The World Trade Organization and its predecessor GATT are frequently criticized

Question

The World Trade Organization and its predecessor GATT are frequently criticized for their decisions regarding the environment. Briefly discuss the relationship between economic growth and environmental degradation, and then discuss the relationship between economic growth and international trade. Use this as a background to discuss the Uruguay Round decision that a nation cannot restrict imports from countries whose environmental standards are lower and therefore, less costly for their producers.

Explanation / Answer

Economists, ecologists, private industries and government decision-makers have long been interested in the relationships between economic growth and environmental quality. These relationships are often the subject of intense public policy debates such as the current debate surrounding global climate change issues. From an ecological or environmental perspective, the argument is often made that economic growth is bad for the environment. Economic growth is desiging good infrastructure, It could be done by cutting down trees to make space to develope it.

Relationship between economic growth and international trade

It can be said that the positive effects of International Trade (IT) on Economic Growth1
(EG) were first pointed out by Smith (1776). This idea prevailed until World War II
(WWII), although with relative hibernation during the ‘marginalist revolution’. After
WWII, the introverted and protectionist EG experiments had some significance,
especially in Latin America. From the 60’s on, owing to the failure of those experiments
and to the association of quick EG with the opening of IT and the consequent
international specialization in several countries, as well as to the results of many studies
based on the neoclassical theories of EG and IT, a new decisive role was given to IT as
EG’s driving force.
However, although the dominant theoretical position tended, from the beginning (with
the Classics), to indicate a positive relation between IT and EG, many studies linked the
gains of IT only with static effects. But Baldwin (1984), for example, concluded, in a
survey of empirical studies, that the static effects were of little significance. The debate
has widened in the last decades, precisely in the direction of pointing out and stressing
the dynamic effects of IT. The theoretical development afforded by the models of
endogenous EG [especially after the works of Romer (1986) and Lucas (1988)], which
stimulated the creation of empirical studies, moved toward an integrated analysis of the
EG and IT theories. So, the classical tradition, apparently interrupted by the neoclassical
separation of those two areas of the theory, seems to have been recovered, assigning as
a result, a decisive role to IT on the countries’ rate of EG.
The recognition of this importance has even led to the ceaseless appearance of proposals
from international organisations, such as the World Bank (WB) and the United Nations
(UN). As a result, many countries began to reduce commercial barriers and other
controls of economic activity and obtained a significant (and lasting) increase in the rate.

In the rate of EG, during the evolution of economic growth theory. We then underscore studies that
manifestly convey the ‘effect of EG’ (changes that modify, in a durable way, the rates of
EG and its tendency in the long-term), instead of simple ‘level effects’ (changes that
influence the EG only in the short-term).

As far as the interaction between IT and EG is concerned, we found two main ideas to
point out in Smith (1776). On the one hand, IT made it possible to overcome the reduced
dimension of the internal market and, on the other hand, by increasing the extension of
the market, the labour division improved and the productivity increased. The IT would
therefore constitute a dynamic force capable of intensifying the ability and skills of
workers, of encouraging technical innovations and the accumulation of capital, of making
it possible to overcome technical indivisibilities and, generally speaking, of giving
participating countries the possibility of enjoying EG.
In turn, Ricardo (1817) presented a ‘dynamic model of EG’ with three forces and two
restrictions.3 He characterized the progressive states as having high savings, capital
accumulation, production, productivity, benefits and labour demand forcing the increase
of wages and demographic growth. However, in view of the limitations of land, both in
quantity and in quality, the additional alimentary resources were obtained in conditions of
decreasing returns, in which the production is absorbed by wages in an increasing
proportion, reducing the stimulation of new investments and, sooner or later, reaching the ‘stationary state’.4 IT could delay the fall in the rate of profit.5 Apart from the
contribution of IT, underestimating the importance of technology, he underestimated the
positive effects of IT on technology.
Finally, among the Classics, Mill (1848) also explicitly reported the Classic point of view
according to which the production resulted from labour, capital, land and their
productivities. And just like Ricardo, he recognized that underlying the ‘progressive state’ there was the ‘stationary state’, and that ultimately the force capable of delaying
this state was technical progress. Accordingly, the emphasis that Smith had placed on the
extension of the market decreases, even though he also defended free trade among
countries. We think that this situation was the result of the expectation created by the
Industrial Revolution (IR) in regards to technical progress.

Note: please ref the given reference to complete your answer.

Ref: ÓSCAR AFONSO; THE IMPACT OF INTERNATIONAL TRADE ON ECONOMIC GROWTH; CEMPRE**, Faculdade de Economia do Porto, Portugal

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