The Impact of Trade on the Environment:

A Basis for Controversy over Environmental Regulation

e-mail: Dan Hammer

This comic strip was taken from There's Treasure Everywhere, a collection of Calvin and Hobbes cartoons. Bill Watterson has been able to adequately describe in full the trials and tribulations of humanity using only the exploits of a six-year-old and his stuffed tiger; a genius beyond his time.

Mobility has allowed human civilizations throughout history to reap the benefits of unrestricted, intercontinental trade, but there are environmental costs as a result which are not immediately apparent. There is no doubt that trade between nations has depleted natural resources, but the question as to whether current trade policies augment or temper environmental degradation is currently under contention. One view is that environmental regulations will create "pollution havens" in countries where there are less stringent regulations, simply relocating environmental damage to a country where the environment is worth less. The opposing view comes in the form of the "Porter hypothesis" named for Michael Porter and his suggestion that stringent regulations will encourage technological innovation among polluting firms thereby decreasing the rate at which the environment is damaged. The opposing views deal with current trade policies, but it is also important also to look at the effects that trade has had on the environment when trade policies were just taking shape.

The act of trade itself has had very little impact on the environment. It is the resulting increased economic activity that destroys local ecosystems and exhausts natural resources. However, increased economic activity also is the main driving force behind growth and production, which is vital to a poor community. As such, I am hardly attacking free-trade policies, only analyzing their environmental implications, of which there are many. For example, sugar cultivation and trade had an enormous impact on the American tropics beginning in the late 17th century and lasting over a century. In the early 1640's, the Dutch began transporting slaves and agricultural technology to their colonies in the Caribbean and Brazil (which they had taken from Portugal in 1630 and held until 1654). The introduction of plantations into these countries had immediate effects on the local ecosystems. "Deforestation … was extensive in both Brazil and the [Caribbean] islands. Forests were cleared to plant cane and to supply fuel for the sugar mills as well as for urban construction and other purposes. The coastal forests of northeast Brazil, Rio de Janeiro, Sao Paolo, Minas Gerais and other settlement zones largely disappeared during the colonial era, permanently altering the landscape of vast territories (Solbrig, 32)." This form of destruction is neither an isolated nor exceptional event. Clearing of forests for urban trading centers and agriculture should be expected in an economically stimulated trade system. Without ocean transport, the intercontinental slave and sugar trade routes could not have existed. In fact, John Coatsworth (cited in Globalization and the Rural Environment) comments that until the slave trade, the "huge cost advantage" of ocean transport was not fully exploited because with the innovations in sea-faring technology, the most cost-effective use of shipping was in trading very heavy goods i.e. humans and sugar cane. Intercontinental free trade clearly had an overwhelmingly detrimental effect on the environment in its early stages.

At present, the effects of current environmental policy and trade liberalization on the environment are being assessed in order to offer some insight as to how we can reduce pollution while still maintaining high levels of economic activity. The manner by which the environment is being harmed is much different now than it was in the 1400's. Production byproducts rather than the actual production are the cause of current environmental degradation. However, economic analysis has proven that environmental protection is a normal good. A normal good or service in economic terms means that the demand for such items increases as income increases. As such, for the sake of the poor as well as the environment, policy makers with the aim of environmental protection should also consider their effects on the resulting, generally decreased level of production. What is the socially optimum level of production keeping in mind the environment? How should it be achieved? It is at this point that the great economic minds of out time begin to take up arms. Michael Porter, a Professor of Business at the Harvard Business School claims that environmental regulation of businesses will actually give the businesses a competitive advantage over their counterparts in nations with less stringent regulation because it forces them to innovate. Porter claims that by changing their production processes, the businesses will actually lower their production costs (Porter, 97). This claim has become commonly known as the "Porter hypothesis". If the Porter hypothesis is true, environmental regulation will increase production and environmental standards with easy legislative action. The issue that other economists have with this idea is that the hypothesis assumes that the businesses will not just move their manufacturing plant to avoid the costs of cleaner production practices. As such, the opposing "pollution havens" hypothesis was developed in response. The theory behind this hypothesis is that stricter environmental regulations in one country will offer an incentive to the businesses operating within that country to move to another country with less environmental concerns (Tietenberg, 561). Generally, the countries that are willing to accept the polluting producers for the least amount of compensation are the third world countries. This is no longer just an issue of relocating pollution, but the relocation also brings in environmental justice issues as well. Also, by migrating to a different country, a firm will incur relocating costs, which will cause reduced competitiveness and lower production levels (Bredahl, 288). In any event, the pollution havens hypothesis attempts to show that environmental regulations will reduce trade and as a direct result, the level of consumption.

Both hypotheses have had numerous case studies both proving and disproving each of them. For example, a study conducted in 1993 found that states with stricter environmental standards have experienced the best economic performance. However, there is question to whether this adequately proves the Porter hypothesis or just illustrates another economic aspect with similar outcomes (Tietenberg, 561). With a completely different mindset, Tom Tietenberg comments in his text on natural resource and environmental economics that the pollution control costs comprise such a small portion of operating costs that regulation wouldn't matter either way. Clearly there is a wide range of opinions on this subject, all with sufficient quantitative evidence to prove their worth. While there is no argument that trade and increased economic activity will adversely effect the environment, there is a fundamental disagreement about what national governments should do about it. It seems as if we live in a sort of paradox. On the one hand, sustainable living requires that we leave our future generations with the same capabilities for consumption as we have in the present (by a single definition, although there are many more definitions of sustainability). In essence, sustainability is intergenerational equality. On the other hand, why should we value the consumption of future generations if there are starving people today? In other words, why should we care so much about intergenerational equality if we haven't even achieved infragenerational equality? If the environmental regulations diminished production, those without the basic human needs of food, shelter, and clothing will be forced into still greater poverty. So the very debate about whether to curb production to save the environment is also a question of whose livelihoods we value more: present day poor or future populations.

Works Cited:

Bredahl, M. E. et al. Agriculture, Trade, & the Environment. Westview Press: Boulder, Colorado, 1996. pp. 288.

Porter, M. E. & Claas van der Linde. Toward a New Conception of the Environment-Competitiveness Relationship. Journal of Economic Perspectives. (Fall 1995) pp. 97-118.

Solbrig, O. T. et al. Globalization and the Rural Environment. Harvard University Press: Cambridge, Massachusetts, 2001.

Tietenberg, Thomas. Environmental and Natural Resource Economics. Addison Wesley: New York, 2003. pp. 561. ISBN 0-201-77027-X, pp. 7-11.

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last updated 3/17/03