Is Free Trade Good or Bad for the Environment? New Empirical Evidence

Abstract

One of the most important debates in trade policy concerns the impact of trade liberalization on the environment and, hence, on climate change. “Increased trade liberalization, increased trade, increased production, increased energy use and climate change,” while treated as separate issues until the early nineties, have become the focus of scholars researching trade and the environment (Stoessel, 2001). In particular, the debate originated in the early 1990s, following negotiations over the North American Free Trade Agreement (NAFTA) and the Uruguay round of the General Agreement on Tariffs and Trade (GATT), both of which emerged during a time of rising environmental awareness. Environmentalists argued that the creation of NAFTA would result in an environmental disaster for Mexico and pointed to the Maquiladora zone, where trade with the United States caused a concentration of industry that had detrimental effects on the local environment. Moreover, trade is related to numerous environmental problems. The Handbook on Trade and Environment emphasizes that trade acts as facilitator of the “international movement of goods that, from an environmental perspective, would best never be traded. With hazardous wastes and toxic materials, the environmental risks increase the further the goods are transported, since spillage is always possible. Equally, such ‘goods’ may end up being dumped in countries without the technical or administrative capacity to properly dispose of them, or even assess whether they should be accepted. Trade also makes possible the overexploitation of species to the point of extinction—there is rarely enough domestic demand to create such pressure.“ Examples include the threats to species such as elephants, due to trade in ivory, the deterioration of air quality in parts of China attributed to export-led growth, and unsustainable harvest rates in tropical rainforests due to trade in timber (Copeland and Taylor, 2003). A major concern is that the increasing competition between companies induced by further trade liberalizations causes a ”race to the bottom” in environmental standards, because countries might weaken their environmental policy in order to shelter their industry from