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Trade and the Environment

International Trade, Finance and the Environment

International trade and investment have increased dramatically during the past fifty years. There have also been changes in the institutional setting, such as the establishment of the GATT and the WTO, increasing integration of world financial markets, and the growing prominence and power of multinational companies. These trends form part of a wider pattern of change, often grouped under the umbrella term 'globalisation,' the nature of which is hotly debated. Public concern has focused on the impacts of international trade and investment on the development process, poverty and the environment. Proponents of trade and investment liberalisation emphasize the potential efficiency gains and increased access to capital in poor countries that would result from the removal of restrictions.

Environmental groups, on the other hand, are concerned that liberalisation will lead to exploitative investment, rapid environmental degradation, inequitable patterns of growth, and unsustainable development. They point to the market, institutional and political failures that lead many private firms to ignore social and environmental costs.

Research on trade issues has addressed the environmental and developmental impacts of trade liberalisation, the effect of environmental regulations on competitiveness, and the role of environmental criteria as trade barriers. Analysis of foreign investment has focused on the volatility of speculative capital flows, the concentration of foreign direct investment in certain countries and sectors, and the role of foreign portfolio investment in corporate governance. Research results are best described as mixed, due to a lack of empirical studies. For example, there is some evidence that differences in pollution abatement costs can influence company location decisions and trade flows. While foreign direct investment has led to improved social and environmental performance in some cases, there are counter examples from several developing countries. There is evidence that increases in income will, over the longer term, lead to lower levels of certain pollutants that specifically generate local environmental impacts, but the role of trade and foreign investment in this process remains unclear.

CREED made an important contribution to the understanding of trade and environment linkages, by investigating the incidence of environmentally-motivated trade barriers in OECD markets and their effect on environmentally-sensitive exports from developing countries. CREED projects in China and India also examined the social and environmental impacts of international trade in secondary (recyclable) materials. These studies indicate that international trade in recyclable materials allows countries with different comparative advantages to achieve a more efficient allocation of scarce resources. When market failures are significant, however, for instance in the case of adverse health and environmental effects, international trade in recyclables can reduce rather than increase welfare. CREED projects did not directly address the linkages between international investment and sustainable development.

Research priorities for the PREM Programme under this theme are likely to include:
· The impacts of trade liberalisation on environmental quality in developing countries, focusing on different types of goods and services and extending the analysis to social inequities. Research is likely to focus on how institutional failures such as market distortions and lack of enforcement cause trade to be associated with environmental degradation and social deprivation, and on potential mitigating mechanisms to avoid adverse impacts.
· The impacts of environmental regulations and initiatives such as eco-labelling and "fair trade" labels, in terms of market access and income in developing countries. This may include analysis of the trade implications of moves to harmonise environmental standards, linking with the theme of international environmental agreements, below.
· Company-level and sector case studies of the social and environmental impacts of foreign investment in developing countries, and the potential / limitations of 'socially responsible' private investment (e.g. ethical funds) for financing sustainable development in the South.


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