Free Trade Is Green Trade

Environmentalist objections to trade and proposals for the “greening” of trade are a fundamental assault on free trade principles.  They also threaten environmental quality.  Free trade is essential for both wealth creation and environmental protection.

The Green Critique

“A more accurate name than the persuasive label ‘free trade’ is deregulated international commerce,” scolds World Bank environmentalist Herman Daly. 1  International regulation of trade is necessary “to build environmental responsibility into economic activity,” 2 and to assure that “trade meets the goals of environmentally sustainable development,” 3 in the words of Jay Hair, president of one of the largest environmental organizations in the United States, the National Wildlife Federation.  As trade has become globalized, environmentalists argue, so has the magnitude of environmental degradation.  “Further growth beyond the present scale is overwhelmingly likely to increase costs more rapidly than it increases benefits, thus ushering in a new era of ‘uneconomic growth’ that impoverishes rather than enriches,” the foreboding Daly intones. 4

The “green” trade agenda necessarily entails greater political management and regulation of the private sector to safeguard social and environmental goals.  In the eyes of environmental groups like the Worldwatch Institute, “trade can bring greater prosperity and improved quality of life, if properly managed, but if not it can become an engine of enormous destruction” of biodiversity, the global climate, and natural resources.5  Fearing destruction of the “global” environment, environmental groups call for radical alterations in the free-market system by government.

Environmental activists are particularly concerned with trade between progressive nations (with high regulatory standards) and more free-market or less developed countries (with lower regulatory standards).  Nations without strict regulatory standards attract accelerated flows of international capital investment, leading to the creation of “pollution havens.”6  The lack of stringent environmental regulation gives firms an unfair competitive trade advantage, amounting to an environmental subsidy which enables firms to undercut prices in export markets.  This phenomenon is called environmental dumping, or “eco-dumping.”7  Vice President Al Gore, in his bestselling Earth in the Balance, argues that “weak and ineffectual enforcement of pollution control measures should also be included in the definition of unfair trading practices.”8

The remedy for eco-dumping is a mixture of protectionism, industrial policy, and regulation.  To offset the unfair cost advantages of another nation, a government can impose tariffs on the offending nation’s imports (protectionism), or a government can subsidize the exports of its politically-preferred businesses (industrial policy).9  The purpose of import and export restrictions and subsidies is to induce nations to adopt stricter environmental standards, “internalizing” the externalized costs of unenlightened environmental policies.  In this manner, nations can “harmonize” their trade-related regulations and risk assessment practices to facilitate an overall improvement in standards.10  Harmonization of production standards is envisioned as a means of establishing minimum environmental standards, either in the context of a regional trade agreement, or through a system of global environmental standards.11

Environmentalist opposition to free trade stems from harsh scrutiny of “market failure” and the uncritical acceptance of political approaches to environmental protection.  Wherever the market “fails” to protect environmental values to the desired degree, political intervention is assumed to be the solution.  Because all economic activities have some impact on environmental quality, there is no end in sight for government intervention in the marketplace.12  Viewing economic growth as incompatible with a healthy environment, the environmental lobby insists on political restraints on private activity, both domestically and internationally.  The environmentalist perspective is rapidly becoming conventional wisdom.

Richer Is Cleaner

Ultimately, however, there is no contradiction between a commercial free market and environmental quality.  Numerous academic studies demonstrate a positive link between economic growth and environmental quality.  Princeton University economists Gene M. Grossman and Alan B. Krueger have found that “economic growth tends to alleviate pollution problems once a country’s per capita income reaches about $4,000 to $5,000 US dollars.”13  In fact, levels of sulfur dioxide are significantly lower in countries that engage in significant international trade.14

The link between economic growth and environmental improvement becomes clear in reviewing the ecological successes of the developed world.  According to the World Bank, the economies of OECD countries have grown by approximately 80 percent since 1970.15  During that time period, these countries have achieved nearly universal access to clean water supplies, sanitation, and waste disposal.  Air quality has improved dramatically, with particulate emissions dropping by 60 percent and sulfur dioxide emissions by 38 percent.  Pollution from large shipping accidents and oil spills has declined, and nearly all countries have increased the acreage of their forestlands.  Similar statistics for the developing world demonstrate that improved environmental quality in all of these areas is generally associated with higher income.16

There are a variety of reasons for the beneficial relationship between growth and environmental quality.  As economic activity increases, so does human interaction with nature.  Since most human actions strive to improve quality of life, environmental amenities receive greater attention.  Environmental improvements are particularly significant in market-oriented economies.  The societal institutions that facilitate prosperity, such as property rights, market-based prices, and overall economic freedom, are equally essential for raising environmental quality.  These institutions form the bulwark of private stewardship of natural resources and, thus, sustainable management practices.  Market forces naturally drive economies to become more efficient by reducing the costs associated with energy and materials use, and waste disposal.  Moreover, since growth creates wealth, greater economic resources are made available to address the primary human needs, which must be fulfilled before individuals will focus on environmental amenities.  According to Marian Radetski, an economist at the University of Luleo in Sweden, “rich consumers are more willing than poor ones to spend substantial parts of their income for safeguarding high environmental standards.”17

Furthermore, poverty is a significant cause of environmental degradation.  Poorer people are more likely to exploit environmental commons in search of fuelwood and other basic necessities, causing overhunting, overfishing, and stress to water resources.18   Lacking significant employment opportunities and productive land, the poor in the Third World often must utilize marginal lands for food production, attempting to farm in deserts or tropical forests. The result is environmental degradation in the form of soil erosion, desertification, and deforestation.19

Moreover, economic growth enables societies to advance in ways that are environmentally beneficial.  At earlier stages of development, pollution problems are likely to be more threatening to human beings.  Air- and water-borne hazards can result in immediate illness or death.  As societies advance, pollution problems decline in severity.  Environmental concerns generally become less life-threatening, and more aesthetic in nature.

Even though growth coincides with environmental improvement, “market failure” is often blamed for the existence of pollution itself.  Many environmentalists consider the system of capitalism and private enterprise inherently responsible for environmental externalities.  Only government regulation in the public interest can force businesses to internalize social costs, according to this argument, and such regulation must be extended to trade.  Thus, there is a strong anti-market bias to environmentalist arguments.

The market-failure argument leads inexorably to central planning; any human activity with environmental impacts must be politically controlled.  Government is entrusted to effectively foster only the types of economic growth which are environmentally friendly, while preventing the types that are not.  Yet no government has the capability of assimilating the vast amounts of economic, technological, and scientific data necessary to make such determinations.  The task of ecological central planning is no easier than economic central planning.20

If market failure was truly the cause of pollution, we would expect the absence of markets in the centrally-planned economies of Eastern Europe would have been environmentally beneficial.  On the contrary, without the profit motive of the market, some of the worst environmental degradation in the world occurred in the former Soviet Bloc.21  Central planning failed largely because it could not efficiently distribute resources.  Neither could it safeguard environmental resources.  Data from sample market and socialist economies shows that market economies become more resource-efficient with economic growth.  Socialist countries, however, are generally more resource intensive, even in times of recession.22  Without a profit motive, there is little incentive for political owners of a resource to conserve for the future in order to maximize returns.23

Free Markets Are Truly Green

In a market economy, environmental and other costs are internalized more thoroughly via the price system.  Internalization is made possible by the extension of property rights and a system of voluntary exchange to an ever-wider array of resources.  As environmental and other resources are integrated into the market system of voluntary exchange, information is conveyed through prices, which encourages more creative resolutions of environmental and other problems.  Falling prices for energy and raw materials demonstrate that the market’s technological improvements and efficiency gains are making resources more abundant.24

The “market failure” argument misses the fundamental cause of pollution—the lack of private property institutions.  Individuals are far more likely to care for the environmental sustainability of their own resources.  Logically, the less common property there is, the less pollution will be tolerated by a society of individual property owners.  Likewise, by internalizing external costs, market forces obviate the need for corrective regulations.  By reducing the scope of government intervention, markets enable individuals to seek redress from those who impose unwanted pollution costs.  Political owner/managers are incapable of seeking adequate redress primarily because they cannot calculate accurate prices and values for environmental amenities.25  Thus, a free market effectively implements the “polluter pays principle,” making capitalism the only form of sustainable development.26  Pollution externalities could be reduced further by eliminating the remaining barriers to full private property rights.

Environmentalists need not fear that expansion of trade will produce growth in pollution.  To the extent that expanded trade is generating economic growth, environmental quality should also improve.  This fundamental economic reality does not change simply because goods and services are crossing borders.  The same free-market institutions which generate economic gains also generate environmental gains.  To the extent that protective tariffs and subsidies restrict and distort trade, they reduce income and, hence, the demand for environmental quality.

Environmentalists have more to fear from protectionism.  Current agricultural policies cause major distortions of world food production and trade.27  Industrial countries encourage agricultural production with price supports and other subsidies totaling $200 billion per year, while developing countries discourage agricultural production through tax and trade policies.28  Agricultural subsidies in the United States, for example, are responsible for intense chemical pesticide and fertilizer use on farmlands.  By fostering inefficient land use, US subsidies and land set-aside programs contribute to soil erosion and loss of wetlands and forests.  Federal mismanagement also encourages farmers to overplant while discouraging crop rotation, depleting soils and exacerbating pest eradication.29  By scaling back interventionist government policies, trade liberalization would have significant environmental benefits.

End Notes

1.   Herman Daly, “The Perils of Free Trade,” Scientific American (November 1993).

2.  Jay D. Hair, “GATT and the Environment,” Journal of Commerce, December 8, 1993.

3.  Testimony of Jay D. Hair, president of the National Wildlife Federation, before the Senate Committee on Commerce, Subcommittee on Trade and Environmental Issues, February 3, 1994.

4.  Herman Daly and John B. Cobb, Jr., For the Common Good: Redirecting the Economy Toward Community, the Environment, and a Sustainable Future (Boston: Beacon Press, 1989), p. 2.

5.  Hilary F. French, “Costly Tradeoffs: Reconciling Trade and the Environment,” Worldwatch Paper, no. 113 (Worldwatch Institute, March 1993), p. 9.

6.  Ibid., p. 29.

7. Robert Repetto, “Trade and Environmental Policies: Achieving Complimentarities and Avoiding Conflicts,” Issues and Ideas (New York: World Resources Institute, 1993), p. 5.

8.  Al Gore, Earth in the Balance (New York: Houghton Mifflin, 1992), p. 343.

9.  Charles Arden-Clarke, “The General Agreement on Tariffs and Trade, Environmental Protection and Sustainable Development,” World Wildlife Fund Discussion Paper, June 1991, p. 1.

10.  Repetto, “Trade and Environmental Policies,” p. 6.  

11.  French, “Costly Tradeoffs,” p. 35-36.

12. See Fred L. Smith, Jr., “Environmental Quality, Economic Growth, and International Trade” (Washington, DC: Competitive Enterprise Institute, 1992).

13. Gene M. Grossman and Alan B. Krueger, “Environmental Impacts of a North American Free Trade Agreement” (Princeton: Princeton University, 1991), p. 35.

14.  Ibid., p. 17.

15. World Bank, World Development Report 1992: Development and the Environment (New York: Oxford University Press, 1992), p. 40.

16.  Ibid., p. 11.

17. Marian Radetzki elaborates on the market’s incentives for environmental protection; “Economic Growth and the Environment,” Symposium on International Trade and the Environment, International Trade Division, International Economics Department (World Bank, November 21-22, 1991), p. 22.

18.  World Resources, 1992-93 (New York: World Resources Institute, 1992), pp. 30-31.

19.  Ibid.

20.  See Fred L. Smith, Jr., “The Market and Nature,” The Freeman (September 1993) [see pages 25-38 in this volume].

21.  Thomas DiLorenzo, “Does Capitalism Cause Pollution?” Contemporary Issues Series, no. 38 (Center for the Study of American Business, August 1990).

22.  Mikhail S. Bernstam, “The Wealth of Nations and the Environment” (London: Institute of Economic Affairs, 1991).

23. Thomas DiLorenzo, “The Mirage of Sustainable Development,” The Futurist (September/October 1993).

24.  World Development Report 1992, p. 37.

25.  Daniel C. Esty, Greening the GATT: Trade, Environment, and the Future (Washington, DC: Institute for International Economics, 1994), pp. 66-67.  Esty criticizes markets for not “getting environmental prices right” but admits that there is no agreed method for political calculation of prices.

26.  See Roger E. Meiners and Bruce Yandle, Taking the Environment Seriously (Boston: Rowman & Littlefield Publishers, 1993).

27.  GATT Secretariat, “Trade and the Environment,” Final Report: International Trade 90-91, vol. 1 (General Agreement on Tariffs and Trade, February 3, 1992), pp. 32-35.

28.  Dennis Avery, World Food Progress 1991 (Indianapolis: Hudson Institute Center for Global Food Issues, 1991), pp. 172-177.

29.  Ibid., p. 216.  Also see Richard L. Stroup and Jane S. Shaw, “Environmental Harms from Federal Government Policy,” in Meiners and Yandle, Taking the Environment Seriously, pp. 51-72.