The Analysis of Trade and Environmental Policy in the Trade between Korea and Japan Using CGE Model

Abstract

The ability of international trade to alter the composition of domestic production activities allows it to exert an important influence on the environment. Trade liberalization growth has often been associated with high and unsustainable pollution levels, and countries on this path of development are increasingly aware of the environmental risks. This paper uses data on the economy of Korea to appraise the environmental risks of its trade orientation and to evaluate some alternative economic instruments for reducing these risks. Three principal conclusions emerge from this preliminary research, two rather negative and one positive. First, Korea's historical trade orientation has been environmentally asymmetric in the sense that is occasioned significant transfers of pollution services from its trading partners of Japan to the Korea's economy. Secondly, trade liberalization by Korea is likely to raise both the levels and intensities of major industrial effluents, posing an ever more serious threat to public health. Other things being equal, these effects would be intensified by across-the-board Korean tariff reductions. Third, there is considerable scope within the economy for reducing both the level and intensity of domestic pollution under existing technologies. This can apparently be achieved by economic instrument which change the composition of domestic output, including important tariffs and effluent taxes. Such taxes may lead to reductions in real output, but by significantly smaller percentages than the pollution reductions. We have assessed the relative cost of curtailing pollution with a variety of instruments, including export taxes, specific effluent taxes, and uniform effluent taxes. A combination of uniform tax and tariff removal is simulated to examine the possibility of lowering domestic emissions and raising material welfare simultaneously. Our simulation results indicate that a uniform effluent tax is the most cost effective instrument in abating SO2 emissions. Our results shows that it is possible to abate industrial pollution while maintaining or increasing real output when uniform taxation is combined with trade liberalization. Trade liberalization should not be discouraged because of its environmental effects.

Keywords

• SAM
• CGE model
• Effluent Intensities of Pollutant Uniform Effluent Tax
• Equivalent Variation (EV) Income
• AHTL