2 December 2019

Why globalisation is good for the environment

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Globalisation is under attack in ways which would be scarcely imaginable even just a few years ago. That the President on the USA now proudly brands himself ‘Tariff Man’ is testimony to this fact.

But it’s not just sloganeering – statistics show a recent decline in trade and foreign direct investment flows. Amazingly, trade as a percentage of global GDP has yet to recover to its pre-financial crisis level.

What is perhaps most puzzling is the strange alliance which has coalesced in the fight against the free movement of goods, services, and capital.  On the one hand, traditional communitarians bemoan the offshoring of jobs, as domestic industries pack up and move elsewhere in search of cheaper labour. On the other, left-wing environmentalists argue that efforts to promote globalisation – such as multinational trade pacts – are merely a guise with which to mask Western corporations’ desires to seek out, amongst other things, lax pollution standards.

The conclusions of a recently published paper, however, counter at least the latter of those gripes – that globalisation must necessarily be environmentally damaging. Writing in the Journal of International Economics, academics Arlan Brucal, Beata Javorcik and Inessa Love analyse plant-level data from the Indonesian Manufacturing Census between 1983 to 2001. What they find is that plants which underwent foreign acquisition reduced their energy intensity by around 30%, two years after being bought up by multinational firms.

The authors posit a number of reasons why this might be. At the top of their list is the idea that because production tends to increase when a firm is acquired by a foreign owner (due in part to things like access to new trading networks made possible by the parent company), that firm can more readily make investments in increasing energy efficiency. The logic is intuitive – sell more stuff, make more profit, and you’ll have more disposable cash with which to invest in energy-economising technologies.

Secondly, the paper points to the fact that precisely because foreign-owned firms typically sell more into foreign markets, the use of “energy-efficient technologies and management practices may be passed on to their affiliates in developing countries to maintain their production standards and meet the requirements of their environmentally conscious export markets”.

Indeed, this quote directly refutes the ‘race-to-the-bottom’ theory of pollution standards which many left-wing activists attempt to peddle. Rather, it highlights how firms will voluntarily cater to the more ‘ethical’ standards demanded by consumers living in privileged, already developed nations. It also demonstrates how such a process occurs spontaneously and at the behest of the market, not strict government mandates.

Other insights set out in the paper include that plants with higher energy intensity scores tend to reduce their emissions intensities more than those which were already less intensive, and that the decline in emissions intensities overall was positively associated with an increased presence of foreign affiliates.

But Brucal, Javorcik and Love’s paper is by no means the first which touches upon the often positive relationship between international free trade and better environmental outcomes.

Back in the 18th century Adam Smith’s Wealth of Nations explained why free commerce is fundamental for the effective conservation of scarce resources – a useful parallel for modern environmentalism.

In the second chapter of the fourth book of Smith’s magnum opus, he explains how “[b]y means of glasses, hotbeds, and hot walls, very good grapes could be raised in Scotland”. Yet to do so, Smith continues, would be thirty times as costly as simply importing grapes from more hospitable climes.

What Smith is invoking here is the concept of comparative advantage – famously later refined by another British economist, David Ricardo – which states that economies all have relative strengths and weaknesses in producing different goods and services. Smith’s example shows how the resource intensity of production for certain goods can vary between different economies, demonstrating the perhaps counter-intuitive logic behind why it can be better from an environmental perspective to import the goods an economy demands, instead of having them all produced locally under a system of autarky.

Another key role globalisation plays in conserving the natural environment is increasing per capita incomes. Economists such as Gene Grossman and Alan Krueger have shown how as societies get richer, they invariably end up with better quality environments. Indeed, so called ‘environmental Kuznets curves’ have been observed in natural assets like water and air quality, tree cover, and chemical pollutants.

The leftist critique of capitalism often centres on it (ostensibly) being an exploitative arrangement – of workers, and, increasingly nowadays, the environment. A closer inspection of the evidence suggests otherwise. Far from mindlessly stripping the planet of resources, a true capitalist system ensures we take only what we want, use it as efficiently as possible, and conserve the rest for all to enjoy.

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Eamonn Ives is a researcher at the Centre for Policy Studies