By Pankaj Ghemawat
It is inevitable that prices don't always account for all the costs and benefits for all the people touched by a transaction. Externalities can come in good forms and bad. But the most frequently discussed externalities are those associated with harms to the environment.
Of course, globalization has an impact on the environment, but it is a mixed one and generally far less scary than many people think. Most ecological problems are still local as opposed to global, and while cross-border integration can make the environment dirtier in some places, it can also help with cleaning it up.
As pressure mounts to reduce carbon emissions, the logistics involved with cross-border trade are often cited as an unnecessary cause. With dark-green-tinted spectacles, many call for a return to only locally grown or manufactured products. But let's face it: Consumer demand and expectations have changed a lot since the days of zero cross-border trade. Since a collective global vow of poverty seems unlikely to be taken soon, keeping up with modern demands without cross-border trade would actually do more harm to the environment than good. For example, in 2007, the U.K.-based supermarket chain Tesco decided to ban rose imports from Kenya in a bid to save on emissions. But research revealed that the Dutch roses it relied on instead generated six times as much in the way of greenhouse gases, largely because they were literally grown in greenhouses.
And how much of energy-related greenhouse gas emissions do you think international transport really produces? Since the bulk of internationally-traded merchandise travels by sea, shipping should be the first port of call. Estimates indicate (PDF) that international shipping causes 2-3% of energy-related CO2 emissions (PDF). This may come as a surprise when you think about the long distances ships travel to transport cargo. But on a per-ton-kilometer basis, a cargo ship emits just 15-21g of CO2, as compared to a truck's equivalent 50g (PDF). So carrying something a long distance across the ocean can actually work out to be less harmful than transporting goods a shorter distance over land.
Of course, goods (and people) often travel by plane, too, so we should add the estimated 1-2% of energy-related CO2 emissions caused by international air transportation to the mix (part of its estimated 3% contribution to human-induced climate change (PDF)). This is a fraction of the 20%+ the general public tends to guess, and transport-related emissions from international aviation are one-tenth as much as those from (mostly domestic) driving. Transport used to facilitate international trade does cause some harm to the environment, but it pales in comparison with the domestically-caused damage.
So far I have focused on the direct effects on the environment caused by increased cross-border flows, but what about possible indirect effects? Again, while these effects do exist, they are a mixture of positive and negative, and need to be balanced for a realistic perspective. An example of an indirect composition effect that economists tend to worry about is dirtier industries migrating to (generally) less developed countries with laxer regulations. A recent study (PDF) found that in low-income countries, more trade is associated with higher per capita energy consumption, while the opposite applies to high-income countries. This fits with the idea that imports into rich countries are more pollution-heavy than their exports. But such broad analysis fails to take details into account.
With different countries implementing different rules of varying severity, some differences in energy consumption are to be expected. But there is also evidence that Foreign Direct Investment (FDI) can actually help to spur adoption of cleaner production methods. To maintain consistency across plants (and avoid negative publicity), foreign companies often bring in new technologies and implement higher environmental standards than local firms. More specifically, Germany's high green standards have actually spilled over in some instances to China, where some exporting companies have started to match German requirements even in their domestic products.
The direct and indirect effects of globalization on the environment are less pronounced than many think, but that does not mean that globalization can be ignored in the search for solutions to real environmental problems. The attention to distance sensitivity that is crucial to properly understanding levels and patterns of globalization provides a useful guide as to how to scope environmental solutions. For distance-sensitive pollutants that stay more or less within borders, local solutions are appropriate. But for pollutants that span regions, cross-border cooperation can be crucial for any attempts at a cleanup. For example, cooperation between the U.S. and Canada (most notably the 1991 U.S.-Canada Air Quality Agreement) has helped to reduce North American sulfur dioxide emissions by roughly two-thirds since 1980, going a long way toward addressing the problem of acid rain in that region.
Climate change is by far the most difficult environmental externality of all to combat because of its (unusual) distance-insensitivity. Therefore, in order to tackle it we need more, rather than less, international cooperation. Of course, with the variety of cross-country distances and differences between all the nations that make up the world, such cooperation will need to be both complex and innovative. The failure of the 2009 Copenhagen Conference of the Parties to reach a binding accord on targets for reduction of greenhouse gases shows how it is not as simple as putting a bunch of leaders in a room and getting them to come up with a plan.
Unlike many supposed failures and fears associated with increased global integration, in the case of the environment, globalization has had a part to play. However, it has been a bit part, as opposed to a starring role. And it should be weighed up with gains from cross-border integration, for a more balanced view. Of course, this is not to say that global strategy should ignore environmental externalities. Quite the opposite, integration should be used as a tool for addressing externalities that affect more than one country and for sharing knowledge on greener techniques where effects are localized. And given limited capacity for truly global action, it is useful to recognize that only the most distance-insensitive environmental externalities, such as climate change, require completely global coordination.
Ghemawat is the Anselmo Rubiralta Professor of Global Strategy at IESE Business School in Barcelona, and the author of World 3.0: Global Prosperity and How to Achieve It.
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