Trade and environment


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Trade - separating fact from fiction

Is trade good or bad for the environment?

Production and trade obviously affect the environment, and just as obviously some of these impacts are negative. The issue is not whether trade damages the environment – it does, as do many other human activities.

But trade can also lead to beneficial impacts on the environment by allowing environmental goods and services to be shared more widely. The real question is whether the situation would be better or worse under a more liberal trade regime.

Open markets can improve resource allocation, so that goods are produced where it is most environmentally (as well as economically) efficient to do so, even when shipped to distant markets. Consuming locally produced goods is not always more environmentally friendly than buying imports. This is the case, for example, for dairy, sheep meat, and some horticulture products produced in New Zealand for UK markets.


Increased trade can support economic growth, development and social welfare, thereby contributing to a greater capacity to manage the environment more effectively. Studies from a decade or so ago concluded that for some pollutants, emissions rise as countries advance from low to middle-level per-capita incomes and then fall as countries attain higher incomes. Water pollution falls by a very significant amount as per-capita income rises, with the steepest decline occurring before a country reaches middle-income status.


More recently, a number of developing countries have adopted tougher pollution controls than OECD countries had in place when they were at the same levels of development. Drawing on knowledge of the links between pollution reduction, improved health, and increased productivity, many developing countries have concluded that the benefits of pollution control outweigh its costs.


They are finding innovative ways to address pollution, involving the use of pollution taxes or charges, greater transparency - successful in reducing pollution in Indonesia and the Philippines - and the creation of new industrial parks for heavy industries, such as steel and chemicals, that achieve high levels of materials recovery, recycling and waste treatment.


Openness to trade and investment can provide a country with the incentive to adopt, and improve access to, new environmental technologies. As a country becomes more integrated with the world economy, its export sector becomes more exposed to environmental requirements imposed by the leading importers. Changes needed to meet these requirements, in turn, flow backwards along the supply chain, stimulating the use of cleaner production processes and technologies.


The early adoption of environmental regulations has been helped in many ways including by the spread of bilateral and regional trade agreements between developed and developing countries which typically provide resources and institutions for information exchange and capacity building, and encourage the less economically developed partner to strengthen its environmental regulations.


Are open markets a “race to the bottom”?


The “pollution haven” argument is essentially that open markets for trade and investment encourage countries to retain weak environmental regulations, in order to improve their international competitiveness in product markets or to attract foreign direct investment.


For this to occur, the cost of meeting environmental regulations would have to be significant enough to counteract the other factors that determine international competitiveness and that influence investment decisions: access to labour, raw materials, transport infrastructure, intellectual-property rights, and so on.


Numerous analyses have shown that the cost of avoiding or treating most pollutants adds only a few percentage points to total production costs; in brief, there is little that countries can gain from becoming pollution havens but they would have a lot to lose in the long run if environmental degradation affects their own competitiveness.


Emissions of greenhouse gases (GHGs) may be the notable exception. The cost of mitigating emissions of carbon dioxide, the most common GHG, can be significant for industries that consume large amounts of fossil fuels or which produce large quantities of GHGs such as agriculture. Moreover, carbon dioxide, unlike carbon monoxide or sulphur dioxide, poses no immediate danger to people or property close to the emitter. Rather, it contributes to the phenomenon of global climate change.


Countries that are attempting to impose caps on GHG emissions within their own borders are concerned that industries that are both potentially large emitters of GHGs, and vulnerable to competition through trade, will shift production to countries that are not limiting their GHG emissions - so-called carbon leakage.


Analyses suggest that this concern is likely to be valid for only a few heavy industries - notably, metal manufacturing. Other industries, such as glass-making and cement manufacturing, are to some extent vulnerable, but their products generally have lower unit value than metals, and therefore the need to produce close to final consumers and avoid high transport costs is strong.


For the future, a global climate regime could eliminate potential carbon leakage, through emissions limitations in a broader group of countries or specific co-operative approaches on sectoral action in the most carbon intensive sectors.  In this way, governments can help promote a low-carbon economy and provide the first mover advantage to companies first developing low-emitting technologies.


How can environmental interests be achieved?


Effective environmental policies and institutional frameworks are needed at the local, national, regional, and international levels. The impact of trade and trade liberalisation on a country’s welfare depends on whether the country’s environmental resources are correctly priced. This in turn depends on whether appropriate environmental policies are in place within the country in question. If they are, trade and trade liberalisation benefit the environment because the resulting increase in economic growth stimulates the demand for environmental protection and generates additional income to pay for it.


Trade barriers are not the answer. Trade restrictions are counter-productive - they inhibit growth within the countries being sanctioned and reduce their capacity to improve environmental standards. They are also less effective than robust environmental policies, vulnerable to retaliation, and prone to prone to be used as a disguised form of protectionism.


This does not imply hands-off from a trade policy perspective. The World Trade Organization (WTO) is actively involved in environment-related activities: pursuing the liberalisation of environmental goods and services; seeking more clarity on the relationship between existing WTO rules and specific trade obligations in multilateral environmental agreements; seeking greater disciplines on fisheries subsidies; and ensuring the non-discriminatory application of GATT Article 20 “to protect human, animal or plant life or health”.

In this way, the WTO is complementing national policies that seek to optimise trade and environment linkages and to discourage any misguided temptation to engage in a “race to the bottom.

See also:

 Does trade kill jobs ... or create them?

 Do developing countries need to protect their infant industries?

 What is the link between trade, innovation and growth?

 Do open markets matter ... or is protectionism the answer?

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