International Trade and the Environment

Michael J. Pieropan

Michael J. Pieropan

ENVS 02: Human Nature, Technology and the Environment

Professor Everbach

Essay 3: Travel and the Environment

March 25, 2006

            In recent decades, a revised and expanded economic order has taken precedence – that of a global economy. International trade has increased 50% since 1990, and shows no signs of slowing (Williamson 1). Companies and investors now think in global terms when deciding on business plans and strategy. The rise in international trade and globalization has placed an influential emphasis on the need to make such trade as efficient and profitable as possible. As such, a growing consensus has come forth in favor of trade liberalization and free trade amongst the nations of the world. In January 1995, the World Trade Organization (WTO) was created with the intent to promote and establish unfettered trade liberalization on a global scale.  

            Theoretical economic sentiment favors the establishment and maintenance of free trade. Economists generally agree that free international trade benefits all participants by allowing countries to acquire goods and services at the lowest opportunity cost. Trade liberalization allows for production, distribution, and consumption decisions to be decided on a global basis, which ensures that costs will be lower and profits greater. A global competitive market also will generally ensure that prices faced by consumers will be lower. From an economic standpoint, free international trade is an ideal that should be pursued intensely. As such, one of the World Trade Organization’s main priorities involves the reduction or elimination of any supposed barriers to trade.

            One of the main contentions against trade liberalization is the fact that the blanket term of ‘trade barrier’ is often applied to the domestic environmental regulations of country. Many of the domestic environmental regulations enacted by a country have been considered by another nation as a hindrance to its free barter with that country. If a nation enacts an environmental policy that any other country deems a barrier to its unfettered international trade, that regulation becomes subject to investigation by the WTO Dispute Settlement Process. Cases are heard and decided by a panel of three trade bureaucrats. Only national governments are allowed to provide testimony. Public interest groups, as well as local and state governments, are not granted a voice in the proceedings; nor are such groups or local governments allowed to even hear the case, as the meetings are held behind closed doors!

In an overwhelming majority of the cases (various citizens’ groups claim in all of the cases) where a domestic environmental or health regulation was challenged, the WTO ruled in favor of the challenging nation. Its environmental policy deemed contrary to the interests of free trade, the ‘perpetrating’ country was forced to eliminate or alter its policy to be in compliance with the WTO’s rules for free trade, or face a substantial monetary fine. In most cases, the country decided to eliminate or reduce its environmental regulation. The United States’ official position is that laws must ultimately be changed to be consistent with WTO policy (Working Group 5).

            To provide an example of the many instances in which the WTO has declared a nation’s domestic environmental policy to be in violation of the rules pertaining to unfettered international barter, consider the Venezuelan Clean Air case of the mid 1990’s. On behalf of its oil industry, the Venezuelan national government challenged a bylaw of the U.S. Clean Air Act that required gasoline refiners to produce cleaner fuel. As the baseline for required improvements for the refineries without reliable data (which happened to be primarily foreign refineries), the rule used data from the oil refineries that filed with the EPA (which were mostly U.S. refineries). Venezuela, claiming the rule posed as a trade barrier to foreign refiners, filed a dispute with the WTO. The dispute panel agreed with Venezuela, and claimed the Clean Air regulation to be in violation of free trade. The clean air regulation was altered to allow foreign refiners to select an individual baseline, which in many instances allowed refiners to obtain a weaker starting point and thus sell dirtier gasoline to the United States. The EPA acknowledged that the mandated change to the regulation ‘created a potential for adverse environmental impact,’ but was unwilling to face the fine for refusing to make the alterations. As demonstrated by this case, “the WTO gives businesses a special avenue to challenge policies, like Clean Air rules, which have withstood domestic challenges” (Working Group 7).

            The Venezuelan Clean Air case is just one of the many instances in which the WTO Dispute Settlement Process has ruled that a country’s domestic environmental policy is in violation of the principles of free international trade. In response to such allegations of environmental ignorance, the WTO claims that it actually works to reduce global pollution. The WTO believes that its pursuit of free international trade provides an engine of growth for developing nations. In line with this argument is the theoretical economic viewpoint of an inverted U-shaped relationship between economic growth and pollution levels. The emerging consensus is that many forms of environmental pollution will increase when a nation’s income level is below a certain threshold value, but will decrease once the income level exceeds the threshold. The line of thinking behind this argument is that once a country achieves a standard of living sufficient enough to make considerations beyond survival, its people begin to give greater attention to environmental issues. The increasing levels of education and technological sophistication that accompany an increase in domestic income will ultimately lead to an emphasis on environmental awareness and protection. Advocates of the idea that free trade will eventually lead to decreased levels of pollution also cite the fact that increased international barter often involves direct foreign investment. An advanced nation that invests in a less developed country through trade will impart many of its technologies on the developing country, thereby encouraging the adoption of various environmentally conscious production methods.

            A number of econometric analyses have been aimed at determining the validity of the theoretical inverted U-relationship between economic growth and pollution levels. A majority of these empirical studies have found that, for most kinds of environmental pollution, economic growth brings an initial phase of increased pollution, followed by a subsequent and extended phase of improvement. Grossman and Krueger (1993) found that emission levels of sulfur dioxide and dark matter suspended in the air increase with per capita GDP at low levels of income, but decrease with GDP at higher levels of national income. Selden and Song (1994) also found an inverted U-shaped relationship for emissions of carbon monoxide and oxides of nitrogen. While the U-shaped relationship exists for many forms of pollution, some display different patterns in regards to changing levels of national income. Shafik (1994) found that standards for safe water and sanitation improve exponentially with rising national income, even at low levels. On the contrary, some pollutants, such as dissolved oxygen and solid wastes, tend to worsen steadily with rising per capita GDP (Lim 3).

            The issue of free international trade and environmental pollution is an extremely contentious controversy because both sides raise justifiable claims and have empirical support. Advocates for the WTO are correct in asserting that unfettered trade is an economically efficient ideal that should be pursued vigorously. Additionally, empirical studies have demonstrated the existence of an inverted U-shaped relationship between economic growth and pollution levels, signifying that free trade could serve as a catalyst for increased per capita GDP and thus decreased emission levels. On the other hand, environmentalist groups have substantial evidence showing that many of the WTO dispute settlements have resulted in the alteration of an environmental policy that created adverse impacts on the environment. The solution to this dilemma must involve each side making concessions toward a common good. Economic growth should still be pursued vigorously, but it must be pursued in a broader context that integrates social and environmental policies. Trade agreements must be made that place an emphasis on mutual environmental agreements. Trade rules must be crafted to be supportive of domestic environmental policies, rather than trying to undermine such regulations; trade agreements between nations should establish a minimum standard in regards to environmental pollution, as opposed to setting a maximum standard. During the negotiations of a barter agreement, environmental implications must be fully taken into account. The WTO must also strive to strengthen its cooperation with international environmental organizations. In regards to dispute settlements, the process must be altered to include a formal environmental review by pertinent public interest groups and local governments. Cases must also be opened to the public to eliminate the secretive nature of the proceedings. To sum, international trade liberalization must be pursued in tandem with environmental protection, as it stands as an exemplar vehicle for the adoption of worldwide, multilateral environmental regulations.


“A Citizen’s Guide to the World Trade Organization.” Working Group on the WTO. July 1999.

“International Trade and the Environment.” World Bank Policy Research Bulletin. Volume 4, Number 1. January 1993.

Lim, Jaekyu. “Economic Growth and Environment: Some Empirical Evidences from South Korea.” School of Economics, University of New South Wales. Sydney, Australia. September 1997.

Williamson, Laura. “International Trade and the Environment.” Conscious Choice. Chicago: January 2000.

Yu, Vicente Paolo B. “Briefing Paper on the WTO Committee on Trade and Environment.” Friends of the Earth International. Geneva, Switzerland. February 2002.


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