Environment and Trade: A HandbookUNEP/IISD   
4    Physical and economic linkages
   4.1  Product effects
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Product effects occur when the traded products themselves have an impact on the environment or development. On the positive side, trade may lead to spreading of new technologies for protecting the environment, such as microbial techniques for cleaning up oil spills. Or it may more rapidly spread goods or technologies that have less environmental impact—for example, solar power technology or more fuel-efficient automobiles—than those currently used. Openness to trade and investment can also help contribute to development objectives, by facilitating transfer of new and improved technologies and management systems.

On the negative side trade can facilitate international movement of goods that, from an environmental perspective, would best never be traded. With hazardous wastes and toxic materials, the environmental risks increase the further the goods are transported, since spillage is always possible. As well, such "goods" may end up being dumped in countries without the technical or administrative capacity to properly dispose of them, or even assess whether they should be accepted. Trade also makes possible the over-exploitation of species to the point of extinction—there is rarely enough domestic demand to create such pressure. The Basel Convention and CITES, discussed earlier, are MEAs that restrict such trade because of its negative direct effects.

A subset of product effects, sometimes termed "technology effects," are associated with changes in the way products are made depending on the technology used. Technology effects stem from the way in which trade liberalization affects technology transfer and the production processes used to make traded goods. Positive technology effects result when the output of pollution per unit of economic product is reduced. Foreign producers may transfer cleaner technologies abroad when a trade measure or agreement results in a more open market and a business climate more conducive to investment. Trade-induced growth and competitive market pressures generated by liberalization can hasten processes of capital and technological modernization for all firms. Newly opened markets can provide the revenue and the income to allow firms to accelerate capital turnover, and invest in cleaner, more efficient plants, technologies and processes.

On the other hand trade liberalization and an expanded marketplace may harm more environmentally friendly and socially valuable traditional production methods. Trade liberalization can also promote the spread and use of harmful, less-environmentally friendly technologies. Whether technology effects stemming from liberalization have an overall positive or negative effect on the environment will depend considerably on other conditions and policies in the marketplace that determine availability and choice of those technologies (for example, price and national environmental regulation). These effects are reflected again under the heading "imported efficiency" in Box 4-1.

Box 4-1. Improving efficiency: How trade can create wealth

Allocative efficiency. Liberalizing trade allows countries to specialize in producing those items at which they are relatively more efficient—at which they have a "comparative advantage." This allows more goods and services to be produced by nations that engage in trade, and so increases GDP. The other side of this coin is that trade restrictions or distortions tend to decrease allocative efficiency. For example, if a Northern country put enough tariff protection or subsidies in place, and devoted enough greenhouses and energy, it could produce coffee for its own market. But this would be economically inefficient and environmentally damaging.

Efficiency from competition. Another way in which trade creates wealth is to expose domestic firms to foreign competition, and thereby force them to innovate to become more efficient. Sometimes, better provision of goods can directly serve development objectives, as in the case of telecommunications and other such infrastructure provision. Again, these efficiency benefits are missed where trade is restricted or distorted. Of course, even efficient domestic producers may suffer if exposed to competition from firms with international monopoly power.

Imported efficiency. A third way in which trade can create wealth is through openness to foreign investment, or imports of foreign technology, which can bring more efficient methods of process and production. These can be embodied in a piece of equipment, or in the management techniques brought by a foreign firm setting up shop in a host country. Some multinational firms adhere to a global standard, and bring the same level of technology and practice to all their locations worldwide. Others will diminish the imported efficiency effect by using outdated, less efficient technology in countries where health, safety and environmental protection is more lax.

 © 2000 United Nations Environment Programme,
International Institute for Sustainable Development