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In economic theory, free international trade in goods and factors is seen as a source of wealth and welfare gains. Restrictions on trade and factor movements prevent the factors of production from moving to the locations of their most efficient utilisation and are, therefore, in general undesirable. The exceptions to this rule are based either on second-best arguments (the infant industry argument) or on strategic considerations that lead to Prisoner's Dilemma situations (the optimum tariff and strategic trade policy). Moreover, the stylised facts of post-war economic history suggest that outward-oriented development strategies employed, e.g., by East Asian countries have been much more successful than import substitution and the striving for self-reliance that were the philosophies of development in many Latin American countries and the Council of Mutual Economic Aid. On the background of this historical experience and of the theoretical work of the last decades, most economists now accept the general validity of the free-trade principle, at least as a good rule of thumb (Krugman (1987)). This view has come under attack again, now by environmentalists.
There are several reasons for environmentalists to be sceptical about free trade and unrestricted factor movements. Free trade has specialisation effects and inevitably some countries will specialise in the production of pollution-intensive goods. This will increase environmental disruption in these countries and, if there is transfrontier pollution, also elsewhere. The second problem is that of capital mobility and foreign direct investment. Owners of capital are looking for the most profitable investment opportunities. Since high levels of environmental regulation raise production costs, capital will, ceteris paribus, move to the country with the lowest pollution abatement requirements.
Concerns about tropical deforestation have led to an increased focus on the role of the timber trade in promoting forest depletion and degradation. Recent reports suggest a marked increase in tropical deforestation in the 1980s, with the overall rate doubling from 0.6% in 1980 to 1.2% in 1990 (Dembner 1991). However, the deforestation rate varies across regions, with an estimated annual rate for Latin America of only 0.9% compared with 1.7% for Africa and 1.4% for Asia.
Despite concern over the state of tropical deforestation and its implications for global welfare, several recent studies have indicated that the tropical timber trade is not the major direct cause of the problem – perhaps less than 10% of total deforestation – rather, it is the conversion of forests for agriculture that is much more significant (Amelung and Diehl 1991; Barbier et al. 1994b; Binkley and Vincent 1991; Hyde et al. 1991). Nevertheless, it is clear that current levels of timber extraction in tropical forests – both open and closed – exceed the rate of reforestation (WRI 1992). Less than 1 million hectares, out of an estimated total global area of 828 million hectares of productive tropical forest in 1985, was under sustained yield management for timber production (Poore et al. 1989). Moreover, timber extraction has a major indirect role in promoting tropical deforestation by opening up previously unexploited forest, which then allows other economic uses of the forests such as agricultural conversion to take place (Amelung and Diehl 1991; Barbier et al. 1991).
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