ENVIRONMENT STANDARDS HAVE LITTLE IMPACT ON COMPETITIVENESS

6:32 AM Aug 5, 1993

ENVIRONMENT STANDARDS HAVE LITTLE IMPACT ON COMPETITIVENESS
Geneva 5 August (TWN) -- Empirical studies on the relationship between the costs of compliance with environment regulations and international trade patterns have shown that the relative stringency or laxity of environmental standards has little or no impact on general competitiveness of countries or their trade balances, even if winners and losers start to emerge in particular sectors and for individual firms, according to Candice Stevens of the OECD's Environment Directorate.

In an article, "Do environmental policies affect competitiveness", in the August September issue of the OECD observer, Candice Stevens points out that environment compliance costs are not a large share of overall costs and in most sectors account approximately for 1-2% of total costs or turnover.

Relative to other costs they have not been large enough to influence national competitiveness or affect the balance of trade and this picture is not expected to change much even if environmental standards are tightened further in the pursuit of sustainable development, since in most sectors environmental costs may still be a relatively small share of the total.

In some pollution-intensive and natural-resource sectors -- such as chemicals, minerals, oil-refining and pulp and paper -- the environmental compliance costs are far higher than the average. Environmental regulations could also have adverse impacts at the margin for sectors or firms that have competitive weaknesses because of higher labour costs, poor availability of capital or laggardly technological development.

In these cases, domestic firms complying with stringent environmental standards may suffer competitive disadvantages in relation to firms in countries allowing lower standards, Stevens says.

"But environmental regulations can also enhance the competitiveness of firms, sectors and countries. Environmental legislation can spur use of cleaner and fewer inputs, cleaner and more efficient technologies and waste minimisation and recycling. Firms and enterprises investing early in such technologies can realise advantages in efficiency and productivity and put themselves in a position of comparative advantage in meeting future regulations."

Countries with the most stringent environment regulations are also those which export most environmental technologies and services.

Industrial sectors seem able most to realise competitive advantages in domestic and international markets from environmental regulations -- benefiting from technological improvements and by marketing 'green products'.

The steel industry, for example, despite the relatively heavy costs faced in complying with environmental regulations, can gain from the technical improvements associated with such regulations -- such as development of more resource-efficient methods of production using fewer energy inputs and yielding less waste.

Automobile firms can similarly increase market share by developing more fuel-efficient, recyclable vehicles that pollute less.

Sectors which will have more difficulty in gaining trade advantages include commodity chemicals, primary agricultural and resource-based commodities such as food, minerals and wood -- all of which compete on price rather than product differentiation.

A range of empirical studies, Stevens says, has also failed to confirm claims of wide-spread 'pollution havens' -- countries or regions with low environmental standards luring OECD companies seeking to escape environment regulations in their own countries.

Environmental costs are simply not a high enough share of overall costs in most sectors to outweigh other factors. Access to markets, raw material supplies, labour costs, political stability, availability of infrastructure and transport are far more important in decisions on where to invest.

Sectors that may be most prone to industrial flight -- minerals and commodity chemicals -- are the exception rather than the rule. But this would not prevent a wide range of firms from threatening to relocate when confronted with likelihood of higher environmental standards.

However, 'dirty industries' in toto are being shut down in the OECD and being taken up in the developing world, partly due to environmental regulations, and entire sectors slowly disappearing from the OECD countries account for a growing share of Third World exports -- metal refining, oil refining, cement, pulp and paper and commodity chemicals.

But such growth in the developing countries will not be sustainable in the longer-term; increasing environmental degradation and resource depletion might curtail production. These countries lack the cleaner production technologies or the means to acquire them, and in future their ability to attract foreign investment may be impaired.

Addressing the issue of best policy approach to deal with adverse competitive effects on the few sectors affected, Stevens says that international harmonisation of environment policies, particularly standards to minimise air and water pollution or harvesting timber might help particular types of companies taking unfair advantage or being allowed to pollute or deplete resources.

Some limited use of environmental subsidies could help firms incorporate expensive environmental technologies in transition periods and dampen calls from uncompetitive polluters for trade protection. But care must be taken that environmental policies are not misused for protectionist purposes to shield domestic producers against more efficient competition from overseas.

If any one country unilaterally takes steps to address global ecological concerns (ozone layer depletion, climate change or preservation of biodiversity), its vulnerable sectors and firms will suffer competitive disadvantage visavis foreign rivals.

But in such cases, countries should jointly develop policies -- though international environmental agreements are providing difficult and time-consuming to negotiate.