Any student of economics encounters, at a very early stage, the concept of international trade, as a shaper of today’s globalized world, positively advocated by most of the academics and global leaders, as a source of economic and social development. The global flow of goods and services, factories of production and ideas, has been modeled countless times by two main streams of academics: the neoclassicals and the new trade theorists.
However, trade theories have been drawn since as early as the 19th century with the goal to explaining why countries trade, with whom and how gains from trade are distributed, students still hardly address non-traditional aspects of non-contemporary trade issues, as is the trade of waste.
The concept of global/ international waste trade refers precisely to the exchange between countries of unwanted and unused material mainly categorized as non-hazardous or hazardous. Being suitable for recycling, paper, plastic, iron scrap are the most traded non-harmful types of waste. Its trading has been successful in the past years, especially in China, which together with Honk Kong, imported, from 1988 to 2016, 81$ billion worth of plastic scrap from G7 countries (Science Advances, 2018), and is highly advocated as a win-win situation in the basis of the circular economy.
Even so, as of 2018, China has imposed a ban on imports of most plastic waste claiming its contamination with hazardous materials. The question raised by China reflects the complications underlying this topic: the negative impacts on environment and health generated by waste trade due to the lack of suitably prepared waste management systems in importing countries, mainly developing countries.
That being said, as a generator of negative externalities, the activity of trading waste and even more so, hazardous waste, differentiates itself from the action of trading traditional goods that are usually depicted in the trade models (we) students first learn. Despite that, it can be analyzed in an analog way, therefore this essay’s purpose is to share some light towards this type of international trade, by acknowledging its sources and explaining its patterns, gains, and problematics, with the support of the trade theories lectured, adapted to fit the topic, according to research.
Make & Waste
As with any other ‘good’, waste trade flows increased a great deal, due to the trends that started to shape the post-industrial revolution world: population growth, increasing living standards and globalization. All of these factors contributed to a change in producing and consuming patterns. The path towards abundance engenders a noticeable pressure on natural resources and, in the end, generates extremely high volumes of waste that require the setup of collection, treatment, and disposal through either landfill, incineration or recycling, often actions taken by waste importers.
In fact, The World Bank 2018’s report affirms that a shocking 2.01 billion tons of waste are generated annually and expects an increase by 70% over the next 30 years – to an astounding 3.40 billion. The growth pattern in waste production was mimicked by the more than 500% increase in the total waste and scrap trade from 1992 to 2012 (Kellenberg, The Economics of International Trade of Waste 2015).
Additionally, even though that high-income countries only account for 16 percent of the world’s population, combined they generate more than 1/3 of the world’s waste.
In consequence of producing such a high percentage of waste, it comes as no surprise that larger economies (in terms of GDP) also trade more waste. This is largely supported by both the gravity equation, new trade theory and the role of economies of scale in promoting trade between similar economies, the case being, big economies.
From the exporter’s side, the intuition is that, by the result of larger production and consumption, the supply of waste, and more so, hazardous waste, is also higher. In its turn for importers, the possible explanations may be that, because bigger countries generate more waste, they have more developed disposal capacities, and with that, they achieve economies of scale in hazardous waste disposal activities. Moreover, larger economies may have more advanced technologies and programs to operate this activity, especially when it comes to recycling.
The aforementioned can’t, however, lead us to wrongly refuse the empirical evidence of waste flows to developing countries. When trying to explain the evidence, two explanatory theories rise through research: the first is deeply rooted in the Heckscher-Ohlin model, yet considering the negative impacts on welfare on the importing country, and the second one is usually referred as the “haven effect”, presenting developing countries a “safe places” where waste management is less regulated and, therefore, less costly.
Starting with the traditional Heckscher-Ohlin model, considering thus, non-hazardous waste (excluding negative externalities for now) and assuming that waste disposal activities are land intensive, we get to the conclusion that developing countries, where the price of land is relatively cheaper (land abundant) hence the price of land is relatively cheaper, have comparative advantages in land-intensive industries such as waste disposal in landfills. For these reasons, gains will be achieved if developing countries process foreign as well as domestic waste material. In this case, a win-win situation is created if considering overall national gains from trade.
Is trading waste then suitable for developing countries? Well, it’s in most cases cheaper to dispose of waste in these countries due to a decrease in shipping costs and the increase in land price in developed countries.
However, as mentioned, hazardous waste generates negative externalities, not accounted for in the private marginal cost (MPC-marginal private cost in figure 1) and therefore generating overproduction (Q0-Q1) of waste disposal services, as shown in figure 1. Theoretically, in microeconomics, the 1st best policy, in order to reach the optimal level of production correcting the market failure, would be to tax the industry, as shown in figure 1, by adding the tax to the MPC, therefore reflecting the marginal social cost (MSC) in the optimal price (P opt). In this case, the loss in the welfare of trading harmful waste would be reflected in through the MPC curve, reducing the quantity of waste that importing country is willing to dispose of and as a result import to (Q opt.).
That being said, governments in developing countries are not able to apply optimal taxation, either because they don’t have enough information to do so, or they are under lobby influence, additionally, in practice, the first best policy may lead to illegal waste disposal. For that reason, the second-best policy is to restrict the import of waste, being China’s example a prove that this conclusion holds.
In addition to the application of the H-O model, there has been also interesting proof (Kellenberg,2012) that differences in environmental regulations across countries have a significant impact on bilateral trade flows. Given that policies that regulate the environment are considered a normal good , low-income countries can’t afford to allocate resources to environmental policies when their population is dealing with extreme poverty, hunger, and death. The persistence of more relaxed rules in regard to waste management in this group of countries , in combination, with the low cost of shipment between North and Southern countries , generates high incentives for developed countries to trade with developing ones, as the low cost allow to increase the optimal distance of waste disposal.
In the end, we arrive at the conclusion that understanding the waste trading system is a very ambitious goal, being that, there are more than one trend that shape it: developed economies trade the largest proportion among themselves, however, the flows between them are largely of non-harmful and recyclable materials. This happens, since, developing countries have, in addition to more relaxed environmental policies, comparative advantages in land-intensive industries, such as disposal of waste (non-recyclable) in landfills.
Still, the most important point is, is importing waste a win-win situation? It can be if properly taxed, but as referred above, that is very challenging and, so, while industries win with free trade, a lot of doubts remain if these gains are enough to make up for the environmental and human health losses. And even if they are in the optimal economic sense, should we stand by the conclusions as economists and humans?
