Trade and the environment
Clarke Ricks
School of Business, Liberty University
BUSI 690: Policy and Strategy in Global Competition
Dr. Hicks
April 6, 2021
Trade and the environment
he expansion of global trade and the increasing integration of global value chains raise
questions about how trade and the environment interact with each other. What are the
effects of trade on the environment? And inversely, how can a changing natural
environment (e.g. climate change impact) modify trade patterns? Is trade liberalisation good
or bad for the environment? What are the short term and long term consequences and can
an optimal combination of trade and environment policies harness the benefits of trade
while minimizing environmental costs?
Trade can have both positive and negative effects on the environment
Economic growth resulting from trade expansion can have an obvious direct impact on
the environment by increasing pollution or degrading natural resources. In addition, trade
liberalisation may lead to specialisation in pollution-intensive activities in some countries if
environmental policy stringency differs across countries – the so-called pollution haven
hypothesis.
However, increased trade can in turn, by supporting economic growth, development,
and social welfare, contribute to a greater capacity to manage the environment more
effectively. More importantly, open markets can improve access to new technologies that
make local production processes more efficient by diminishing the use of inputs such as
energy, water, and other environmentally harmful substances.
Similarly, trade and investment liberalisation can provide firms with incentives to adopt
more stringent environmental standards. As a country becomes more integrated within 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.
Consequences from climate change can disrupt trade
Direct consequences of climate change on trade could come from more frequent
extreme weather events and rising sea levels. Supply, transport and distribution chains
infrastructure are likely to become more vulnerable to disruptions due to climate change.
Maritime shipping, which accounts for around 80% of global trade by volume, could
experience negative consequences, for instance from more frequent port closures due to
extreme events. More importantly, climate change is expected to decrease the productivity
of all production factors (i.e. 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 economic impacts on maritime shipping
through the potential further opening of Arctic shipping routes, albeit at the cost of
environmental degradation.
How can policymakers optimally combine trade and the environment policies?
Effective environmental policies and institutional frameworks are needed at the local,
regional, national, and international levels. The impact of trade liberalisation on a country’s
welfare depends on whether appropriate environmental policies are in place within the
country in question (e.g. correctly pricing exhaustible environmental resources). Stringent
environmental policies are compatible with an open trade regime as they create markets for
environmental goods that can subsequently be exported to countries that follow suit on
environmental strandards – the so-called first-mover advantage. This is especially true for
complex technologies such as renewable energies.
Countries have undertaken a number of environment-related efforts under the World
Trade Organization (WTO) framework including negotiating tariff reductions in
environmental goods and services, seeking more clarity on the relationship between existing
WTO rules and specific trade obligations in multilateral environmental agreements, and
seeking disciplines on fisheries subsidies. In this way, the WTO is building a multilateral
framework for international trade that also discourages any misguided temptation to
engage in a “race to the bottom”.
The inclusion of environmental provisions in bilateral and regional trade
agreements has also helped harmonise environmental regulations between developed and
developing countries. More advanced economies can provide resources and institutions for
capacity building, and can encourage less-developed partners to strengthen environmental
regulations. The OECD has addressed many issues on trade and environment such
as environment and regional trade agreements (RTAs) the drivers of environmental
provisions in RTAs, as well as the stringency of environmental policies as a driver for trade in
goods in environmental goods and services. We are also currently developing a set of policy
indicators on trade and environment to help monitor progress towards more policy
coherence, and to identify policy priorities at the intersection of trade and environment.
