In this article, the writers Gulati and Kellenberg (2013) are concerned about the effect of international trade on the environment by a political-economic system of a world country. Gulati and Kellenberg (2013) expressed that a country that supports the environment would oppose free trade, rail against the government’s capture by industrial special interests, and bemoan its indifference to the environment. Thus, the writers keep mentioned about the role of government as an important institution in how the government tackles this issue regarding international trade and the environment.
This review will attempt to answer the following questions: First, what are the formal framework elements that have to contribute to this issue, and in what way has been developed to overcome the formal framework? Second, what is the impact of reducing barriers to international trade on environmental policy? and third, how economic interests can influence voter preferences for environmental policy and how international trade can impact informal institutions, and the issue of corruption.
The objective of this review is to analyze the political economy in the aspects of the relationship between international trade and environmental policy in a globalized world. Through this objective, the focus of this review will be on the government considerations as formal institutions followed by informal institutions that are also concerned about the environment or about the globally competitive that would bring harm to the environment and many other issues.
Next, the literature review of this article can be seen through the models and methods that have been explained in more specific aspects and are narrow in scope. The first method is about the formal framework that will be discussed on the government, economy, and environmental policy. Second, the impact of reducing barriers to international trade on environmental policy with the local and international aspects would affect the domestic environment and environmental policy. Lastly, the discussion about the outside of the formal framework which is the impact on the other policy issues such as informal institutions and the prevention of corruption.
The first discussion will be about the formal framework. The formal framework focus on how the political economy has considerations towards the interaction between international trade and the environment. The political economy considerations can be influenced by these categories which are government, economy, pollution, and environmental policy. Gulati and Kellenberg (2013) expressed that in order for the government to achieve its mission, the government needs to attain power in an imperfect and often short-sighted political system. This combination would bring government into two component which is social welfare and the welfare of organized interest groups.
Social welfare is about the needs of public voting by the government. If the government neglects the people’s welfare, the government would lose the vote in the next election. While the welfare of interest groups consists of these reasons such as contributions in terms of money for the campaign in the political system, the need for information from the targeted or special groups regarding the political information, and the position of government in interest groups. These reasons become an important element for the government because of government mostly involve in corruption thus they need support from the interest groups by not neglecting the welfare and needs of that particular group.
In an economic context, the small open economy is one of the contributions towards international trade. However, the small open economy cannot manipulate the prices in international by altering its domestic policy. Therefore, there is one way for the small open economy to get the chance to influence the prices of goods and services in international trade which is through the process of economic flow across jurisdictional boundaries. While for the environmental issue, this issue may not be taken seriously by neighboring countries with the small open economy because the effect from the production would occur in that production country only which would cause pollution.
Therefore, the concerns about the increasing economy in international trade and the control of the environment have made the whole world consider this environmental policy. The environmental policy can be divided into two parts which are the import price neutral and import price augmenting. According to Gulati and Kellenberg (2013), the import price neutral will affect the cost of domestic production but leaves the price of imports unchanged in a simple way these policies are targeted to particular inputs or stages of the production process. While the import price augmenting, will impact the cost of domestic production and imports these policies are targeting the product sold, not the production process.
The second discussion will be on the impact of reducing the barriers to international trade on environmental policy. This discussion will be looked into these categories which are the environmental policy with local effects, and the environmental policy with local and international effects. The impacts of increased international trade on the environment can be divided into three main effects. The first impact is the scale effect, the second is the composition effect and the third is the technique effect. All the above categories are based on the earlier discussion which is import price neutral and import price augmenting.
The first category is the environmental policy with local effects. When environmental policy is imported price neutral, it would affect the domestic producers, not the foreign producers. Therefore, according to Gulati and Kellenberg (2013), the government can make it better by reducing the stringency which the lowering of stringency would allow domestic producers to gain profits by transferring the costs onto pollution-suffering citizens. In this case, the government should use the optimal policy combination through the positive tariff on imports and optimal pollution tax. Through policy combination, it will result from lower tariffs, and consumers can enjoy the lower price of goods as it will not impact the special interest welfare groups.
The second category is the environmental policy with local and international effects. When the government is using the concept of import price augmenting, the environmental policy will affect both domestic firms and foreign costs. From this, the government needs to increase the stringency for local producers to have profits. The implementation of environmental policy towards local and international effects can be observed its effect using the cost advantage concept. The meaning of cost advantage is the marginal cost of local industry is lower than the foreign industry and also give a lower effect on the environment. For example, in the development of gasoline (EC-X), ARCO, a leading gasoline refiner in California produces cleaner gasoline with low levels of carbon monoxide and ozone precursor emissions than its other competitors.
Refer to figure 1 in the article, it is shown the graph of import augmenting environmental policy in an open economy. The concept used is the price of the import into the country is determined by the difference between import price (Q*) and domestic price (Q) which in a simple way is [Q*- Q = P]. When domestic firms followed the cost advantage regulation, the supply curve (S1) will be lower than the foreign supply curve (S1*) and the product price will be higher from P to P1 thus, domestic production increase to Q1 eliminating foreign imports from the domestic market.
The third discussion is about international trade that gives impacts other issues outside of the formal framework. In this discussion, there will be an explanation of the role of voter preferences on environmental policy in an open economy. According to Gulati and Kellenberg (2013), the role of lobby groups from dirty producers may determine the environmental policy in an open economy. However, the writers told that is it important to recognize voter preferences as their vote is one of the important factors in determining the environmental and trade policy.
The scope of this discussion will look into the role of informal institutions and how international trade will involve corruption. Apart from formal institutions, informal institutions also bring how they react toward the preservation of the environment. For example, an informal institution such as citizen activism has the right to boycott or complain about the goods produced that neglect the importance of the preservation of the environment. Therefore, the existence of informal institutions will be a huge influence on formal institutions and these efforts shown by the informal institutions will help the world to be more aware of the preservation of the environment not in the local effects but also the international effects.
Gulati and Kellenberg (2013) expressed that any institutions that have higher levels of corruption are likely to have higher levels of contribution towards pollution as per unit of their output. As an example, the evidence from the article emphasizes that those countries that have a good rank in the world are mostly involved with corruption as these countries have many multinational investors in their country. As time goes by, both formal and informal institutions are taking the issue of the preservation of the environment and reducing the activity of reduction seriously for a better political economy in their own country.
In conclusion, it shows how a political economy of a country will contribute a positive or negative impact on international trade and the environment. Besides that, the precaution taken by countries in the world by both formal and informal institutions to prevent pollution and corruption while at the same time moving towards increasing their economic profits, especially in the international arena full of implementation in a cleaner industry.