggregate trade flows, yet, the area is still open for further research, especially in evaluating the competitive impact of environmental control.

The purpose of this study, therefore, is to investigate the impact of EC policies on international trade and competitiveness in general and, in particular, the impact of differential EC policies on the international trade and competitiveness of the two industrial countries, the Federal Republic of Germany and the United States.

To accomplish this objective, the study applies a comparative analysis divided into six chapters. The theoretical framework and methodology are set forth in Chapter Two. Chapter Three presents a comparative review of legislation and regulations on environmental control as applied in the two countries. In Chapter Four, the environmental control costs in the United States and the Federal Republic of Germany are compared at a disaggregated level, i.e., industry by industry. Chapter Four also examines the pollution content of exports and imports of the two countries. In Chapter Five, an attempt is made to assess the impact of environmental control policies on international trade flows, and the international competitiveness of the two countries. This assessment is presented at both aggregate and disaggregated levels. Finally, Chapter Six introduces the findings and the policy implications of the study.

Thus, since both government and business need better information to develop appropriate policies to minimize the costs of readjustments, we hope that this comparative study on the two main competitive countries may shed some light on the formation of rational policies.

¹ Ingo Walter, Environmental Management and Optimal Resource-Use: The International Dimension, Paper delivered at the Institute fuer Weitwirtschaft, University of Kiel, Kieler-Woche-Symposium on “Das Umweltproblem in Ockonomischer Sicht,” (26-27 June 1973); _______________, International Economics of Pollution, (John Wiley & Sons, Inc., New York, 1975), p. 78.

² Economic Commission for Europe, U.N., ECE Symposium on Problems Relating to Environment, New York, 1971, pp. 266-267; OECD, The Aims and Instruments of Industrial Policy: A Comparative Study, Paris, 1975, p. 136.

³ A.C. Fazio and M. La Cascio, “Evaluation of the Economic Effects of Anti-Pollution Public Policy,” Problems of Environmental Economics, OCED, Paris, 1972, p. 143; U.N. Economic Commission for Europe, ECE Symposium on Problems Relating to Environment, U.N. New York, 1971, p. 30; Commission of the European Communities, Continuation and Implementation of a European Community Policy and Action Programme on the Environment, European Communities, 1976, p. 43.

⁴ Kredietbank, “Economic Aspects of Environmental Problems and Policy,” Kredietbank-Weekly Bulletin, (January 18, 1974), No. 3, pp. 17-21.

CHAPTER II

ENVIRONMENTAL CONTROL EFFECTS ON ECONOMIES AND THE M...

Table of contents

• Cover Page
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Preface
• List of Tables
• List of Illustrations
• Chapter I: Introduction
• Chapter II: Environmental Control Effects on Economies and the Method of Analysis
• Chapter III: Environmental Control Policies in Germany and in the United States
• Chapter IV: Environmental Control Costs By Industry: The U.S. and the Federal Republic of Germany
• Chapter V: The Trade Impact of Environmental Control
• Chapter VI: Summary and Conclusions
• Appendix
• Bibliography