Problems With Current U.S. Policy.

Current U.S. policy rests squarely on neoliberalism--dismantling national barriers to international trade and investment and creating global commercial disciplines while leaving the social and environmental regulation of markets to nations.

U.S. foreign policymakers, however, are not wholly insensitive to environmental concerns. The Office of the U.S. Trade Representative has a section devoted to natural resources and the environment. At the World Trade Organization, the U.S. has been viewed as a leading environmental proponent--at least when it suits U.S. commercial interests. In keeping with its overarching commitments to neoliberalism, U.S. investment/ trade-environment policy has two tenets: 1) liberalization is, on average, good for the environment; and 2) the best way to increase MNC global environmental performance is through voluntary corporate self-regulation.

What is the evidence that these tenets are valid? In a recent literature review, the OECD found that FDI generates both positive and negative environmental impacts at the micro (that is, plant or locale) level. However, the OECD identified a significant research gap on the ecosystem-wide scale or macro effects of FDI, especially of FDI-induced increases in income. Free-marketeers have made much of two studies by economists Gene Grossman and Alan Krueger showing that environmental quality rises with income, once per capita income reaches about $5,000-8,000. Richer consumers, for example, are able to buy better cars, reducing air pollution.

These studies, however, utilize narrow indicators of local environmental performance, e.g., measures of urban air and river pollution in Mexico. They ignore a range of other environmental impacts that have been shown to increase with affluence, including bioaccumulating toxic and hazardous wastes, the loss of biodiversity/habitat, and atmospheric pollution. Raising incomes in developing countries should be a central goal of global investment rules, but it will not, of itself, put economic development on an ecologically sustainable footing.

Moreover, foreign firms apparently do not consistently perform better in developing countriest. In some sectors, notably energy, foreign firms are likely to have superior technology or close links to "green consumer" markets. Both foreign and domestic firms seem to be incrementally improving their environmental performance in many parts of the world, primarily due to national regulation and/or local community pressure. In the main, foreign links, including export markets and plant ownership, seem to make little difference to firm performance. Though FDI may offer benefits in particular sectors in particular countries--for example, cleaner energy technologies in China--there is no discernible, broad "pollution halo."

There is some evidence that green consumers in Europe and North America are using ecolabels to positive effect, especially concerning sensitive resource-based products like timber and bananas. The improvements, however, have been incremental. The "Eco OK" label, for Costa Rican banannas allows European consumers to reward producers who reduce agrichemical inputs and improve worker health and safety. However, it does not stem--and may even promote--the widespread ecological damage caused by monocultural banana production. Thus, even the halos that do exist are apparently pretty small.

On the other hand, there is little evidence to support the "pollution haven" hypothesis, at least in terms of the industry-location variable. Differences in environmental standards seem to have little influence on where firms locate, probably because costs of compliance with environmental regulations are low. However, there is substantial evidence of poor environmental performance by foreign companies in developing countries. Indeed, in some cases, FDI has generated egregious local and even national ecological degradation with severe impacts on human health--oil exploration and drilling in Nigeria and the Amazon, minerals extraction in Indonesia and the Philippines, chemical plant explosions such as in Bhopal. Thus, although foreign firms may not be drawn to relocate by lower standards, they may perform like environmental renegades once they get there.

There is also substantial case-study evidence that local policymakers--from Costa Rica to China to California--are sensitive to the potential effects of higher environmental standards on MNC investors. They may not weaken standards, but-they may not enforce them either, and they certainly hesitate to raise them.

This mix of demonstrated impacts mitigates against any overarching conclusion about the effects of FDI "on average." There is no average; performance is context-dependent and other things are far more important than ownership. If a goal of U.S. foreign policy is to promote ecologically sustainable development on a global basis, then what is needed is effective collective regulation of industry that addresses both the "micro" and "macro" ecological impacts of international investment.

What about the efficacy of corporate self-regulation? As yet, there are few in-depth studies, and research is hampered by the reluctance of companies to disclose environmental performance data in either domestic or overseas operations. Early evidence from the U.S., however, suggests that experiments to give more regulatory flexibility to corporations, especially in the high-tech sector, have fallen short of expectations. Without better company disclosure and third-party monitoring, self-regulation will be doomed to the realm of public relations-type claims--including by U.S. policymakers--that lack credibility.

Key Problems

* The U.S. has single-mindedly pursued investment liberalization without considering environmental impacts either at home or overseas.

* U.S. policy is based on two unproven tenets: that, on average, FDI is good for the environment and that voluntary self-regulation is the best way to raise corporate environmental performance.

* The evidence shows that the environmental impacts of FDI are context-dependent and that effective regulation is key to corporate environmental performance.

Lyuba Zarsky is Codirector of the Berkeley-based Nautilus Institute for Security and Sustainable Development and manages the Globalization and Governance Program.

Lyuba Zarsky, Nautilus Institute for Security and Sustainable Developement