Free Trade and the Environment - Literature review Example

Does Free Trade Harm the Environment? The advent of globalization has been encouraged by the liberalization of trade which has allowed nations to engage in the exchange of goods and services without the adverse influence of barriers such as trade quotas and tariffs, the presence of which essentially limits the benefits that can be obtained through international trade. While, the emergence of trade liberalization can be attributed to the relentless efforts of the World Trade Organization (WTO), opponents of the concept are of the opinion that trade liberalization is characterized by negative aspects and consequences with environmentalists claiming that the liberalization of trade poses severe threats to the environment which are harmful and dangerous to the wellbeing of both the ecosystems and habitats across the globe. Carbaugh (2004) understands that environmentalists put forward three key claims to support and rationalize their point of view. According to Carbaugh (2004) these assertions state that: The liberalization of trade is responsible for initiating the “race to the bottom” with respect to environmental standards. Trade liberalization poses a conflict with the morally acceptable environmental laws, standards, rules and policies that should be imposed and regulated across the globe. The liberalization of trade also leads to the production and subsequent trade of products that are responsible for contributing towards overall pollution rates across the globe, these locations are also referred to as “pollution havens”. Responding to the environmentalists’ arguments regarding the adverse effects of trade liberalization on the environment are the proponents of the notion, who claim that regulations such as the “polluter-pays policy” can actually benefit the environment by incentivizing manufacturers and traders to formulate innovative methodologies for managing augmented levels of pollution (Carbuagh, 2004). This perspective highlights the multidimensional nature of the topic at hand because it encompasses a range of opinions, attitudes and judgments with respect to the association that is shared between free trade and the environment. The purpose of this paper is to comprehensively explore, discuss and analyze the environmentalists’ assertions regarding the harmful impact of trade liberalization on the environment by assessing the validity of the arguments and counter-arguments that have been put forward by analysts and researchers in relation with the topic. In order to successfully and effectively achieve the objectives of the research, the outline of the paper follows a systematic structure. This structure assists the explanation of recreated arguments and counter-arguments, by highlighting the party that is involved in the issue in addition with the party’s assertion and objective followed by an evaluation of the identified perspectives to conclude whether the contradictory positions that constitute of this discussion can be effectively resolved. The first assertion that is presented by environmentalists outlines the drastic increase in the competitive nature of the business landscape that is prompted by trade liberalization and the elimination of trade barriers. Environmentalists argue that the escalation of these competitive pressures will likely impact existing environmental policies and regulations in an adverse manner thereby, leading to a relaxation in environmental standards that are presently maintained by various countries (Esty, 2001). This argument is essentially rooted in a country’s decision to eliminate increased costs that are incurred by its producers and manufacturers in a bid to develop innovative techniques for reducing pollution levels (Esty, 2001). Esty (2001) claims that when a nation which regulates high environmental standards wishes to compete with a country that only maintains the minimal level of environmental policies in the international trade arena, the former maybe discouraged to uphold its rigorous environmental regulations due to a loss in cost benefits that are experienced by the latter. Esty (2001) understands that to eliminate such discrepancies in the imposition of environmental standards, countries with high environmental standards may “…call for a harmonization of pollution control regulations…or other policy interventions to “level the playing field””. For environmentalists, however, this argument holds validity because competitive pressures are indeed increasing. In the business world, multiple international and local suppliers aim to capture the attention of customers for the purposes of profit-maximization and enhancing their cost-efficiency by eliminating the expenses that are incurred during the implementation of techniques that control pollutions levels. As a significant party in the debate, the primary objective of environmentalists is to oppose the efforts of the World Trade Organization (WTO) for the advancement of trade liberalization and promotion of free trade across the globe. While the environmentalists’ claim regarding this “race to the bottom” is characterized by the presentation of concrete evidence and examples, a counter-argument to this claim has been put forward by economists. Economists assert that, dissimilarities between countries in terms of existing pollution levels, climatic conditions, geographic characteristics, the degree of economic development and even societal aspects govern the optimal or desired degree of environmental standards that should be exercised (Esty, 2001). According to Esty (2001), “…the variation in standards should be considered welfare-enhancing and appropriate” for these dimensions fundamentally permit nations to enjoy the benefits of trade by comprehending the essence of the principle of comparative advantage which is rendered null and void in the presence of standardized environmental regulations. The standard analysis of optimal intervention conducted by Sheldon (2006) also confirms the perspective of economists by concluding that any current or future efforts to liberalize trade will not lead to the realization of the “race to the bottom” concept with regards to environmental regulations, regardless of the size of the jurisdiction or nation being studied and assessed. The second assertion which is voiced by environmentalists highlights the supposed and possible conflict between the notion of trade liberalization and the implementation of environmental standards that can be identified as morally-conscious. Environmentalists’ concern regarding the presence of a severe clash between environmental policies and trade regulations has been depicted by several high-profile cases which have emerged in recent decades. For example, the well-documented rift between the European Union and the World Trade Organization (WTO) regarding the member nations’ policy of not permitting the injection of hormones in beef for public consumption in a bid to promote the implementation of rigorous standards of food safety has been questioned by the WTO on scientific and economic grounds and as a violation international trade practices that must be exercised across the globe (Esty, 2001). Several researches have documented the environmental impact of beef hormones, the negative impact of which is transferred into the soil through the manure of livestock animals thereby, contaminating ground water and destroying ecosystems. The key objective of environmentalists behind the presentation of this argument is to lay emphasis on the fact that trade liberalization is bound to adversely impact environment by conflicting with the global standards that must be preserved for the sustenance of habitats and ecosystems that are present on the planet. Furthermore, examples such as the beef hormone dispute essentially demonstrate that the disagreement between environmental standards and policies of free trade has the capability to either directly or indirectly harm the wider environment. On the contrary, Jackson (1992) states that even though analysts may believe that environmental regulations and trade liberalization policies are in disagreement with one another, this observation is only valid and applicable in the short-term. Therefore, if the arguments of environmentalists which severely criticize free trade due to its incongruity with environmental policies are assessed, it would be discovered that the foundations of these claims are rooted in temporary implications. Jackson (1992) understands that the congruence of environmental and trade regulations can be realized once the consequences that lead to the enhancement of welfare and economic gains are comprehended and acknowledged. For Jackson (1992), the advancement of welfare policies shares a correlation with the goals of environmental regulations that can be maintained and improved by the means of the welfare enhancing capabilities of trade liberalization. This view also coincides with the observation of Esty (2001) who believes that variations in environmental policies play a key role in assisting the achievement of welfare gains, which in turn can be recognized as a benefit of free trade and trade liberalization. The objective of this counter-argument is to highlight the significance of valuing the long-term impact of a policy over temporary or short-term consequences. Thus, this notion supports the advancement of trade liberalization at the expense of forgoing the implications of imposing environmental regulations in the short-term to gain permanent benefits through the maximization of welfare. The pollution haven hypothesis (PHH) is the third assertion that has been put forward by environmentalists as an argument to oppose trade liberalization and reject the efforts of the World Trade Organization (WTO) for encouraging free trade between nations. According to the pollution haven hypothesis, an increased degree of economic freedom and liberty that emerges as a consequence of trade liberalization is an alarming threat for developing nations. This observation implies that developing nations are likely to experience greater levels of industrial pollutions as manufacturers and producers from developed nations opt to relocate their factories in jurisdictions that regulate lower or relaxed environmental standards. Birdsall and Wheeler (1992), highlight an interesting aspect of this argument by stating that the consequences and implications are assumed by both environmentalists and economists as valid. Unlike, prior assertions that have been made in the paper which portray economists and environmentalists as opposing parties in the debate between greater trade liberalization and imposition of more rigorous environmental standards. However, the significant matter of concern that should be addressed is whether empirical data and research support or negate this widespread perception. The research of Cole (2004) found that the creation of pollution havens is a reality; in this case the data suggests that for four trade pairs including USA-Asia, UK-Asia and USA-Latin America, the developed member of the pair experienced a decline in managing industries that are most likely to contribute towards pollution thereby, indicating or implying that the gap in supply for the products is being filled by a developing nation. While, Cole (2004) states that the pollution haven hypothesis which is supported by environmentalists is a possibility, the researcher claims that its effects are only observable in the short-term and on a temporary basis. In their counter-argument to the pollution haven hypothesis, Birdsall and Wheeler (1992) claim that empirical data is suggestive of the fact that the pollution haven hypothesis is not applicable in the region of Latin America where the increase in trends of trade liberalization and the influx of foreign investment has not led to the establishment of industries that significantly contribute towards pollution levels in the area. The primary premise of Birdsall and Wheeler’s (1992) argument is based on two aspects which state that; 1) it is a greater possibility for protected jurisdictions to favor the establishment of industries that contribute towards the level of pollution and 2) a higher degree of economic openness is likely to promote the development of cleaner industries and the adoption of pollution controlling techniques by developing countries that are introduced by developed nations which follow high environmental standards and implement advanced techniques in comparison with developing economies. With respect to the first assertion that has been discussed in the paper, the parties involved in the debate are that of environmentalists and economists who share differing opinions regarding the existence of the “race to the bottom” argument and also its implications on jurisdictions that have high and low environmental standards. The environmentalists’ argument in this case is characterized by the discussion of the competitive pressures that businesses face in the present economic scenario. Supporters of the race to the bottom argument believe that the differentiation in environmental policies, standards and regulations does not motivate industries and manufacturers that are expected to abide by high environmental standards which contribute towards the cost of the business thereby, impacting its cost-efficiency in an adverse manner. In today’s business environment, an organization’s ability to reduce the average cost that it incurs is considered to be an unparalleled advantage which is critical to the achievement of corporate objectives such as profit maximization. Therefore, it is likely that in a bid to save costs businesses may be forced to lower their environmental practices in order to compete with competitors and combat competitive pressures. Even though, the environmentalists’ argument is marked by validity for it recognizes and takes into account the significance of the changes in the external environment the economic perspective that has been introduced in this case negates these observations. Another significant element that is associated with the environmentalists’ identification of the realities that are linked with the “race to the bottom” argument is concerned with the business of Multinational Corporations (MNCs). The widespread appeal of MNCs is rooted in their large scale and extensive operations, their ability to raise capital and boost the economy of a nation by providing thousands of employment opportunities, if not more. As identified by Chan (2003), the power of the MNCs lies in their ability to relocate their operations which can also be termed as the portability of such organizations. Therefore, once a MNC corporation has effectively exhausted all the resources of a developing nation such as its workers and raw materials, the MNC has the convenient option of transferring to another developing country. The most alarming observation in this scenario is the developing nations’ belief that their economies are entirely dependent upon the operations of the MNC. Therefore, in a bid to attract the investment of MNCs developing nations often lower their environmental standards, thereby proving the “race to the bottom” argument. The economists’ view of the situation is based on the identification of long-term consequences and the recognition of numerous factors that provide a comparative advantage to one nation over the other, thereby, formulating the basis for trade benefits and gains in addition with the enhancement of welfare. The contradictory arguments that are associated with the assertion of the “race to the bottom” concept can be eliminated when environmentalists acknowledge the significance of the long-term consequences of an action over short-term gains. As stated by Jackson (1992), “…welfare enhancement can in turn lead to enhancement of environmental policy objectives”. This notion is reflective of the long-term congruence that is and can be shared by environmental standards and trade liberalization once the scope of the discussion is widened and assessed comprehensively. Moreover, it is also important to understand that the variation in the social, economic and political dynamics of a nation makes it impossible to formulate and effectively implement environmental standards that are uniform (Esty, 2001). Moreover, the welfare enhancing capabilities of trade liberalization can also be viewed from the perspective of the “race to the top” argument. This argument is rooted in the acknowledgment and identification of several economic and social benefits that can be gained by a country through the investment of MNCs. From the economists’ perspective this notion also supports the postulations of Jackson (1992) who explores the long-term advantages of trade liberalization rather than focusing on a narrow and limited short-term perspective. The “raise to the top” argument explores the economic gains that are provided by the liberalization of trade and states that the consequences of these benefits have the ability to positively impact the working conditions of laborers in addition with the environmental policies that are implemented in a country. The stance of the economists’ in this case is evidenced by the research of Woods (2006) who asserts that economic and capital gains essentially stabilize the political condition of a nation thereby, leading to the establishment of a government which believes in the creation of effective regulations to promote the growth and progress of a nation and these include laws also encompass environmental standards. This perspective outlines the observation that the existing conflict between economists and environmentalists in this scenario is an outcome of the short-term evaluations of the latter who must value the long-term benefits that have been assessed by the former which are likely to have a positive impact on the environment. Furthermore, the resolution of this conflict can also be achieved by deliberating the advantages and disadvantages of MNCs and understanding that the benefits of MNC investment for developing nations surpass their drawbacks. Therefore, the entrance of MNCs into developing nations should be encouraged and their operations must be checked extensively to ensure that they are engaging in ethical behavior and respecting the environment. The clash between trade liberalization and morally-conscious ethical standards is highly debatable and argued upon from the economic and environmental perspectives. An example of this is the beef hormone dispute between the European Union and the World Trade Organization, in which the EU has adopted the environmental stance while, the WTO continues to favor the economic realities to deem the EU’s stance as unreasonable or in conflict with the rules and laws of international trade. The conflicting position in this case can be solved once each jurisdiction is awarded the right to establish environmental laws rather than following uniform, standardized and homogenous regulations. This observation also highlights the significance of WTO’s role in understanding the regulations of various jurisdictions and favoring the implementation of laws when the social and political structure of the region permits the execution of this action. In addition with the WTO, the parties that present a counter-argument to the second assertion are makers of trade policy and also free traders. The stance of these actors stems from the acknowledgement of the gains from trade that must not be ignored. Conflict resolution in this case can only emerge once the environmental costs are optimized with the benefits that are obtained from trade liberalization. According to Johnston (2013), this would allow economies to identify a socially optimal balance. An example which supports the argument of free traders rests on the notion of comparative advantage and how the exchange of goods has the potential to reduce the negative externalities that were being borne by a nation previously. Consequently, free traders can also rest their argument on the perspective of the economists’ who have been able to depict how gains from trade can help the expansion and growth of developing economies that is welfare enhancing. An assessment of this assertion suggests that there exists a high possibility which points towards a possible assimilation of the two conflicting concepts. These notion is rooted in the formulation of policies to liberalize free trade while, establishing regulations to encourage the protection of the environment and dictate the behavior and operations of organizations to ensure that they are in alignment with the policies that aim to protect the environment. An example of such an agreement is the North American Free Trade Agreement (NAFTA) which also governs the implementation of environmental standards, policies and regulations across the continent. The assertion which highlights the pollution haven hypothesis is supported by environmentalists and economists (Birdsall and Wheeler, 1992) who claim that the openness of economies which is prompted by free trade is harmful to the environment of developing nations who suffer from consequences associated with environmental degradation at the expense of the advancement of developed countries. However, research has indicated that the pollution haven hypothesis is either invalid (Birdsall and Wheeler, 1992) or its impact on the environment is temporary (Cole, 2004). The openness of economies permits the transmission of technologically advanced techniques for controlling pollution from developed countries to developing nations, which can be viewed as a positive consequence of trade liberalization and renders the negative implications of the PHH as invalid to resolve the conflict that is posed by this assertion. The resolution of the conflict that is posed by the pollution heaven hypothesis can only be conducted once an ongoing process of research is implemented to objectively and empirical assess the validity of the PHH. In many cases, recent studies have shown that the hypothesis is mere conjecture which is yet to be validated by statistical findings. As seen by the findings of the research conducted by Birdsall and Wheeler (1992) and Cole (2004) it can be established that the tested impact of the PHH is not enough to transform the environmentalists’ third assertion to limit trade liberalization into a factual statement. References Birdsall, N., & Wheeler, D. (1992). Trade policy and industrial pollution in Latin America: where are the pollution havens?. International trade and the environment, 159, 159-67. Carbaugh, R. J. (2004). International economics (9th ed.). Mason, OH: Thomson/South-Western Educational Publishing. Chan, A. (2003). Racing to the bottom: international trade without a social clause. Third World Quarterly, 24(6), 1011-1028. Cole, M. A. (2004). Trade, the pollution haven hypothesis and the environmental Kuznets curve: examining the linkages. Ecological economics, 48(1), 71-81. Esty, D. C. (2001). Bridging the trade-environment divide. The Journal of Economic Perspectives, 15(3), 113-130. Jackson, J. H. (1992). World trade rules and environmental policies: Congruence or conflict. Wash. & Lee L. Rev., 49, 1227. Johnston, N. (2013). Does freer trade mean lower environmental standards: Environmentalism and the FTAA. Retrieved from: http://www.economics.about.com/cs/development/a/freer_trade.htm Sheldon, I. (2006). Trade and environmental policy: A race to the bottom?.Journal of Agricultural Economics, 57(3), 365-392. Woods, N. D. (2006). Interstate Competition and Environment Regulation: A Test of the Race-to-the-Bottom Thesis. Social Science Quarterly. Vol. 87. No. 1: 174-189. Read More