Pollution and International Trade in Services

Two major topics in recent rounds of international trade negotiations have been environmental concerns, and services trade. While each is undoubtedly important, they are unrelated. The service sector emits only a small part of overall pollution, and those service industries that do pollute do not trade internationally. This paper uses data on trade in services from the U.S. Bureau of Economic Analysis, and data on the pollution intensity of various industries from the U.S. Environmental Protection Agency, to demonstrate that the correlation between services trade and pollution intensity is negative. Acknowledgments I am grateful to the National Center for Environmental Economics (NCEE) and to Resources for the Future for hosting me during parts of this research, to Mun Ho, Carl Pasurka, and Jared Creason for helpful conversations and suggestions. Roy Huntley and Rhonda Thompson at the EPA provided invaluable help interpreting the National Emissions Inventory. Pollution and International Trade in Services Recent rounds of international trade negotiations have increasingly addressed services, a sector that has been growing as a share of output in industrialized countries, and the negotiations have also increasingly focused on how trade might affect the environment. It is natural, therefore, to link these two subjects and ask whether increased trade in services might affect the environment. In this paper I show that the servicesenvironment link is small, for two reasons. First, services account for only a small fraction of overall pollution; and second, those service industries that do emit pollution (including through the use of intermediate inputs that themselves pollute) tend to be the ones that are least likely to be traded across international borders. Trade in services only became a formal topic of discussion in 1986, with the Uruguay round of world trade negotiations. These talks led to the General Agreement on Trade in Services (GATS), which became law in January 1995. Meanwhile, the combined value of imports and exports of services to the U.S. grew from $296 billion in 1987 to $1.6 trillion in 2007 (see Table 1). Adjusted for price inflation, this amounts to a 243 percent increase in international services trade. During the same period, U.S. international goods trade grew by 183 percent. So while the service sector only makes up 35 percent of U.S. international trade, its share has been growing. It is thus easy to see why services have become increasing important to international trade negotiations. It is also clear that the environment has become increasingly important to trade negotiations. Environmental groups have long protested trade agreements, partly out of concern that producers will relocate to countries with weak pollution regulations, avoiding strict regulations in developed countries and damaging the environments of