Thursday, February 28, 2008

Environmental impacts of China's WTO-accession

Another classic "glibalisation and the environment" paper:

This is actually a very good question to ask. The paper in a recent issue of Ecological Economics does a decent job of introducing the topic and outlining the main issues but employs CGE analysis to arrive at its conclusions. However, such black box results are never entirely convincing.

Environmental impacts of China's WTO-accession

Haakon Vennemoa, Kristin Aunanb, Jianwu Hec, Tao Hud, Shantong Lic, Kristin Rypdal

ECON Analysis, P.O.Box 5, 0051 Oslo, Norway
CICERO Center For International Climate and Environmental Research, Oslo, Norway
Development Research Center of State Council, Beijing, China
Policy Research Center for Environment and Economy of SEPA, Beijing, China

The paper concludes perhaps surprisingly that:

We have found that WTO accession improves China's environment as far as main air pollutants are concerned. There are also gains to public health and aggregate welfare, but the distribution becomes more skewed. The reason for these developments is that WTO induces a new course for industry growth. The textile and apparel industries, already China's largest export earners, gain tremendous momentum
and increase close to 50% after WTO-accession. The growth of these and industries supplying their inputs draw resources from heavy industry and from agriculture. In short we find a “composition effect” that is favourable to the environment.

The obvious question is why has China not become a pollution haven. These conclusion make some sense and add some credibility to the predictions in the paper.

The reason we find a positive composition effect in our material is that the comparative advantage in the labor dimension dominates. A main effect of WTO is to lift export restrictions in the textile and apparel sectors. These are labor
intensive, but not pollution intensive as far as air is concerned. In our material we recognise the comparative advantage in labor, but not the comparative advantage in pollution. Why is it that WTO-accession does not allow China to play out its comparative advantage in pollution intensive goods? It is useful to distinguish between different elements of accession. Perhaps paradoxically, agricultural import barriers do seem to have a link with China's pollution advantage. Removing agricultural import barriers encourages industrial production, building on comparative advantage of the traditional sort (labor and pollution advantage). From Table 5 above we see that pollution goes up from that aspect of accession in isolation. Removing industrial import barriers on the other hand, actually leads to a decline in pollution intensive goods since pollution intensive industry loses when the protection is lifted. On the export side the quota under the Multi-Fibre Agreement is a significant barrier to Chinese labor advantage, but except forNOx andVOC, it isnot a barrier to an air relatedpollution advantage. It is the textile cluster that gains from removing the export barrier, and the cluster is not a major source of air pollution in China. In conclusion it is mainly removal of agricultural import barriers that exposes traditional pollution intensive comparative advantage, but the agricultural barrier is not dominant in the accession package. Thus, the composition effect of free trade is positive for the environment.


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