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Will Trade Liberalization Harm the Environment? The Case of Indonesia 2020


  • Anderson, Kym
  • Strutt, Anna


Most-favoured-nation (MFN) trade liberalizations will always improve global economic welfare provided globally optimal environmental, and other, policies are in place. But since the latter proviso is not met in practice, empirical studies of the environmental and resource depletion effects of such reforms are needed to convince sceptics that trade reform is still worthwhile. This paper provides a methodology for doing that. It is illustrated with a case study of Indonesia, a large newly industrializing country that is rich in natural resources and committed to taking part in major multilateral and regional trade liberalizations over the next two decades. A modified version of the global CGE model known as GTAP is used to project the world economy to 2010 and 2020 both with and without those reforms. An environmental module is attached to the Indonesian part of that global CGE model so as to measure the effects of changes in economic activity on air and water pollution. The proportional contributions to environmental indicators of changes in the level and composition of output, and changes in production techniques, are identified. A base case projection without trade reform is compared with alternative scenarios involving full global implementation of Uruguay Round commitments by 2010, and the additional move to MFN free trade by APEC countries by 2020. The study suggests that, at least with respect to air and water, trade policy reforms slated for the next two decades would in many cases improve the environment and reduce the depletion of natural resources and, in the worst cases, would add only slightly to environmental degradation – even without toughening the enforcement of existing environmental regulations or adding new ones, and even if the reforms stimulate a faster rate of economic growth.

Suggested Citation

  • Anderson, Kym & Strutt, Anna, 1998. "Will Trade Liberalization Harm the Environment? The Case of Indonesia 2020," CEPR Discussion Papers 1933, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1933

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    Cited by:

    1. Damania, Richard & Fredriksson, Per G. & List, John A., 2003. "Trade liberalization, corruption, and environmental policy formation: theory and evidence," Journal of Environmental Economics and Management, Elsevier, vol. 46(3), pages 490-512, November.
    2. Sonja Peterson, 2008. "Greenhouse gas mitigation in developing countries through technology transfer?: a survey of empirical evidence," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 13(3), pages 283-305, March.

    More about this item


    Global CGE Model; Indonesia; Trade and Environment;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy


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