Will trade liberalization harm the environment? The case of indonesia to 2020

Most-favoured-nation (MFN) trade liberalizations will always improve global economic welfare provided globally optimal environmental and other policie s are in place. But since the latter proviso is not met in practice, empiri cal studies of the environmental and resource depletion effects of such ref orms are needed to determine whether trade reform is still worthwhile. This paper provides a methodology for doing that. It is illustrated with a case study of Indonesia, a large newly industrializing country that is rich in natural resources and committed to taking part in major multilateral and re gional trade liberalizations over the next two decades. A modified version of the global CGE model known as GTAP is used to project the world economy to 2010 and 2020 without and with those reforms. An environmental module is attached to the Indonesian part of that global CGE model so as to measure the effects of changes in economic activity on air and water pollution. The proportional contributions to environmental indicators of changes in the l evel and composition of output, and changes in production techniques, are i dentified. A base case projection without trade reform is compared with alt ernative scenarios involving full global implementation of Uruguay Round co mmitments by 2010, and the additional move to MFN free trade by APEC countr ies by 2020. The study suggests that, at least with respect to air and wate r, trade policy reforms slated for the next two decades would in many cases improve the environment and reduce the depletion of natural resources and in the worst cases would add only slightly to environmental degradation - e ven without toughening the enforcement of existing environmental regulation s or adding new ones, and even if the reforms stimulate a faster rate of ec onomic growth.