Competitiveness and environmental standards : some exploratory results

Contrary to common perceptions, higher environmental standards in industrial countries have not tended to lower their international competitiveness, the author contends. There has been little systematic relationship between higher environmental standards and competitiveness in environmentally sensitive goods (those that incurred the highest pollution abatement and control costs in the U.S. in 1988). Among the author's findings about what determines trade flows in environmentally sensitive goods: (a) environmental spending has been a small share of total spending -- so it is unlikely on its own to have caused shifts in comparative advantage in most industries; (b) differences in environmental spending among industrial countries seem to have been minor; (c) environmental spending has been concentrated in a few basic industries under heavy pressure to structure the international division of labor; (d) energy use and environmental spending are closely linked; and (e) positive adjustment and increased comparative advantage in environmentally sensitive goods were more pronounced in countries where environmental policies encouraged investment rather than current spending. The costs of environmental standards depend not only on physical characteristics but also on the policies chosen. The reductions industrial countries have achieved in the main pollutants differ greatly across countries. In the United States, which has some of the highest private environmental spending (as a share of GDP), investments have been a declining share of spending. The United States also has some of the lowest reductions in abatement, which may mean that it has succeeded less than other countries in internalizing environmental costs. Compliance with higher environmental standards is not a zero-sum game. Higher environmental standards to reduce the social cost of pollution is a new source of permanent structural change. Countries that adjust early and invest in environmental protection technology can maintain and even create comparative advantage in environmentally sensitive industries. Private costs incurred to reduce the social cost of pollution may, apart from the social benefit of lower pollution, also bring private benefits. Adjustment can mean shifting to producing less pollution-intensive goods. Pressures toward this end are likely to increase as environmental awareness becomes more common. Instead of lobbying for protection, industries struggling with environmental spending should lobby for better environmental policies -- that is, policies and standards that encourage efficient abatement. Demands for protection because of differences in environmental spending are likely to be counterproductive and to retard adjustment toward a new way of competing. Ecodumping duties could do little for the environment but much harm to the trading system.