Environmental Standards and International Trade in Automobiles and Copper: The Case for a Social Tariff

Natural Resources Journal, Sep 2017

Duane Chapman

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Environmental Standards and International Trade in Automobiles and Copper: The Case for a Social Tariff

Natural Resources Journal Environmental Standards and International Trade in Automobiles and Copper: The Case for a Social Recommended Citation 0 0 Duane Chapman, Environmental Standards and International Trade in Automobiles and Copper: Th e Case for a Social Tariff , 31 Nat. Resources J. 449 (2020). Available at: Environmental Standards and International Trade in Automobiles and Copper: The Case for a Social Tariff Worldwide acid rain sulfur emissions are increasing, in spite of reduced emissions in the United States. This increase is due to the growth in manufacturing outside the United States without adequate pollution control. Copperand automobilesmake useful case studies. Copper is a pollution-intensive raw material, and automobiles are pollution-intensiveproducts.Both are tradedon a global basis.Production of each is less costly outside the United States because environmental protection is frequently absent. Ultimately, global agreementswill be reachedon industrialpollution control,analogous to the MontrealProtocolon chlorofluorocarbons.Until such agreements exist, a socialtariffon UnitedStates importscould be valuable. The tariffcould be based upon the degree of avoidance of environmentalprotection costs in the manufacture of imported goods. Since 1970, global sulfur oxide emissions have increased 50 percent.' As Figure 1 indicates, this global increase has occured despite the 25 percent decrease in United States emissions. National reduction of sulfur emissions have been more than offset by increased emissions in the rest of the world. The growth in world emissions, and subsequent pollution, arises from the increased use of coal, oil, and metal ores without adequate sulfur control. This paper examines the significance of pollution control costs, and the avoidance of these costs, to trade and development. The general belief among economists is that industrial country pollution control and workplace safety are unimportant economic factors in influencing productivity, *Professor of Resource Economics, Department of Agricultural Economics, Cornell University, Ithaca NY 14853. Research supported by the New York State Agricultural Experiment Station at Cornell University and the Department ofAgricultural Economics. The assistance of Wendy Bacon is appreciated, as are the valuable comments of a Journalreviewer and several readers of earlier versions of the paper. 1. Environmental Data Report, U. N. Environment Programme at 12, U.N. Doc. GC14/L.6 (1987). (million metric tons) 1940 1950 1970 1960 Years the location of manufacturing, or levels of global pollution. For example, Edward Denison finds that United States productivity declined at a 0.22 percent rate from 1973 to 1981. He attributes this primarily to a reduction in managerial and technical knowledge and efficiency and finds environmental factors to be unimportant with respect to productivity. The OECD Environment and Economics Conference, Walter, Smith and Ulph, and Leonard agree. 2 This paper, however, develops evidence to the contrary. TRADE IN AUTOMOBILES AND COPPER The largest flow of cars, trucks, and buses in world trade is the movement of four million vehicles from Japan and Korea to the United States. 2. Denison, Accounting for Slower Economic Growth:An Update, in International Comparisons of Productivity and Causes of the Slowdown 46 (. Kendrick ed. 1984); Organisation for Economic Cooperation and Development, Environment and Economics 61-6 5 (1985 ); Walter, Environmentally InducedIndustrialRelocation to Developing Countries, in Environment and Trade 22 (S. Rubin & T. Graham eds. 1982); Smith & Ulph, The Impactof EnvironmentalPoliciesin DevelopedCountries on the Trade of Developing Countries, in Environment and Development in Asia and the Pacific 112 (1982); and H. Leonard, Are Environmental Regulations Driving U.S. Industry Overseas? (1984). This is nine percent of all of the 4 5 million vehicles produced in 1986 , and 22 percent of all world trade in vehicles.' An average passenger vehicle consists of 3200 pounds of material. Table 1 indicates the raw materials in an automobile. Japan almost wholly lacks the mineral and fuel resources needed to produce those automobiles. Table 2 shows Japan's resource dependency in basic resources. This dependency is matched by South Korea and the other newly industrializing countries in East Asia. It seems, then, that Japan's contribution to global pollution is connected to both the supply of raw materials from resource-exporting, developing countries, and to United States product demands. In other words, an American buyer of a Japanese vehicle purchases a commodity which incorporates the environmental protection or worker safety problems of the resource exporting countries. Copper trade is studied here because of its importance as a source of acid rain sulfur emissions in the absence of sulfur control. In northern Mexico and the southwestern United States, the ore types result in a smelter feed which generally has one unit of sulfur for each unit of copper produced. Consequently, in the absence of sulfur controls, for each ton of copper produced by the smelter, one ton of sulfur is emitted into the atmosphere, or passed into the water or land environment. Each ton of sulfur, in turn, will be transformed into two tons of sulfur oxide, and three tons of sulfuric acid. 6 Table 3 illustrates that the major exporting countries average 32 percent control of sulfur emissions. Those industrial importing countries that smelt copper average 89 percent control. (The index of sulfur control in Table 3 is zero if the maximum of one ton of sulfur is released into the atmosphere for each ton of copper produced. The index of control would reach 100 percent if no sulfur became airborne, and any sulfur in the ore was converted into sulfuric acid, or retained in slag or a tailings pond.7 ) Sulfur control presumably increases production costs. If this is the case, an automobile manufacturer that buys lower cost copper attains a cost advantage due to the absence of pollution control in the refining process. At this point, the relevant generalization is that Canadian and West German manufacturers of automobiles exporting their product to the United States obtain their raw materials from countries with generally less pollution control than is practiced in the United States, Japan, or Western Europe. This subject is addressed in greater detail in the fourth section, below. IMPORTER COST ADVANTAGES FOR AUTOMOBILES Table 4 summarizes five types of cost differences between Japan and the United States for automobile manufacturing. The most important 6. Some fraction of contained sulfur, on the order of 3 percent, will be held in the smelter slag; the remainder will be airborne. 7. The index is constructed to reflect the amount of atmospheric SO 2 emitted per ton of copper produced, taking into account ore type and hydrometallurgical processing as well as sulfur control. 8. Table 3 includes all market-economy countries with at least 200,000 metric tons at one or more stages in 1985. The sulfur control index in Table 3 is defined as I less the ratio of emitted sulfur to copper production. (See supra notes 6 and 7). Stockpile changes are not shown. World Bureau of Metal Statistics, World Flow of Unwrought Copper (1985); see also D. Maxim, The International Competitiveness of the U.S. Non-Ferrous Smelting Industry and the Clean Air Act (1982), and Air Pollution Requirements for Copper Smelters, United States compared to Chile, Peru, Mexico, Zaire, and Zambia (May 1985); and author's visits to copper manufacturing plants in the U.S., Mexico, Chile, South Africa, Zambia, and Zaire. Group totals are weighted averages. difference is the estimated cost savings from avoided environmental protection costs. These costs are estimated from 1-0 (input-output) data summarized in Table 5. The 1982 data for eighty-one commodities were aggregated into the eighteen categories in Table 5.o Since $15,000 is the current average price of both domestic and imported cars,"' it is used as the basis for Tables 4 and 5. It is assumed that smaller environmental costs for developing country suppliers reduce the costs of Japanese mining, chemicals, energy, and metals by ten percent. It is further assumed that the same factor is five percent for other manufactured commodities. The magnitude of these percentages is critical, and the validity of the percentage assumptions is examined in the following section. Summing up the entries in Table 4, the Japanese manufacturer has an advantage of about $1300 per vehicle. As illustration, about $1550 is before-tax capital income for the United States manufacturer,' 2 and the figure may be about $2850 for the Japanese manufacturer. The overall context, then, is that an estimate of $2100 in avoided environmental protection costs is essential to providing for the profitability of the sale of Japanese cars in the United States. It is critical to examine the empirical basis for this estimate. 9. For Table 4 notes, see Appendix. 10. Table 5 in the text is developed from the coefficients in Table 4 of the 1982 1-0 set, provided to the author by the Bureau of Economic Analysis, Department of Commerce. 11. 28 Survey of Current Business 20 (Nov. 1987). 12. Before-tax capital income is 0.104 of sales. 65 Survey of Current Business 17 (Nov. 1985) , and Table 3, 1982 1-0 analysis supra note 10. R. Cole and T. Yakushiji, The American and Japanese Auto Industries in Transition 117 (1984), report that the United States government tax on labor and capital is $650 higher than the Japanese tax. As noted above, most authors have found pollution abatement costs to be generally insignificant for most industries. However, a detailed review of copper production costs indicates that environmental protection and worker safety cost approximately 15 cents per pound.' 4 The major items involved are shown in Tables 6 and 7. With current production costs in the United States at about 65 to 70 cents per pound, 5 these costs are 20 to 25 percent of production costs. The most comparable figures from other economic studies are on the 13. See supra note 8. 14. Based upon actual accounting records for equipment and personnel. Sources withheld to protect confidentiality. It should be noted that an informed reviewer believes some of the items in Tables 6 and 7 would be utilized by an efficient management in the absence of environmental regulations. This seems logical. However, on-site visits to copper mines and smelters in South Africa, Chile, Mexico, Zambia, and Zaire did not support this view because the Table 6 and 7 items were generally absent. South Africa, in particular, used the most modem production technology without these aspects of environmental and worker protection. 15. I U.S. Dep't of the Interior, Bureau of Mines, 1986 Minerals Yearbook 331 (1988). order of one or two percent. These are the estimates of environmental protection costs for the nonferrous mining and smelting industries. 6 The other studies have used Federal survey data. 7 How can these differences be reconciled? There are several possibilities. First, many environmental activities that are a part of a production process may not be reported in surveys. For example, the labor, fuel, and equipment costs of dust control in a pit mine by use of watering trucks may not be reported. Similarly, collateral protection devices that are a secondary part of production equipment, such as the cost of a dust hood, or fans and hoods on a grinder, may not be reported. Second, monitoring and planning activity may be excluded from surveys. For example, surveys may omit the environmental protection expense of: (a) professional time spent with visitors inspecting protection systems; (b) meteorological monitoring of ambient air quality; (c) envi Environmental Protection Activities and Equipment in Copper Production s a. air and water pollution control for coal burned for power generation b. bag house on crusher c. berms for chemical storage d. covered conveyor e. primary convertor hoods f. fugitive emission hoods g. gas collection fans, electricity h. hazardous waste control i. meteorological data and forecasting for possible pollution emergencies j. monitors for air and water quality k. PCB control 1. storm catchment reservoir for ten-year storm m. tailing reservoir and drain n. tall stack o. waste oil control and monitoring p. water discharge plans and monitoring q. water recycle zero discharge r. water spray for dust control s. wet scrubbers t. acid plant u. professional environmental protection personnel v. Federal and State reports and meetings 16. I. Walter, Environmental Resource Costs and the Patterns of North-South Trade 16 (April 1986) (unpublished manuscript); C. Pasurka, EnvironmentalControl Costs and U.S. Effective Rates of Protection, 13 Pub. Fin. Quarterly 167, 168 (April 1985); see also supra note 2 and text. 17. Historically, there were two Federal surveys. The Bureau of Economic Analysis surveyed business investment in plant and equipment for pollution abatement. The Census Bureau surveyed both operating and capital costs incurred by manufacturing industries. These surveys are being reorganized. Comments here are based upon discussions with personnel in the Bureau of Economic Analysis, the Bureau of the Census, and management personnel at mines and smelters. 18. Sources for Tables 6 and 7 are personal interviews and confidential accounting records at mines and smelters. ronmental planning; (d) time and expense in report preparation and meetings with State and Federal regulatory personnel. A third omission from survey data is the cost of protection of workers from environmental hazards. All the items in Table 7 are excluded.20 A fourth excluded item is productivity loss. When production stops or is slowed because of environmental problems, this is not counted as an environmental expense. A fifth factor in under-reporting environmental costs in surveys may be the perception of managment: current management may not perceive practices that preceded them as protective; they may simply focus on environmental practices introduced during their tenure. Examples here may be respirators, or tall stacks. Finally, interest expense or opportunity cost for investment in protection equipment is not included in the survey data. This could be significant. Whether or not these six factors are sufficient to account for the difference between my estimate (20 to 25 percent) and previous economic studies (two percent) is an open question. Certainly field research on environmental protection, worker safety, and productivity should be encouraged. In 1973, only 11 percent of United States' primary copper consumption was imported, refined copper. By 1986, this proportion had grown to 36 percent.2' Although copper demand has been constant for fifteen years at about two million tons annually, we now import about one million tons embodied in automobiles, consumer electronics, capital goods, plumbing equipment, and so on.' Apparently, overall copper consumption has increased in the United States while smelting has decreased. 19. Id. 20. Sources for this discussion are those for Tables 6 and 7; see supra note 18. 21. U. S. Dep't of the Interior, Bureau of Mines, supranote 15, at 303; Copper: A Chapter from Minerals Facts and Problems 13 (1985) (unpublished manuscript). 22. Analysis of U.S. imports prepared by T. McClive (1988) using 1-0 data on copper content. McClive estimates about 200,000 tons of copper are embodied in imported motor vehicles and equipment annually. This, presumably, is part of the explanation for the growth in sulfur emissions from copper production outside the United States. The rest of the world has increased its SO2 emissions from copper production from five million tons in 1970 to 12 million tons in 1983. The United States reduced emissions from copper from three million tons to one million over the same period. 23 This reduction was attained both by sulfur scrubbing and the closing of noncontrolled smelters. Thus, the global acid rain problem is increasing, as Figure I indicates, in spite of United States reductions. In one important respect, the copper data do not support the hypothesis that Japanese cars have lower production costs because of the absence of pollution control in pollution-intensive raw materials. In Table 3, Japan had smelter production equal to 75 percent of its copper consumption, and 98 percent control of sulfur emissions. Consequently, it cannot be argued that imported copper is a major component of potential Japanese cost advantage with respect to pollution-control avoidance. A Japanese cost advantage must be found in the importation of industrial resources other than copper, or in the avoidance of environmental protection costs at the mining stage before smelting. However, the copper data support the concept for two other major automobile exporters, Canada and West Germany. Canada is the second leading exporter of vehicles to the United States, and Table 3 shows its sulfur control at 26 percent. West Germany, the world's second leading producer and exporter of vehicles after Japan, imports 99.9 percent of its copper, two-thirds of which has been smelted prior to import, primarily in developing countries. The recent fluctuations in copper commodity markets help protect United States copper producers from the competitive advantage held by developing country producers. In early 1989, the price exceeded $1.50 per pound, more than twice average production costs. As long as this worldwide price is near this level, United States producers will continue to prosper. If competitive markets return to the much lower price levels present in the mid-1980s, it would seem unlikely that United States production could be internationally competitive at its present production level. A SOCIAL TARIFF The illustrative subject matter here has been a raw material (copper) and a complex final product (vehicles). Both are consumed and produced on every inhabited continent, and widely traded. Forty percent of all vehicles and 70 percent of all copper are sold in international trade. Several other pollution-intensive commodities are also traded globally. These include metals, petroleum, coal, forest and paper products, fruit and vegetable produce, and ordinary metal products such as silverware. The pollutants produced affect domestic workers and the public, and have transnational and global effects. We have reasonably firm data on growth in world sulfur, chlorofluorocarbon, and carbon dioxide emissions. We can speculate with some confidence that global accumulations of hydrocarbons, nitrogen oxides, and lower atmosphere ozone are also increasing. There may be growing pollution of world oceans with metals and chemicals, but there are no global data on these two pollutants to confirm or deny the possibility. If current national policies continue, we may confidently anticipate exponential growth in world emissions of pollutants. Economic theory offers three broad kinds of remedies: bribes or payments from pollution recipients to polluters, taxes or fines on pollution, and regulation of pollution emission. Ultimately, we can anticipate global agreements on standards for emissions of major pollutants. If these standards are defined on a per capita basis, they will tend to encourage developing countries to "catch up" in terms of higher pollution levels. If international agreements are defined in terms of percentage reductions from current levels, they will tend to hinder developing country growth by freezing their pollution-intensive industry potential. One likely outcome is some balance between per capita emissions and percentage rollbacks, as with the Montreal chlorofluorocarbon treaty. Another approach would be framed on the basis of pollutant emissions per unit of final product. Some future agreements may also consider pollutant emissions per dollar of gross domestic product. Ambient air standards are another potential basis for agreement. Before global agreements are established, consideration should be given to environmental or social tariffs based upon cost advantages obtained by avoiding commonly available pollution control technologies. If, for example, this tariff is set at 50 percent of the avoided cost, then given the estimates in this paper, imported Canadian copper might have a tariff of up to seven cents per pound. A Japanese or Korean car might be subject to a tariff of 33 cents per pound.24 An environmental tariff could have several positive consequences. First, the funds raised could be used to finance pollution control in developing countries. Second, some part of the tariff funds could be allocated for research on the general problems of transnational externalities and world 24. This is 50 percent ofthe $2100 per vehicle environmental cost differential in Table 4, divided by the 3,178 pounds in Table 1. pollution. Third, producer resistance to pollution control would be diminished. With a 50 percent tariff, each dollar spent on pollution control in the production of an exported car or refined copper would reduce net income by fifty cents. In addition, a social tariff would enhance the domestic political position of groups advocating environmental protection in developing countries. Finally, the economic position of producers using modem methods of pollution control would be enhanced rather than eroded. There are three approaches to such a tariff: global, including the Soviet Union and China; industrial-market economies, meaning Japan, Korea, Australia, Western Europe, and North America.; or, finally, implementation by the United States. The most practical near-term approach is probably to build domestic United States support for a general trade and tariff agreement covering environmental protection costs. Should wage levels and worker safety be included in international social tariffs or standard-setting agreements? At some future point in time, the answer will probably be yes. But for the present, the need for policies addressing global pollution arising from world trade is evident. APPENDIX: WAGE AND PRODUCTIVITY CALCULATIONS All figures in Table 4 are rounded to the nearest $25. With higher U.S. taxes and benefits, the after-tax advantage is probably much greater. The $1500 pricing differential for cars of the same quality is assumed to be 10 percent of retail price, and is based on the Cole and Yakushiji discussion of marketing and pricing.' The higher Japanese transport cost of $450 is also based on their analysis.2 6 The labor cost differential of $1150 per vehicle was based upon three different methods of estimating U.S. labor cost per vehicle, each giving an estimate of approximately $3200 per vehicle. In the first method, production worker pay is assumed to equal the average for all employees. In other words, the production worker rate of $20.53 per hour is assumed to be the average for all clerical, sales, managerial, and production workers. This is multiplied by 2000 hours per year, and divided by 13 vehicles per employee.27 The result is an estimate of $3158 per vehicle. In the second method, an average 1985 motor vehicle industry pay of $31,559 was assumed to be the basis for industry-wide benefits of 29.1 percent for all employees, the I-0 value for the auto industry. This was increased by 1.7 percent, the reported increase for production workers in total compensation per hour between 1985 and 1987.' Dividing again by 13 vehicles per employee, the result is an estimate of $3187 in labor cost per vehicle, $29 higher than the first method. In the third method, the value-added coefficient (0.331) is multiplied by the ratio of wages and benefits to value added (0.685), and by the $15,000 price.29 The result of this method is a labor cost per vehicle estimate of $3401. The estimate of 13 vehicles annually per employee is based upon the U.S. production of 10.906 million vehicles in 1987 with 841,508 employees.3 ° Cole and Yakushiji review several studies of Japanese and American productivity, and cite Japanese studies finding a 10 percent differential, or 14.3 vehicles per employee.3 Total Japanese compensation is 70 percent of the U.S. level for production workers.32 Taking the median U.S. estimate of $3187 total labor cost per vehicle, and assuming 10 percent greater Japanese productivity and 30 percent lower wages, the result is an estimate of $2028 labor cost per Japanese vehicle. The arithmetic difference of an $1159 wage differential is rounded to $1150 in the text. 3. Japan and Korea each export more than one-half of their production . In 1986 , Japan produced 12 . 9 million vehicles and South Korea produced 600 thousand . Motor Vehicle Manufacturers Association, Facts and Figures 8 ( 1986 - 1988 ). 4. Data are estimated for U.S. cars . In 1976 , the average was a higher 3761 pounds. The reduction is equal to the smaller amount of steel used now . Motor Vehicle Manufacturers Association, Facts and Figures 74 ( 1988 ). 5. Statistical Yearbook for Asia and the Pacific, [1985] Y.B. on Energy Statistics, U.N. Doec . ST/ ESCAP/427; III U.S. Dep't of the Interior , Bureau of Mines , 1986 Minerals Yearbook: Area Reports, International ( 1988 ). 23. See U.S. Envtl . Protection Agency, National Air Pollution Emission Estimates ( 1984 ), and Environmental Data Report, supra note 1. 25. R. Cole and T. Yakushiji , supra note 12, at 108. 26. Id . at 116. 27. Motor Vehicle Manufacturers Association ( 1988 ), supra note 4 , at 70. 28. Id ., and Motor Vehicle Manufacturers Association ( 1986 ), supra note 4 , at 69. 29. 65 Survey of Current Business 17 ( Nov . 1985 ) ; 1-0 Table 3 , supranote 10. 30. Motor Vehicle Manufacturers Association ( 1988 ), supra note 4, at 6 and 70. 31. R. Cole and T. Yakushiji , supra note 12, at 122. 32. Motor Vehicle Manufacturers Association ( 1988 ), supra note 4 , at 70.

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Duane Chapman. Environmental Standards and International Trade in Automobiles and Copper: The Case for a Social Tariff, Natural Resources Journal, 2020,