International Trade Liberalization and the Environment

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Does free trade harm the environment?

Environmentalists argue that trade liberalization harms the environment. The decisions of the World Trade Organization (WTO) in particular have been the subject of much criticism. Carbaugh has described environmentalists' three primary assertions (Carbaugh, 2004):

Trade liberalization leads to a "race to the bottom" in environmental standards.
Trade liberalization conflicts with morally-conscious environmental policies.
Trade liberalization encourages trade in products that create global pollution ("pollution havens").
Proponents of trade liberalization argue that freer trade might actually improve the quality of the environment. For example, the international environmental policy of the U.S. and other industrial nations is based on the "polluter-pays principle." This approach is intended to give producers the incentive to develop more pollution-control techniques (Carbaugh, 2004).

In this project, you will recreate and evaluate the arguments and counter-arguments for all three of the environmentalists' assertions described above.

Part 1: Recreate the arguments/counter-arguments
Recreate the arguments for and against the three assertions noted above (six arguments total). Approach this assignment as an exercise in critical thinking; your goal is to represent the arguments as accurately and as thoroughly as possible. For each argument and counter-argument, present the following information:
The party you represent
Your party's interests or objectives
Your party's assertion
A summary of the available evidence that supports your party's assertion and/or examples that illustrate the assertion.
Feel free to use the Library or other Web resources to help recreate the arguments.
Trade liberalization leads to a "race to the bottom" in environmental standards.
Trade liberalization conflicts with morally-conscious environmental policies.
Trade liberalization encourages trade in products that create global pollution ("pollution havens").

Proponents of trade liberalization argue that freer trade might actually improve the quality of the environment. For example, the international environmental policy of the U.S. and other industrial nations is based on the "polluter-pays principle."

The major issues that are leading to this are:

Externalities and cost internalization

'Externalities' is the economic term for the costs (e.g. environmental and social) of an economic activity which are not borne by the operator, but instead by the wider community. For example, if a forestry operation contributes to species loss or habitat destruction and these 'costs' are not somehow paid by the operator and thus reflected in the price of the final product, they will be 'paid' by the wider community - locally, nationally or globally. They are thus 'externalities'. The theoretical idea that trade benefits all is partly based on the assumption that externalities do not exist because prices reflect the true costs of production (i.e. the costs have been 'internalized'). Such an assumption is a fallacy; the environment is being damaged, costs are not 'internalized' and thus trade is not benefiting all. Many now recognize that, for the trade system to work properly, costs must be internalized.
But this recognition has not been turned into reality. This is partly because, if anything, the world trade system encourages competition to reduce costs (which can include actively externalizing them) rather than encouraging the internalization (and thus increase) of costs through taxes, regulations or other mechanisms.

Trade and specialization

One of the central pillars of trade theory is that countries will specialise in producing those products, which they are comparatively better at making relative to other products and other countries. On the one hand, such specialization allows a country to take advantage of economies of scale (i.e. larger scale operations producing goods more cheaply) and become more efficient. On the other, such specialization can lead to problems. For example, if a nation is reliant largely on exports of a small number of products, changes in the international markets of those products can have drastic impacts on the nation in question. Also, specialization of production can result in the specialized use of natural resources (e.g. monocultures) which impoverishes the natural environment.

The global 'race to the bottom'
The increasing global mobility of companies means that they can often move, or threaten to move, to wherever the costs of production are lowest. Such costs include environmental and social issues (such as the exploitation of cheap labour, often women). The use, by companies and/or governments, of the uncosted services to gain competitive advantage could lead to what has been called the 'global race to the bottom'.

ARGUMENTS FOR
Put simply, this is competition between countries to lower, or keep low, social and environmental standards in order to be more 'competitive'. Averting a 'race to the bottom' requires government involvement yet the world trade system aims to reduce government 'interference' in the international flow of goods, services and capital.

ARGUMENTS AGAINST
It leads to the deterioration of environment (See arguments against free trade)

Tradable pollution permits
a modern development in the area of controlling negative externalities has been the use of tradable pollution permits. These can be used to control the degree of structural change and focus on tackling the worst culprits.

ARGUMENTS FOR
Firms are allowed to buy and sell those rights. Then they could take the polluters to court for compensation as the provision of property rights would give them individuals ownership rights and they can take the action promptly. It will also increase the accountability.

ARGUMENTS AGAINST
It leads to the deterioration of environment (See arguments against free trade). This is leading to another entry barrier.

SUMMARY

ARGUMENTS FOR FREE TRADE
Classical economic analysis indicates that free trade increases the global level of output because free trade permits specialization among countries.

Specialization allows nations to devote their scarce resources to the production of the particular goods and services for which that nation ...