Common Tragedies

Thoughts on Environmental Economics

Regulating from abroad and the EKC

Posted by Evan Herrnstadt on December 12, 2007

The New York Times reported today that China has agreed to increase American oversight of food safety procedures:

The safety accord, part of several aimed at easing economic tensions with China on a number of divisive subjects, would impose new registration and inspection requirements by Chinese food exporters for 10 specific products, with the United States government maintaining a public list of the exporters’ records.

Interestingly, HHS Secretary Michael Leavitt is optimistic that U.S. FDA officials will eventually be embedded in Chinese bureaucracy to help expedite the development of good practices.

Let’s join Leavitt in his optimism for a second and suppose this limited development takes hold and expands, thus revolutionizing food safety oversight in China. If this occurs, it is a good example of the U.S. using its trade and economic power to encourage regulatory progress in a developing nation. I was intrigued by this development — many have claimed that importer outrage is one avenue by which trade can raise standards across the developing world. So why do we not see such substantial, public developments occurring in the arenas of labor and environmental standards?

Food safety is something of a unique area of regulation. Lack of regulation in China results in the United States importing tainted food, resulting in sicknesses and death right here at home. By encouraging China to enforce standards more stringently, price of Chinese food exports will likely go up. Basically, we see the costs of poor regulation and are so outraged that we won’t even worry about the incremental price bump necessary to reduce them to a tolerable level. In fact, the costs of food safety are probably overblown by the media, as every recall becomes a huge scare over the evil, lax ways of the Chinese economic empire.

Compare this to labor. (Let’s set aside all the arguments that low wages are relative, it’s the worker’s best option, etc. If you can’t, consider obvious “benefits” like bathroom breaks and freedom from sexual assault. I’m not trying to make a normative argument about sweatshops.) No doubt that many people think about labor regulation from time to time, especially when confronted by anti-sweatshop activists. However, few people probably associate low wages and standards as they pay extremely low prices at Old Navy, et al. Thus, from the viewpoint of the consumer, the main impact of international uniformly high labor standards is higher prices, and thus, lower real wages here. Basically, it’s not that people don’t care about foreign workers, it’s just that low labor standards in a Vietnamese textile mill is not threatening the safety of someone wearing a t-shirt because they bought it for $6 instead of $10. In fact, low labor standards are only increasing that person’s real income.

Now consider environmental standards, especially pollution embodied in imports. While there are some instances in which this pollution does actually directly affect American consumers (e.g. Chinese plumes reaching California), we are not seeing the stark impacts from these emissions as we did with acid rain caused by American smokestacks. As statues melted like ice sculptures, it became more apparent that we probably needed to regulate SOx somehow. Although some do call for more stringent environmental regulations on U.S. imports from the developing world, the only impact that the majority of Americans would notice is, again, higher prices and lower real income.

Basically, the point is that because the negative externalities of lax labor and environmental regulation is largely localized, the enormous purchasing power of Americans is likely to remain an impotent instrument of progress. Although the fraction of the U.S. economy that really pays attention and purchases carefully could help things along incrementally, these issues are not likely to be addressed through outside pressure. I’m wary to cite the always tenuous environmental Kuznets curve, but I think it’s clear that in the developed world demand for environmental regulation has risen with the income of those directly affected.

This raises two questions (which, if I were to answer definitively, ought to get me tenure somewhere). I’ll leave them open to discussion.

1. Is regulation a luxury good or does it just seem this way because higher average incomes may have coincided with a politically empowered and pollution-affected middle class?

2. If the latter, more political answer is true, do labor regulations necessarily precede stringent environmental regulations? (Maybe I’ve been reading too much Krugman…)

Update: Dani Rodrik’s take on this news.

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