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Globalization Plays a Bit Part in Environmental Issues

by Pankaj Ghemawat 3. June 2012 23:16

It is inevitable that prices don't always account for all the costs and benefits for all the people touched by a transaction. Externalities can come in good forms and bad. But the most frequently discussed externalities are those associated with harms to the environment.

Of course, globalization has an impact on the environment, but it is a mixed one and generally far less scary than many people think. Most ecological problems are still local as opposed to global, and while cross-border integration can make the environment dirtier in some places, it can also help with cleaning it up.

As pressure mounts to reduce carbon emissions, the logistics involved with cross-border trade are often cited as an unnecessary cause. With dark-green-tinted spectacles, many call for a return to only locally grown or manufactured products. But let's face it: Consumer demand and expectations have changed a lot since the days of zero cross-border trade. Since a collective global vow of poverty seems unlikely to be taken soon, keeping up with modern demands without cross-border trade would actually do more harm to the environment than good. For example, in 2007, the U.K.-based supermarket chain Tesco decided to ban rose imports from Kenya in a bid to save on emissions. But research revealed that the Dutch roses it relied on instead generated six times as much in the way of greenhouse gases, largely because they were literally grown in greenhouses.

And how much of energy-related greenhouse gas emissions do you think international transport really produces? Since the bulk of internationally-traded merchandise travels by sea, shipping should be the first port of call. Estimates indicate (PDF) that international shipping causes 2-3% of energy-related CO2 emissions (PDF). This may come as a surprise when you think about the long distances ships travel to transport cargo. But on a per-ton-kilometer basis, a cargo ship emits just 15-21g of CO2, as compared to a truck's equivalent 50g (PDF). So carrying something a long distance across the ocean can actually work out to be less harmful than transporting goods a shorter distance over land.

Of course, goods (and people) often travel by plane, too, so we should add the estimated 1-2% of energy-related CO2 emissions caused by international air transportation to the mix (part of its estimated 3% contribution to human-induced climate change (PDF)). This is a fraction of the 20%+ the general public tends to guess, and transport-related emissions from international aviation are one-tenth as much as those from (mostly domestic) driving. Transport used to facilitate international trade does cause some harm to the environment, but it pales in comparison with the domestically-caused damage.

So far I have focused on the direct effects on the environment caused by increased cross-border flows, but what about possible indirect effects? Again, while these effects do exist, they are a mixture of positive and negative, and need to be balanced for a realistic perspective. An example of an indirect composition effect that economists tend to worry about is dirtier industries migrating to (generally) less developed countries with laxer regulations. A recent study (PDF) found that in low-income countries, more trade is associated with higher per capita energy consumption, while the opposite applies to high-income countries. This fits with the idea that imports into rich countries are more pollution-heavy than their exports. But such broad analysis fails to take details into account.

With different countries implementing different rules of varying severity, some differences in energy consumption are to be expected. But there is also evidence that Foreign Direct Investment (FDI) can actually help to spur adoption of cleaner production methods. To maintain consistency across plants (and avoid negative publicity), foreign companies often bring in new technologies and implement higher environmental standards than local firms. More specifically, Germany's high green standards have actually spilled over in some instances to China, where some exporting companies have started to match German requirements even in their domestic products.

The direct and indirect effects of globalization on the environment are less pronounced than many think, but that does not mean that globalization can be ignored in the search for solutions to real environmental problems. The attention to distance sensitivity that is crucial to properly understanding levels and patterns of globalization provides a useful guide as to how to scope environmental solutions. For distance-sensitive pollutants that stay more or less within borders, local solutions are appropriate. But for pollutants that span regions, cross-border cooperation can be crucial for any attempts at a cleanup. For example, cooperation between the U.S. and Canada (most notably the 1991 U.S.-Canada Air Quality Agreement) has helped to reduce North American sulfur dioxide emissions by roughly two-thirds since 1980, going a long way toward addressing the problem of acid rain in that region.

Climate change is by far the most difficult environmental externality of all to combat because of its (unusual) distance-insensitivity. Therefore, in order to tackle it we need more, rather than less, international cooperation. Of course, with the variety of cross-country distances and differences between all the nations that make up the world, such cooperation will need to be both complex and innovative. The failure of the 2009 Copenhagen Conference of the Parties to reach a binding accord on targets for reduction of greenhouse gases shows how it is not as simple as putting a bunch of leaders in a room and getting them to come up with a plan.

Unlike many supposed failures and fears associated with increased global integration, in the case of the environment, globalization has had a part to play. However, it has been a bit part, as opposed to a starring role. And it should be weighed up with gains from cross-border integration, for a more balanced view. Of course, this is not to say that global strategy should ignore environmental externalities. Quite the opposite, integration should be used as a tool for addressing externalities that affect more than one country and for sharing knowledge on greener techniques where effects are localized. And given limited capacity for truly global action, it is useful to recognize that only the most distance-insensitive environmental externalities, such as climate change, require completely global coordination.

Tags:

Environment | Externalities | Globalization | Market Failures and Fears

Who's Afraid of a Few Big Companies Taking Over the World?

by Pankaj Ghemawat 3. May 2012 20:55

In my previous post, I argued that the potential gains from globalization are larger than most people think. Since I only addressed possible benefits, it is perhaps unsurprising that readers were quick to point out many potential downsides. The global recession has recently and directly impacted the lives of many, most obviously in the form of rising unemployment — and the finger of blame is often pointed at globalization. Other alleged harms range from environmental degradation and increasing inequality to the rising prevalence of obesity. These are serious issues that deserve serious examination and so I will be looking at them in future blog posts — and will conclude that many such worries are misplaced or greatly exaggerated, but that some do require appropriate policy responses.

In this post I'll focus on one type of market failure: market concentration. There is often a lot of negative discussion buzzing around globalization and market concentration. As people see their local shops replaced with multinational chains and industrial megamergers make headlines, there is a perception that a small number of powerful competitors are taking over the world. This is one of the most widespread beliefs about globalization — in a survey of business executives I conducted a few years back, 58% agreed that "globalization tends to make industries become more concentrated." And among the general public, another survey reveals concentration to be the leading worry about the market economy in the U.S., Britain and Germany: people worry that large corporations will squeeze out small firms.

Why is this so scary? The concern is that if market power is in the hands of a few multinational companies (MNCs), there would be less competition, allowing the remaining global colossi to raise prices or reduce the quality or variety of products and services on offer, harming consumers. But fortunately, the data indicate no such global trend toward increasing industry concentration.

I have been keeping track of industry concentration data now for more than a decade and have analyzed more than 30 industries. As I describe in World 3.0, the data suggest that, in general, globalization isn't leading to higher levels of global concentration across a range of industries. Take the auto industry, for example. Back in the 1920s, Ford accounted for 50% of global auto production. Fast forward to 2010, and a total of six companies accounted for the same percentage. So why were senior executives at auto companies surprised to learn that global concentration has been decreasing in autos since the heyday of Ford's Model T? It is presumably not unconnected to the fact that they have been bombarded for decades now with bombast about how only a handful of full-line automakers will survive globalization.

Autos are not an isolated example. Between the 1980s and 2000s, I compared concentration in 11 industries. Six of these industries showed increases (carbonated soft drinks, cement, steel, oil production, aluminum smelting and paper/board) while five had decreases (automobiles, cargo airlines, copper, iron ore and passenger airlines). On average across these industries 5-firm concentration ratios, or the market share held by the top five biggest companies, did rise from 35% to 38% between the 1980s to the late 1990s. But the five-firm concentration ratios then declined back to 35% by the late 2000s. This is hardly evidence of an across-the-board trend toward rising concentration.

I later repeated the same type of analysis for 37 categories of consumer products. I found that average 5-firm concentration ratios rose from 32% in the early 2000s to 35% at the end of the decade. This rise of 3% was exactly the same as that in the earlier 11 industry sample, in which case the increase in concentration was later reversed.

And not only is globalization not systematically reducing competitive intensity by increasing concentration, it can actually help correct the problems involved when a small number of competitors take control of a market. When competition is lacking in domestic markets, consumers suffer from high prices, poor quality products, or a lack of variety. This is where foreign competition can lend a helping hand. Whether through trade or foreign direct investment, competition from abroad can provide consumers with immediate relief, as well as spur producers to up their game. Returning to my auto example, the entrance of foreign automakers into the U.S. market forced the U.S. big three to improve their quality, design, and efficiency, to the extent that GM is now the market leader in China.

That last point raised the important distinction between global concentration and national or local concentration. In all but the least distance-sensitive industries, it matters more what products are available in your own local or national market and how much they cost there, than what's on offer globally. Even if there were fewer major automakers globally (which there aren't), it's probably still more relevant to know how many automakers are present in a particular country or region, since it's rather difficult and quite costly to go buy a car on a different continent.

What are the policy implications? One approach to problems of excess market concentration is to break companies up before they get to the stage where they can dominate local or national markets. But what makes opening up to foreign producers so much more appealing than breaking companies up is that it combats market power with competition rather than regulation. This can be less disruptive and it leaves a country with its strongest potential international competitors intact. Thus, with respect to concentration, openness can serve as a substitute for regulation.

So, while there are some other factors to think about regarding globalization and market concentration that I describe in World 3.0, my conclusion is that we don't need to get too worried about globalization increasing market concentration. Instead, we should see if opening up can help us address problems of excess national market concentration. What do you think? Share your comments below, and please watch this space for future posts about globalization and other types of market failure: externalities (focusing on the environment), and the risks associated with informational imperfections. I'll also look at market fears that globalization is supposed, by its detractors, to exacerbate.

Tags:

Globalization | Market Failures and Fears

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