Environmental Standards in the Age of Trade Liberalization

By Andrés Rodriquez Brauer

Over the past century, free trade has expanded significantly across the globe. While free trade may often be controversial amongst the general public, economists typically agree that trade liberalization has spurred economic growth. This is in part because added free trade results in further competition among exporters, thus it fosters innovation and more efficient production processes. That being said, many environmentalists are concerned that this rise in competition among exporters might lead to a “race to the bottom” for environmental standards.

The “race to the bottom” view comes from the classic prisoner’s dilemma model, where each country has an incentive to ‘free-ride’ from the rest of the world’s regulation and deregulation.  

Assuming this view is correct, issues that arise from individual incentives to relax environmental standards can be mitigated, most-likely through action taken by the World Trade Organization (WTO). Using an existing framework, the WTO could move to firmly enforce environmental standards.

As a first step, the WTO could set environmental standards that adhere to those dictated in the Paris Agreement. In effect, the WTO would allow countries to impose pollution tariffs on countries that do not follow environmental regulation requirements, thus deterring deregulation. So, as long as these requirements are clear, and guidelines for retaliation are well defined, this policy could greatly reduce countries’ incentives to loosen environmental standards.

Furthermore, we have seen free trade deals serve as a way to impose environmental standards on other countries, which has been the case with the North Atlantic Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP). In NAFTA, the Canadian, American and Mexican governments all pledged to not reduce their environmental regulations. The governments also exalting the importance of sustainable development and expanding environmental standards. It also incentivized Mexico to expand its environmental protections and created additional institutions for environmental cooperation, even though the strength and enforcement abilities of said institutions leave much to be desired. While NAFTA could have benefited environmental standards even further, it shows that with determined enforcement, free trade deals have the potential to increase environmental regulations. The Trans-Pacific Partnership, which President Donald Trump recently withdrew the US from, had attempted to expand environmental standards by increasing requirements and enforceability capacities.

Lastly, the fact that these provisions are being introduced so often in new trade deals, and the fact that the developing world seems to be making their own pushes for environmental regulations, seems to indicate that the prisoner’s dilemma model might not be an accurate reflection of the situation. We now see that plenty of individual nations are prepared to sacrifice some marginal competitiveness for a more sustainable environmental policy. That being said, it certainly seems that the new President of the United States certainly seems to think in terms of the prisoner’s dilemma, even claiming that global warming was a Chinese hoax. Under the Trump presidency, it is likely that the United States will become more protectionist, while also reducing environmental standards locally in a flawed attempt to boost local production. Furthermore, not only did the United States withdraw from the TPP, but it seems likely that NAFTA will be modified. In this modification, it is likely that the enforcement of environmental requirements will be loosened and that the focus on sustainability will be removed.

However, even if Trump decides to take this course, the trade agreements might still not be overall a net negative for the environment. After examining academic literature, it can be seen that free trade has not led to a reduction in environmental regulations, despite the fact that the grand majority of trade agreements have not emphasized the cause. Daniel Drenzen from Tufts University finds no evidence for the “race to the bottom” hypothesis and cites that the World Bank, OECD and ILO have all conducted similar studies and reached similar conclusions. Jeffrey Frankel from Harvard University and Andrew Rose from the University of California at Berkeley claim “there is little evidence that trade has a detrimental effect on the environment.” They cite the “gains from openness,” which says that since trade raises incomes countries are able to obtain more environmentally friendly goods. Additionally, they mention the benefits of increased public awareness, multinational corporations’ insistence upon clean technologies, and the potential for trade to spur innovation that might have positive effects on both the economy and the environment.

In conclusion, free trade seems to have a negligible effect on the environment, with gains from openness often canceling out increased production. Furthermore, environmental standards seem to be such a small part of the overall production cost, that governments don’t face a lot of pressure to remove them, especially considering the local demand that often exists for said standards. All in all, “race to the bottom” hypothesis is thus not only incorrect, it is deeply counter-productive. Contingent upon the government’s focus on environmental sustainability, free trade has the potential to export sustainability to weaker, less willing governments.

Image Source: https://pixabay.com/en/industry-sunrise-sky-air-pollution-1752876/

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Drezner, D. W. (2006, December). THE RACE TO THE BOTTOM HYPOTHESIS: AN EMPIRICAL AND THEORETICAL REVIEW. Retrieved from http://www.danieldrezner.com/policy/RTBreview.doc

Ironing, D. H. (2000, August 25). The Benefits of Free Trade: A Guide For Policymakers. Retrieved January 19, 2017, from http://www.heritage.org/research/reports/2000/08/the-benefits-of-free-trade-a-guide-for-policymakers
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