Trading on the Environment
UMaine economist's research indicates that free trade policies don't
always equate to more pollution
The economic impact of free trade
agreements is tough enough to study. Try measuring the environmental
effects of such policies.
Does more trade necessarily mean more pollution? Are there aspects of
free trade that can be good for the environment? How do countries
balance "green" interests against pro-growth pressures?
Given the complexity of the relationship between trade and the
environment, there are no easy answers. The multiple variables — social,
economic, political and industrial — are constantly in flux. Determining
the environmental impact of liberalized trade is about as difficult as
forecasting the weather several months in advance.
However, there are economists and other academics who think it's
important that countries understand, to the extent possible, the
environmental impact of their trade decisions — and vice versa. Among
those studying the trade-pollution connection is Georges Tanguay,
assistant professor of economics and Canadian studies at the University
"Governments have a responsibility to offset possible negative effects
of free trade and growth, and to base their environmental policies on
the public interest," Tanguay says. "They should aim to maximize social
welfare and not bend to pressure from interest groups, but it's not
obvious that they are currently playing that role."
Tanguay and his colleagues have found that lobbying and other forms of
political pressure greatly influence environmental policies. Their study
of 22 of the world's richest countries indicated that, in a five-year
period, all other things being equal, strong lobbying by industry groups
resulted in less stringent pollution controls, while countries with
large numbers of Greenpeace members had tougher environmental
Free trade refers to trade among countries that isn't constrained by
artificial barriers, mainly tariffs and quotas. Free trade policies
bring economic growth and, it is widely believed by the general public,
environmental harm. For economists, part of that story is correct, based
on what's called the scale effect, says Tanguay.
"The idea is that a country's industries will generate more pollution
simply because they are producing more goods while technology and the
composition of the consumption basket (food and nonfood goods) stay the
same," says Tanguay, who came to UMaine in 2001 from the Business School
at the University of Montreal.
But there's more to it. The so-called technique effect can be a positive
influence on the environment when trade increases.
"Wealthy countries with strong environmental standards may put pressure
on their less-developed trading partners to change their ways of doing
things and pollute less," says Tanguay. "The developed countries will do
this because they are under pressure from the public at home and from
their own industries, which don't want to be operating at an economic
Also, more developed countries often export cleaner production
technologies to poorer ones. "Both technology transfer and public
pressure can have the effect of decreasing pollution in poorer countries
after they start trading with richer ones," Tanguay says.
As wealth increases, industries can afford to pollute less, and the
public demands more environmental controls.
"When people have more money, they become more interested in protecting
or restoring environmental quality," Tanguay says. "To put it simply,
when they get richer, they want to get cleaner."
A third factor to consider in the impact of trade on the environment is
the composition effect. Countries tend to trade with each other based on
their production strengths. For example, capital-rich countries such as
the United States produce high-tech goods that require more capital than
labor, and poor countries with large populations have more
labor-intensive industries since their relative wages are low.
Based on that, it has been widely believed that when poor countries open
themselves to trade, they tend to become "pollution havens." The
assumption is that polluting companies will move to poorer countries
since they have lower pollution standards and will keep environmental
regulation weak in order to boost their economies.
"Theoretically, the hypothesis that trade liberalization sets off a race
for the bottom in terms of environmental protection has been proven over
and over," Tanguay says. However, it is a theory that empirical studies
have failed to support.
"In reality, many factors influence industrial location decisions,
including taxes, labor costs, amenities and political stability. Often
environmental regulation is less important than many of these factors."
Currently, one of the biggest problems in determining the environmental
impact of free trade policies is uncertainty about the extent of
pollution and the effects that pollution will have in future years
worldwide. Another complication, Tanguay says, is that pollution doesn't
recognize national boundaries.
"Even if a country has strong pollution regulations for its own
industries, its environment can suffer because of pollution generated in
neighboring countries," he says. "That is why there need to be global
solutions to global environmental problems."
by Dick Broom
for more stories from this issue of UMaine Today Magazine.