Will trade liberalization harm the environment? The case of Indonesia to 2020

Abstract

Most-favoured-nation (MFN) trade liberalizations willalways improve global economic welfare providedglobally optimal environmental and other policies arein place. But since the latter proviso is not met inpractice, empirical studies of the environmental andresource depletion effects of such reforms are neededto determine whether trade reform is still worthwhile.This paper provides a methodology for doing that. Itis illustrated with a case study of Indonesia, a largenewly industrializing country that is rich in naturalresources and committed to taking part in majormultilateral and regional trade liberalizations overthe next two decades. A modified version of theglobal CGE model known as GTAP is used to project theworld economy to 2010 and 2020 without and with thosereforms. An environmental module is attached to theIndonesian part of that global CGE model so as tomeasure the effects of changes in economic activity onair and water pollution. The proportionalcontributions to environmental indicators of changesin the level and composition of output, and changes inproduction techniques, are identified. A base caseprojection without trade reform is compared withalternative scenarios involving full globalimplementation of Uruguay Round commitments by 2010,and the additional move to MFN free trade by APECcountries by 2020. The study suggests that, at leastwith respect to air and water, trade policy reformsslated for the next two decades would in many casesimprove the environment and reduce the depletion ofnatural resources and in the worst cases would addonly slightly to environmental degradation – evenwithout toughening the enforcement of existingenvironmental regulations or adding new ones, and evenif the reforms stimulate a faster rate of economicgrowth. Copyright Kluwer Academic Publishers 2000