Trade–Environment Linkage: A South-centric Model-Specific Analysis

Big transboundary environmental issues like climate change, global warming, etc. as well as local environmental externality problems have been drawing ever-increasing public attention Anderson (1992) Bovenberg and Smulders (1995), Copeland (1994) Copeland and Taylor (1995). Often, due to the forces of globalization, the sources of externality may be shifted from one nation to another. Brander and Taylor (1997) The comparative advantage of a country in the production of a polluting good triggers trade-induced resource flows and raises doubts about the gains from free trade. The underdeveloped South may experience a seriously endangered environment because of their poorly defined property rights over environmental resources, the environment not entering the utility function as a normal commodity in the South, strategic reductions in the domestic environmental standards to gain pseudo-comparative advantage and the like. Trade opportunities are generated due to different environmental standards. More trade and less pollution make the North unambiguously better off; more trade but more pollution in the South cast doubts on globalization. However, more trade and the need to protect the environment have been at the root of some new challenges the less-developed nations are facing. This paper is an attempt to capture such possibilities in the context of a small open economy. The North shall not be explicitly taken into account in this paper to concentrate only on the South. The North is assumed to have a perfectly elastic demand for exports from the South and a perfectly elastic supply of the South’s imports—both at the global prices given parametrically to the South. The contention of the model is that the countries of the South are seriously challenged by the developments of the last two decades in this respect. While each nation is unique in its own right, our model tries to isolate three fundamental developments, namely, growing food insecurity, increasing wage gap, and the possibility of exportable land services. Each issue is challenging, and therefore, the ongoing trade–environment debate would not become comprehensive unless such issues are identified and addressed by proper policy interventions.