Around the world, open trade has facilitated economic integration, encouraging growth, innovation and job creation. However, in an age where climate concerns are rightly at the centre of the political agenda, some voices speculate that the benefits of trade come at the cost of sustaining our environment.
Negative attitudes towards trade often stem from the idea that an open economic system inevitably encourages a ‘race to the bottom’ in terms of environmental standards and regulations as countries compete with each other. Globalisation does have an influence on the environment but it is not nearly as drastic or destructive as many have been led to believe.
According to the race to the bottom theory, governments – under pressure to remain competitive in a globalised economy – will cut environmental regulations to make their countries more attractive for business. Replicated by other governments, this leads to a downwards spiral of regulatory regression that lowers living conditions across the board. The theory accompanies the belief that companies are flocking to exploit “pollution havens”.
In reality, though, this theory dramatically overstates the importance of environmental regulation in a company’s investment decision-making process. A staggering array of factors help determine where companies locate their operations and investments and, even for pollution-intensive goods, the stringency of environmental regulations remains far down the list. Studies have repeatedly shown that avoiding or treating pollutants adds only a few percentage points to companies’ total production costs. Much more influential are factors such as domestic market access, reliable transport infrastructure and the ability to recruit local workers with the appropriate skills.
Furthermore, environmental degradation is itself a factor that dissuades companies from investing in countries. As the Organisation for Economic Cooperation and Development states in a run-down on the topic: “there is little that countries can gain from becoming pollution havens but they would have a lot to lose in the long run if environmental degradation affects their own competitiveness.”
Far from being a threat to environmental sustainability, trade can actually constitute a key catalyst in the global transition to a greener economy. There are several ways this happens. The first is through the ability of open trade to reduce poverty levels and increase general living standards to unprecedented levels. Put simply, more prosperous countries have greater capacity to manage environmental challenges more effectively. Also, as economies develop and living standards rise, a structural shift is observed away from environmentally-intense production and towards greater interest in the quality of the environment.
This shift could be the result of domestic pressure but the international community also likely plays a role. Through membership in the World Trade Organisation (WTO), many countries are brought into dialogues on global issues and standards for the first time and these discussions extend to the environment. For instance, 46 WTO member countries are currently engaged in negotiations seeking to eliminate tariffs on a selection of environment-related products as part of the Environmental Goods Agreement—helping to make clean energy alternatives available to all.
Trade can also contribute towards greater environmental sustainability through technology transfer. According to the US National Bureau of Economic Research, openness to trade encourages innovation in both technology and management practice, and this innovation can be applied to environmental concerns as well as to purely economic objectives. Multinational companies especially tend to bring state-of-the-art production techniques to host countries, perhaps for the first time. The possible spill-over effects of such technology and knowledge transfers are enormous and can potentially transform the way business is traditionally carried out across different sectors.
It is crucial to note the positive role that trade can play in sustainable development and climate action for countering open trade through protectionism could imperil the environment even further. The burgeoning solar industry offers a current cautionary tale.
Trade with China and other Asian countries have helped drive down the cost of solar panels and cells by around 70% since 2010. This has allowed many Americans to incorporate solar energy in their businesses and households for the first time. The cheap imports have also boosted the domestic US solar installation industry, employing more than 260,000 workers—five times as much as the US coal industry.
However, US solar panel producers, struggling to compete with their Asian competitors, have asked the US Government to effectively double the price of imported solar panels so that they can compete. Fears that the current administration, with its occasional anti-trade rhetoric, will side with the US manufacturers has already increased solar panel prices up 20% as panic buying set in. Funding for future US solar deals has also fallen. Needless to say, any policies that make solar panels more expensive or difficult to obtain will negatively affect the ability of US businesses and consumers to switch to greener energy sources. Far from trade being a threat to global climate objectives, this case illustrates that protectionism can prove a far greater menace to the environment.