ESTIMATING ENVIRONMENTAL EFFECTS OF TRADE AGREEMEN

CIESDiscussionPaperNo.99/26UniversityofAdelaideAdelaideSA5005AustraliaESTIMATINGENVIRONMENTALEFFECTSOFTRADEAGREEMENTSWITHGLOBALCGEMODELS:AGTAPAPPLICATIONTOINDONESIAAnnaStruttandKymAndersonNovember19992CENTREFORINTERNATIONALECONOMICSTUDIESTheCentrewasestablishedin1989bytheEconomicsDepartmentoftheUniversityofAdelaidetostrengthenteachingandresearchinthefieldofinternationaleconomicsandcloselyrelateddisciplines.Itsspecificobjectivesare:•topromoteindividualandgroupresearchbyscholarswithinandoutsidetheUniversityofAdelaide•tostrengthenundergraduateandpost-graduateeducationinthisfield•toprovideshortertrainingprogramsinAustraliaandelsewhere•toconductseminars,workshopsandconferencesforacademicsandforthewidercommunity•topublishandpromoteresearchresults•toprovidespecialisedconsultingservices•toimprovepublicunderstandingofinternationaleconomicissues,especiallyamongpolicymakersandshapersBoththeoreticalandempirical,policy-orientedstudiesareemphasised,withaparticularfocusondevelopmentswithin,orofrelevanceto,theAsia-Pacificregion.TheCentre’sDirectorisProfessorKymAnderson([e-mail])andDeputyDirector,DrRandyStringer([e-mail])Furtherdetailsandalistofpublicationsareavailablefrom:ExecutiveAssistantCentreforInternationalEconomicStudiesUniversityofAdelaideAdelaideSA5005AUSTRALIATelephone:[phone]Facsimile:[phone][Internationalprefix:(+618)]Email:[e-mail]ownloadedfromourHomepage::AGTAPAPPLICATIONTOINDONESIAAnnaStruttandKymAndersonEconomicsDepartmentUniversityofWaikatoHamilton,NewZealandPhone:(647)8384958Fax:(647)[e-mail],SchoolofEconomicsandCentreforInternationalEconomicStudiesUniversityofAdelaideAdelaide,AustraliaPhone:(618)83034712Fax:(618)[e-mail]1999FirstdraftofapaperforanOECDworkshoponMethodologiesforEnvironmentalAssessmentofTradeLiberalizationAgreements,Paris,26-27October.ThanksareduetoShantaDevarajan,DavidRoland-Holst,TomRutherfordandDavidTarrforinsightfulcommentsonanearlierpaper.TheauthorsarealsogratefultotheAustralianCentreforInternationalAgriculturalResearch(underPN9449)andtheOECDforfinancialassistance.Sincepublishedontheinternetat:AGTAPAPPLICATIONTOINDONESIAAnnaStruttandKymAndersonProvidedgloballyoptimalenvironmentalandotherpoliciesareinplace,most-favoured-nation(MFN)tradeliberalizationswillalwaysimproveglobaleconomicwelfare.Butsincetheprovisoisnotmetinpractice,empiricalstudiesoftheenvironmentalandresourcedepletioneffectsofsuchreformsareneededtodeterminewhethertradereformisstillworthwhile.Thispaperprovidesamethodologyfordoingthat,usingamodifiedversionofamulti-countryeconomy-widemodel.AttentionfocusesonenvironmentaleffectsinjustIndonesia,alargenewlyindustrializingcountrythatisrichinnaturalresourcesandcommittedtotakingpartinmajormultilateralandregionaltradeliberalizationsoverthenexttwodecades.AmodifiedversionoftheglobalCGEmodelknownasGTAPisusedtoprojecttheworldeconomyto2010and2020withoutandwiththosereforms.AnenvironmentalmoduleisattachedtotheIndonesianpartofthatglobalCGEmodelsoastomeasuretheeffectsofchangesineconomicactivityonairandwaterpollution.Theproportionalcontributionstoenvironmentalindicatorsofchangesinthelevelandcompositionofoutput,andchangesinproductiontechniques,areidentified.AbasecaseprojectionwithouttradereformiscomparedwithalternativescenariosinvolvingfullglobalimplementationofWTOmembers'UruguayRoundcommitmentsby2010,andtheadditionalmovetoMFNfreetradebyAPECcountriesby2020.Thestudysuggeststhat,atleastwithrespecttoairandwaterpollution,tradepolicyreformsslatedforthenexttwodecadeswouldinmanycasesimprovetheenvironmentandreducethedepletionofnaturalresourcesandintheworstcaseswouldaddonlyslightlytoenvironmentaldegradation--evenwithouttougheningtheenforcementofexistingenvironmentalregulationsoraddingnewones.Keywords:Tradeandenvironment,Indonesia,globalCGEmodelJELCodes:F13,F14,F15,F17,O13,Q2,Q4EconomicsDepartmentCEPR,SchoolofEconomicsandCentreforInternationalEconomicStudiesUniversityofWaikatoUniversityofAdelaideHamilton,NewZealandAdelaide,AustraliaPhone:(647)8384958Phone:[phone]Fax:[phone]Fax:(618)[e-mail]@adelaide.edu.auESTIMATINGENVIRONMENTALEFFECTSOFTRADEAGREEMENTSWITHGLOBALCGEMODELS:AGTAPAPPLICATIONTOINDONESIAAnnaStrutt(UniversityofWaikato)andKymAnderson(UniversityofAdelaide)Most-favoured-nation(MFN)tradeliberalizationswillalwaysimproveglobaleconomicwelfareeveninthepresenceofenvironmentalexternalities,providedoptimalenvironmentalpoliciesareinplace(AndersonandBlackhurst1992;Corden1997).However,inaworldinwhichnationalenvironmentalstandardsdiffermarkedlybetweencountriesandinternationalenvironmentalspilloversaresignificant,globallyoptimalenvironmentalpolicieswilldifferfromn