Hello, and welcome back. So far this course has focused on the benefits and positive external effects of international trade and investment. In economics however, there is no such a thing as a free lunch. In this video, we will look at the cost of internationalization, especially through the lens of sustainability, zooming in on the environment and human development. By the end of the video, you will be able to look at the trade and investment from a holistic perspective. External effects of international trade are especially relevant for developing countries as you can see on this slide. The slide reports findings of a study from 2020 published in Nature Sustainability. The study investigates the association of trade and the achievement of a selection of environmental SDG targets. From the graphs, you may draw the conclusion that accounting for negative external effects is even more relevant for developing countries. But is it really the case? To establish the truthfulness of a statement, you always must check the underlying source when you see results like this being reported. The findings are in the summary of the article. But when you read the article in detail, you will see that a "yes" means that trade improves SDGs. But that a "no" in most cases, means that no effect occurred. Of course, the implications of this important nuance doesn't mean that potential impacts on SDGs can be ignored. The comparison shows that the challenge actually is to improve the share of "yes", and to do so, it's critical to study the different relations between trade and sustainability. Let us by the way of example, look at the impact of tourism. Tourism is a form of trade in services, a topic that has not yet been dealt with in this course. Tourism brings in hard currency, enable inputs, and creates jobs and business opportunities. These impacts create growth, and if growth trickles down, that is good for development. But that is a big if because we know from experience that international economic activities can also be associated with increasing inequality of incomes and opportunities. The second element that we need to consider is the impact on the environment. Tourism brings in money which allows for funding of conservation projects such as wildlife parks. Tourism also brings in tourists and that increases emissions and touring around can also degrade livelihoods of animals and plants. Now, in addition to the direct impact of trade and growth and environment, you will also have thought about indirect relationships. We need to consider the relationship between environment and growth. Wildlife parks, for example, attract tourists, and their spending is an essential source of income for many developing countries, and there is a second loop from growth to the environment. By now, we have seen the interactions between trade using the example of tourism and environment. It is however also necessary to look at the reverse side of a coin, that is, the impact of environmental problems on trade and investment. For instance, direct consequences of climate change, such as more frequent extreme weather events and rising sea levels, have a detrimental effect international trade. To specify, supply, logistics, and distribution chains, infrastructure are getting more and more vulnerable to disruptions due to climate change. The 2021 OECD report on trade and environment provides a clear warning. Maritime shipping is the vital vein of global trade. as it accounts for around 80 per cent of its volume. Shipping could experience negative consequences, for instance, from more frequent port closures due to extreme events. Most importantly, environmental challenges and climate change in particular, expected to decrease the productivity of all factors of production, meaning labor, capital, and land, which will ultimately result in output losses and a decrease in the volume of global trade. At the same time, there could also be positive impacts on maritime shipping through the potential further opening of arctic shipping routes, albeit at the cost of environmental degradation, which is critically high. All in all, we have seen that both positive and negative feedback loops exist, and only the detailed analysis for instance, such as cost-benefit analysis can tell what the net effect is and which processes need to be optimized to get the best result. Peter, is it necessary to show beneficial impact of trade and investment on productivity and employment? Well, politicians will take a look at non-economic aspects anyhow so it is better to consider the external effects of international trade and foreign direct investment right from the start. Well, I'm a bit puzzled then how politician could this take into account? As an analyst, what you could do is consider using a cost-benefit analysis or a CBA, and that is a systematic way to get at all the information of the positive and negative impacts of international trade. Yes, I've read about the cost-benefit analysis, but you need to know more and it needs a substantial work. Yeah. You're right. The requirements look like very big. But actually that's a plus. Because you do this in a systematic way, you will find out what you know, but also and that is even more important, what you don't know. Actually, for me, knowing what you don't know is the basis for evidence-based policy advice. In addition to the relationship between trade and the environment, which is often on the forefront of the news, we also need to consider a similar analysis for other items, such as development per se and social rights. What is the impact of capital on human capital? What is the impact on social and labor rights? As you will remember from the video on the spillover effects of FDI, we can both expect beneficial and detrimental impacts on the labor market and on learning. Likewise, expert-based on low cost and low wage strategies generate employment but may at the same time fuel a race to the the bottom of labor rights. To conclude, the key lesson of today's video is that policies should not be evaluated in a narrow way. A positive economic impact is of course, a necessary condition for trade and investment policies. But it is never sufficient condition. Policy analysis needs to take both environmental and societal effects into account. This is an important starting point for the remaining videos that prepare you to give evidence-based policy advice.