Free Trade: Benefit or Peril for the Environment?

One of the most contentious issues surrounding globalization is the concern that free trade hurts the environment, both locally and globally. The classic argument for free global trade is that it is efficient for countries to specialize in producing goods where they have a comparative advantage, which they can then exchange for other goods. But skeptics like ecological economist Herman Daly have questioned this on the grounds that the real costs of trade -- including depletion of natural resources and pollution -- are hidden and routinely ignored.

In the new book "Trade and the Environment: Theory and Evidence," economists Brian Copeland and Scott Taylor attempt to replace some of the rhetoric in this debate with systematically produced results. Based on a study of sulfur dioxide concentrations in over 100 cities around the world from 1971 to 1996, they reach the surprising and provocative conclusion that free trade can actually be good for the environment.

Copeland and Taylor find no evidence for the "pollution haven" hypothesis, which states that free trade will prompt polluting industries to move to poor countries where environmental regulations are lax. Their results suggest that rich countries have a comparative advantage in capital-intensive polluting industries, so these industries are likely to stay in rich countries even if environmental regulations are tighter.

For these developed countries, the right environmental policy can produce a net good for the environment. Pollution policy, in the form of regulation or taxes, can lead to cleaner production methods by encouraging better technologies. The message to developing countries is that environmental problems can be exacerbated if trade liberalization outpaces environmental policy -- as we will see shortly, therein lies one of the conflicts between trade and the environment.

The complexity of the subject becomes evident as the book leaves a host of questions unanswered. The authors limit their focus to local pollution caused by production of goods, while ignoring other significant environmental impacts of trade.

If a car is manufactured in Japan and then shipped to the U.S., there would be some local pollution in Japan due to the manufacturing process. Some natural resources -- both local and imported -- would also be used up in manufacturing the car. There would be additional resource use and pollution from transporting the car to the U.S., and even more from driving that car year after year.

Pollution from transportation and consumption of goods, as well as resource use throughout the life cycles of products, are all potentially major avenues through which global trade can damage the environment. When all these effects are combined with production-driven pollution, the final outcome could easily reverse the optimistic result that trade benefits the environment.

The argument that polluting industries will stay in capital-rich developed countries also loses steam when capital itself is highly mobile. China, for example, received $44 billion in direct foreign investment in 2001. Even if companies are investing in China to take advantage of its cheap labor, an indirect consequence of concentrating an increasing part of the world's manufacturing in China will be heavy resource use and pollution locally.

A more direct instance of the "pollution haven" effect is the routine transfer of e-waste -- used computers and other electronic appliances that contain highly toxic chemicals -- from the U.S. to countries like India, China and the Philippines. Low-paid workers in these countries work under hazardous conditions to salvage valuable materials from this fast-growing waste stream, while polluting the soil, air and water in the process.

These recent examples heighten the concern that developing countries, where the bulk of the world's population lives, may be unprepared for the environmental consequences of global trade.

Studies of air quality show that it deteriorates in the early stages of economic growth, and then starts improving when per-capita income exceeds $5000 per year. If this holds for most kinds of pollution and resource depletion, then incomes will have to increase by a factor of five to ten in large developing countries like China and India before there is sufficient local demand for environmental protection. Assuming that free trade can eventually deliver this income growth, a big unknown is whether it will result in income-induced policy changes before the cost of cleaning up the environment becomes prohibitively high.

Equally troublesome is the issue of trans-boundary pollution such as greenhouse-gas emissions, where countries with widely different income levels will have to come together with a unified policy response. Between 1973 and 2001, a period in which many domestic economies were turned inside out by globalization, annual carbon-dioxide emissions from worldwide fuel combustion increased by 50 percent. By 2030, these emissions are projected to be 60 percent higher than in 2001 if no new policies are adopted. Power generation and transportation -- two sectors crucial to trade -- will account for three-quarters of this increase.

A great deal of uncertainty remains about the long-term environmental impacts of globalization. But the evidence we have so far suggests that free trade unconstrained by environmental protection could be a recipe for disaster.