Does increased global trade lead to increased environmental damage? This question may seem simple, but the studies on the relationship between trade and environment concluded with contradictory results and therefore there is not an agreed upon answer for this question. The debate is still hot and every claim seems right from its own point of view, with the lack of a common ground for parties and understanding of basic concepts. Not only in theory but also in practice this question has important implications, especially for policymakers. In this essay, I will summarise the theoretical and empirical arguments for and against global trade in the environmental context and then explain with which I am convinced most.
In theoretical side of this argument, mainly distinguished effects are scale effect, composition effect and technique effect. Vennemo et al. (2008) presented a condensed explanation of the technique effect as production of a given good becomes cleaner following free trade as it leads to tighter environmental regulation and enforcement. Esty (2001) stated that technique effects arise from the demand toward cleaner production as a result of wealth increases and noted that trade expands access to better technologies and environmental best practices. Vennemo et al. (2008) also explained the composition effect and pointed out that free trade changes the composition of industries and by this way affects pollution. Concerning the composition effect, it is argued by WTO (1999) that total effect on the local environment could be positive if growing export sectors are less polluting on average that import-competing sectors and could be negative if the reverse relation was true. Scale effect is another major effect described in the literature. Vennemo et al. (2008) argued that production increases by free trade and this leads to the increase of production pollution. Runge (1995) explained that scale effects are the result of the fact that increase in trade leads to increase in transportation, output and demand for raw and processed products. By Runge (1995) it is also mentioned that increasing consumption of non-renewable natural resources including fossil fuels, minerals, and old-growth forests, and increasing levels of air and water pollution among possible scale effects. However, scale effect is not limited to its polluting effect by nature; it also has an indirect effect on environment via growing incomes. With the words of WTO; "the silver lining of the scale effect is the associated income growth that drives a countervailing demand for a cleaner environment" (WTO, 1999, p.3). Environmental Kuznets Curve (EKC) approach provides some useful insight for analysing our point. Sheldon (2006) explained that the inverse U shaped relationship between per capita income and environmental quality is implied by EKC hypothesis. This is to say negative environmental effects of economic development is expected to a certain income level and after that level relationship would be the reverse. Additionally, Sheldon (2006) stated that increased incomes are related to increased pollution for poor countries and decreased pollution for rich countries. WTO (1999) reported that empirical evidence on EKC hypothesis is mixed. It may be valid for some types of environmental indicators for example those indicators of local and primarily urban air pollution, while it seems to be invalid for more global indicators. From the discussion on scale effect, it is clear that total effect caused by growing economic activity is indefinite. Other than three effects above, Runge (1995) stated that impacts of trade growth on the environment also include its effect on allocative efficiency and on policy. Effect of trade on allocative efficiency is again a matter of comparative advantages theory. The idea regarding environmental concern is that total polluting effect of global production will be less in free trade conditions compared to case that every country produces all of the goods and services solely on their own. Runge (1995) cited the example of closed economies of Eastern Europe and former Soviet Union as being huge destructors of environment for this argument. Regarding the effect of trade on policy, it is noted that trade may lead to policy shifts either in favor of environmental quality or in the opposite direction. The arguments cited by WTO (2004) that trade liberalization is not the primary cause of environmental degradation to a great extent and so trade instruments are not the primary or best policy tools for dealing with environmental problems, provide a condensed view of those in favor of trade. In this paper, there are also some arguments of positive relationship between the removal of trade restrictions and distortions and improved environmental quality which are originally from a study prepared by the WTO Secretariat. The main arguments are that enhanced competition will lead to more efficient factor-use and consumption patterns, trade expansion and promotion of a sustainable rate of natural resource exploitation will lead to poverty reduction, market liberalization will lead to an increase in the environment-related goods and services and continuing process of multilateral negotiations will lead to better conditions for international cooperation. Lastly, it is argued that for developing countries trade is an important tool for securing resources that are necessary for protection of environment.
After briefly explaining common theoretical conclusions drawn, now I want to summarize empirical findings on the debate. Firstly, I will begin with "advocates" of trade, which are usually not fully advocating but to some extent supporting idea of trade is good for environment. Arguments in favor of trade are various. Antweiler et al.(2001), studying on a data set of more than 40 developed and developing countries, estimated that 1 % increase of scale of economic activity would raise pollution by 0.25 to 0.50 % for an average country they studied on. The effect of related income increase which would call for cleaner production methods (technique effect) was estimated to decrease pollution 1.25 to 1.50 %. So, combining together the three main effects distinguished in the literature, which move to reverse directions, they found out that freer trade is better for environment. Chintrakarn and Millimet (2006) found some evidence of a beneficial effect of trade on environment. However, they noted that this effect is dependent on several factor i.e. timing, nature (stock versus flow), the scaling of the dependent variable (whether or not it is land area), risk associated with the analysed pollutants. Copeland and Taylor (2004), in their comprehensive and analytic study noted that although having strong theoretical roots, pollution havens hypothesis, which claims relatively low-income countries will become dirtier with trade, seemed to fail in empirical studies. They also emphasized that there are many evidence on positive effects of rising income levels on environment. Their final conclusion pointed out that theoretical effects may vary across countries and further empirical studies needed to cover more sorts of pollutants and also effects of trade on renewable sources. Frankel and Rose (2005) pointed out that there is no evidence of race to the bottom hypothesis, which implies that countries open to trade would have looser environmental regulation to protect competitiveness, and again no evidence to pollution havens hypothesis. They confirmed EKC hypothesis and are among those who claim trade is good for environment. Sheldon (2006) concluded in general that standard analysis of optimal intervention suggests that a race to the bottom is unlikely to happen both for small and large countries under certain assumptions.
What about arguments against freer trade? Or those concluded conditionally as noting that the total effect of freer trade would be to either direction depending on some other factors? To reach a conclusion, we also need to review these studies as being "prosecutors" against trade and also review other studies which concluded without a definite answer but with some additional explanation on the question. Batra et al. (1998) are among those who are against trade in scope of environmental point of view. They focus on the major contribution of international trade to degradation of environment. According to them, international trade generates pollution in many ways that local production does not generate pollution. Their main argument is on transportation of goods. As since 1950 world trade has increased more than economic activity, they claim trade to be a bigger polluter than industrialization. They have some other arguments on different ways of transportation. In addition to normal pollution generated by transportation, they also argue that trade also increases risk of accidental pollution. They think that global free trade is not the optimal policy for any one country and the world because free trade maximises international trade and consequently pollution. Pollution haven hypothesis is discussed also by Antweiler et al. (2001). They remind here that with trade dirty capital-intensive processes would move to the relatively capital-abundant developed countries according to the simple factor endowment hypothesis. They also give example of empirical studies that put serious doubt on the pollution haven hypothesis by finding that trade flows are primarily determined according to factor endowment considerations. Karp et al. (2001) have ended up with some kind of common ground between free-traders and environmentalists as they concluded that the net result depends upon whether environment is fragile or resilient. If it is fragile, trade leads to environmental degradation and if it is resilient, free trade would be the better choice. Kander and Lindmark (2006) have an interesting result with their model. In their country specific analysis, they found out that within the context of total emissions Sweden had benefited from foreign trade between 1913 and 1955 and it was reversed after 1955 to 1995. Fredriksson (1999) concluded that expected effect of freer trade on environment could be either good or bad according to related environmental policies. Moreover he pointed out that total pollution could increase by more liberalised trade as equilibrium pollution tax levels falls. Finally, we can note that environmental regulations could affect relation of trade and environment. WTO (1999) reported that Porter Hypothesis claims just as the competitive pressure, regulatory pressure would also encourage environment-friendly industrial innovations and there are some supporting empirical evidences for it.
After reviewing main points both in favour of and against freer trade made on theoretical and empirical sides, it is now time for making my own comments. It is obvious that effect of increased global trade on environmental damage is a controversial issue and a consensus or common point does not seem to be achievable in a near future. From the literature, I understand that theoretical arguments against trade are relatively dominant. However, when it comes to empirical evidence, these theoretical fears are usually refuted. Personally, I am more convinced with the idea that global trade is better for environment. We should accept that the question we are searching to find answer is an empirical matter rather than being a theoretical matter. Therefore, further empirical study may change the direction of the debate or at least may create a common understanding or common ground for parties. From the current literature available on the trade debate, it is clear that global trade is a way of optimization of global production and global environmental damage. As comparative advantages theory pointed out, without global trade every country should own its own industry without an efficiency order between them. I think that, those who claim trade is bad for environment are usually depending on theoretical potential bad impacts and do not have so much convincing empirical evidence. The most consistent and direct argument against increased global trade is the one that focusing on increased transportation. However, it cannot be proved that the negative effects of decreased global trade on environment would be less than positive effect of lowered transportation on environment. So, focusing solely on transportation is a very short termed way of thinking and would be misleading for policymakers. At above paragraphs, I have used metaphors of "advocate" and "prosecutor" on purpose. Indeed, considering the positive role of global trade for wealth of the world, those who have to prove their arguments are those who argue trade is bad for environment. In conclusion, freer trade is expected to create global value for many ways and therefore, unless it is obviously proved to be bad for environment, it should remain as liberal as possible.
