We need a cooperating nature for international trade to save the environment
Fast crashes of financial markets and environmental impacts due to trade wars
Our society is a big machine built by parts that each serves no purpose when not put together. It’s hard for us to determine the importance or the causality links between the parts, but the failure of a single screw, for example, would place a heavier burden for other screws to keep the machine running. In our society, it’s hard for us to say that the finance industry always has a greater importance than the agriculture industry when it comes to the economy, or a teacher’s job is more important than the doctor’s. However, we should certainly know that our society is a vast connected network of links; without patients, there’s no need for doctors and without students, there’s no need for teachers. Any favoured links in our network cannot survive without the other unfavored links. The recent ongoing US-China trade war signifies the prominent issue of the network that serves no purpose to the machine. The outcome? Nobody wins.
Article summary:
- Water savings through comparative advantage
- What causes trade wars? Trade protectionism?
- Reasons we need international trade to save the environment — why soybeans is crucial to the environment?
- Effects on the Finance Industry and the rise of Artificial intelligence
- What can we do as individuals?
Water
I believe the story of international trade should begin with a type of natural resources, and the most prominent example I can think of is “water”.
Most of us have encountered the concept of comparative and absolute advantage in high school economics class. The basic idea is that a nation would gain comparative advantage if it can produce a good with less “opportunity costs” relative to other nations. Almonds, for example, is one of the corps that require an enormous amount of water to grow compare to other corps (Almonds require 4 gallons of water to produce one gram of protein). Hence, a country with scarce water resources would then choose to grow crops that are more essential and require less water than almonds and import almonds from countries that have a comparative advantage in growing almonds. In other words, water resources often becomes a crucial factor for international trade. However, most of us that live in developed urbanised areas often undermine the importance of water, so just how important is water to our society?
Well, Water is the most fundamental factor for all economic activities; each nation possess their unique access to fresh water resources that are used for agricultural, industrial production, and urban consumption. However, since there are geological limitations, some nations have severe limited water resources available to them and water productivity is constrained to their ability to utilise the available water resources. This can be done through water saving methods such as improved water infrastructure or importing water from countries with rich water resources (For example, Singapore has been importing water from Malaysia’s Johor river). On the other hand, importing/exporting freshwater for large scale agricultural, industrial production, or city consumption is not cost effective with many logistical challenges. Thus, nations with high water productivity have the ability to export commodities that require higher amounts of water resources to nations with lower water productivity; which comes back to the concept of comparative advantage.
By following the trade of agricultural products, it is possible for us to track the virtual water footprint by calculating the amount of water used to produce a unit of the product multiply by the amount that is traded internationally. The global virtual water trade have generated great water savings and positive impact on the environment. Although countries can save water through importing, they can also lose water by exporting since water cannot be used anymore once the agricultural products have left to another nation. Subsequently, the overall benefits from water saving is more accurately calculated by the net effect of the combined exporting/importing nations and not subject to the individual importing/exporting nations.
Trade protectionism and its impacts
If we take the standpoint of natural resources, engaging and cooperating between countries in global trade would help us to use common resources more efficiently and hence, achieve sustainability. However many nations evaluate their performance on trade based on their trade balance and balance of payments. Firstly, a country would determine balance of trade by subtracting the value of imports from the value of exports; if a country sells more products than it buys, then we have a favourable trade balance (trade surplus). A country’s trade deficit indicates a potential rise in unemployment rate as jobs would be lost to countries abroad, devaluing currency and lead to inflation. In other words, if you spend more money than you make, you will end up in debt, so trade deficit is intuitively a bad thing. In order to fight against trade deficit many countries would put in tariffs and other trade protectionism tactics to encourage certain products to be made domestically. By putting a tax on products from countries with comparative advantages would enable domestic products to compete on price with foreign producers. For example, putting an import tax on steel would increase the costs for industries that use steel to produce their products; the producers would eventually pass the cost to the consumers in price. Altogether, consumers in both countries would experience an adverse effect as price of the good would increase and quantity demanded would shift.
The most serious problem with trade protectionism is a potential trade war as countries would often take reciprocal measures to gain leverage in trade. A trade war means increased import costs as consumers have to pay more for products from foreign countries. According to the International Monetary Fund (IMF) a permanent 10 percent increase in American tariffs on imports from all foreign countries would result in a permanent 1% decrease in real GDP. The Smoot-Hawley Act in June of 1931, for example, introduced a tariff that raised taxes on agricultural products and goods imported from other countries. Many nations retaliated and caused global trade to drop by 67% and a fall of 75% for American exports.
Effects of trade wars on the environment
The most direct consequence of trade wars is the inefficient use of resources. As I mentioned above, international trade enables water savings for nations. However, if a barrier of trade is put on the resources such as raw materials would not allow those resources to be used and hence wasted.
Soybeans
One of the largest casualty of the recent US-China trade war is the production of soybeans. China used to purchase 60% of the corps produced in the United States, but as US’s trade protectionism on many of the Chinese imports, China decided to retaliate by imposing many agricultural related tariffs. This results in a drastic drop in demand for soybeans produced in the United States.
Most people don’t understand the importance of soybeans in the agricultural industry, especially for the environment. According to Northeast-Midwest Institute, the drop in soybean production would increase nitrate pollution of freshwater resources. Nitrates are often used as a fertilizer for crops to help them grow faster, but it would also cause pollution to soil and eventually runoff to rivers and other freshwater streams. Hence, many farmers cycle their crop production by planting soybeans to combat the pollution caused by nitrates as soybeans is a crop that is able to absorb the nitrate before it flows into our water streams. As demand for soybeans decrease due to trade protectionism, farmers in the United States do not feel a need to plant soybeans, hence risk of water pollution escalates.
Environmental technologies
“very bad for the environment because you waste resources rather than using them effectively. It will make the spread of environmental technologies less fast. And of course it will keep more people in poverty for a longer period of time”.— UN environment chief Erik Solheim
At first, I was troubled by how trade protectionism would make the spread of environment technologies less fast. After some research, apparently China is the leader in green technologies and it has spent more on cleaning up its energy system than America and the EU combined. China is also the leader in the production of many green technologies such as E-bikes, As evident by recent market trends, E-bikes is one of the fastest growing technology green transportation markets. The growth of E-bikes have been consistently growing in double digits until now. The consequence caused many manufactures to move out of China and hence a higher price for such technology, a potential drop in demand will be expected.
Is economic slowdown good for the environment?
Despite the above mentioned environmental impacts, some believed that the slow-downed economy would bring benefits to the environment as carbon emissions are cut due to a lower production. However I strongly disagree with this argument.
Trade wars indicates an economic slow-down as flow of goods between countries experience a turbulence. Hence production of goods would decrease and less resources are consumed, thus lowering carbon emissions and production related pollutions. However, as I mentioned before, achieving sustainability and fighting climate change takes a global effort of nations working together. Trade wars between two countries might have a short-term benefit on the environment, but there is always a lag. Resources consumed for products that haven’t been sold would be wasted. If a country cannot import the good cost effectively due to trade protectionism, it will simply purchase its good elsewhere, or inefficiently produce the good themselves. Thus the inefficient use of resources would eventually result in more resources being used and increase production related pollutions. Negative environmental impacts might be less for the countries experiencing economic slowdown, but if we try to measure environmental impacts on the global level, it will not change in the long term.
On the other hand, if we allow countries to share green technologies freely, we are able to produce those technologies in countries with a comparative advantage and hence lowering the resources used for production.
Effects on the Financial markets and the rise of AI
Trade wars undoubtedly create potential risks for the market as market indicator such as economic cycles would be deemed insignificant. The increase the costs of doing business due to trade-wars force firms that are short on cash to sell off its assets to reduce debt and survive market downturns. Traditionally, the lag between economic information persists as investors tend to specialise in a single sector and markets would react slowly. However with the rise of Artificial intelligence and high speed trading; it speeds up financial transactions and can be done simultaneously across different market sectors. Hence the markets react to macro-economic data faster, which leads to a violent and rapid moves on the market. Many have termed this phenomenon as a potential “flash crash”.
On the other hand, the use of artificial intelligence in financial markets have been proven to be useful in making more rational decisions and leading to a more efficient financial market. More data resources have been discovered that could influence the market and risks indicators have been broaden and analyzed. Despite what analysts called “a flash crash”, I believe the use of Artificial intelligence could benefit the market in the long run and it will be the future for the finance sector as well as as many other industries.
Read more on Financial stability and AI: http://www.fsb.org/2017/11/fsb-considers-financial-stability-implications-of-artificial-intelligence-and-machine-learning/
What can we do as individuals?
There’s nothing much that we could do with our power. The most important step is to educate ourselves and the people around us. As I mentioned in the beginning, our society is a big machine built by parts that each serves no purpose when not put together. We need to be constantly informed what’s happening around us and learn from countries and their history. History always teach us a lesson about the future and we should use it to make decisions in the future. Trump said trade wars are easy to win, but what is the definition of “winning” in this case? Everyone loses on a trade war and impacts on social, economical, and environmental sectors are costly. As individuals, we should learn to view things not too intiutively and dig deep into the causes and casualties of an argument. Assumptions are easy to make to make information seem accurate. I wrote about my opinions the arguments that would support my opinion, but you should always seek for your own. We live in the world of fast flow of information; you can find whatever you want to know, but be careful of the sources and the figures. It’s time to Google and tell the others what you found!!!
