September 27, 2001

September 27, 2001 | Backgrounder on Trade, Economic Freedom

Trade: The Best Way to Protect the Environment

Congress will soon consider H.R. 2149, the Trade Promotion Authority Act of 2001. Trade promotion authority (TPA) enhances the President's ability to negotiate trade agreements by restricting agreements negotiated by the Administration to a straight up or down vote in Congress. TPA is important because it reassures America's trading partners that deals struck with America's trade negotiators will not be undone through congressional amendment. Without such assurances, many countries are unwilling to negotiate with the United States.

One of the greatest challenges facing passage of TPA is concern among some Members of Congress that free trade creates a "race to the bottom" in environmental protection. Nothing could be further from the truth. Poor nations cannot afford to value environmental protection more highly than such basic goods as food or health care. If poor nations are to increase environmental protection, they must first increase their wealth. Free trade is a necessary component in catalyzing economic growth. Therefore, free trade is critical in providing the economic means that will enable countries to adopt measures that enhance their protection of the environment.

Trade and the Environment
Some environmental groups oppose granting trade promotion authority (TPA) to the President out of fear that free trade agreements will damage the environment. These groups therefore insist that TPA require participating parties to maintain minimum environmental standards and that those standards be enforced through mandatory trade sanctions for violators.

While the environmental groups' goal is laudable, their strategy will not result in greater environmental protection among America's trade partners. It will reduce the chances of negotiating free trade agreements in the future, as few countries are willing to let America dictate their domestic environmental policies. Even the language of the Jordan free trade agreement, which required each country to enforce its own environmental laws or be subject to the same dispute mechanisms and sanctions as a trade agreement violation, is objectionable to many countries. Instead of advancing the cause of environmental protection, the strategy will simply punish U.S. and foreign consumers who might have benefited from lower prices on internationally traded goods.

Even if trade agreements were forged with the environmental restrictions sought by opponents of TPA, they would be more likely to undermine environmental protection in developing countries rather than promote it. Countries with higher incomes are better able to afford environmental protection. Imposing such standards on poorer nations places them in a Catch-22 between paying for environmental protection or staples like food or health care.

As illustrated by Dr. Alan Moghissi, President of the Institute for Regulatory Science, in his testimony before the International Financial Institutions Advisory Commission (the Meltzer Commission), "how do you explain to a father in the Brazilian rain forest, who is poor, has sick children, and is hungry that he should not cut trees because it may impact the biodiversity?"1 Until the underlying issue of poverty is addressed, Dr. Moghissi added, "poverty [will be] the equivalent to exposure to the most toxic pollutant."2

The key to increasing environmental protection in developing nations is to increase economic growth. As a country's standard of living rises through economic liberalization and trade expansion, its industry can more readily afford to control emissions and its citizens have more discretionary income to allocate toward improved environmental quality.

Free trade is a central component in increasing economic growth. By opening markets and creating more business opportunities, free trade fosters economic growth by rewarding "risk taking by increasing sales, profit margins, and market share. Companies can choose to build on those profits by expanding their operations, entering new market sectors, and creating better-paying jobs."3

Full liberalization of the economy, beginning with an open trade policy, is the most effective environmental preservation strategy because economic liberalization, including free trade, leads directly to increased economic growth. Specifically, the evidence demonstrates that:

  • Wealthier societies are more likely to demand and implement greater environmental protection because they can better afford the costs of those policies. Wealthier societies not only are better able to afford environmental protection, but also show a proven desire for such protection that increases as income grows.4 This relationship is supported by extensive evidence published by the National Bureau of Economic Research. Gene M. Grossman and Alan B. Krueger, for example, concluded that

    pollution appears to rise with GDP at low levels of income, but eventually to reach a peak, and then to fall with GDP at higher levels of income....We find that economic growth brings an initial phase of deterioration followed by a subsequent phase of improvement.5

Moreover, the United States is an example of the elasticity of spending for environmental protection. As incomes have risen over the past three decades, America has increased "real spending by government and business on the environment and natural resource protection has doubled."6

  • Economically free countries typically have a more sustainable environmental policy. In January 2001, the World Economic Forum, the Center for International Earth Science Information Network (CIESIN), and the Yale Center for Environmental Law and Policy published an Environmental Sustainability Index (ESI).7 The Index assigns the health of a country's environment a single number ranging from 0 to 100, in which zero means low sustainability and 100 means high sustainability. This number represents a country's success in coping with environmental challenges and cooperating with other countries in the management and improvement of common environmental problems.

Chart 1 illustrates the relationship between The Heritage Foundation/Wall Street Journal 2001 Index of Economic Freedom scores and the ESI. The chart shows a strong relationship between economic freedom and environmental sustainability. The freer the economy, the greater the level of environmental sustainability.

The United States is a classic example of economic freedom's beneficial impact on the environment. America has been a champion of economic freedom for decades while simultaneously maintaining one of the world's cleanest environments.

  • Countries with more open trade and investment policies generally have higher levels of environmental sustainability. Free trade and the investment that typically follows it are two important sources of economic growth. Therefore, an open trade policy and a business-friendly environment will not only increase growth, but also provide the means to protect the environment.

    The Heritage Foundation calculated a "Trade Openness Index" based on the 2001 Index of Economic Freedom by averaging the score for the trade policy, property rights, capital flows and foreign investment, and regulation factors. Consider the relationship between the Trade Openness Index and the Environmental Sustainability Index illustrated in Chart 2. In countries with an open economy, the average environmental sustainability score is more than 30 percent higher than the scores of countries with moderately open economies, and almost twice as high as those of countries with closed economies.

     

  • The lesson of Chart 2 is that economic liberalization is compatible with high standards of environmental quality. Moreover, there is no evidence of a decline in environmental sustainability as economic liberalization increases despite several studies that have shown an initial decline in environmental standards as income grows.8

As shown above, including mandatory standards for environmental protection in free trade agreements will actually undermine the prospects for raising environmental standards in America's developing country trading partners. By reducing the likelihood that those countries will enter into a free trade agreement with the U.S., environmental requirements reduce the likelihood of economic growth in those countries and, thereby, their ability to afford environmental protection.

What to Do
Fighting to impose environmental regulations on U.S. trading partners is a self-defeating strategy that undermines prospects for removing barriers to trade and fostering economic growth necessary for countries to adopt and enforce environmental protection. For this reason, the Congress should:

  • Grant trade promotion authority to the President without environmental provisions. Free trade agreements and environmental protections need not be at odds. However, the strategy of some environmental activists to use free trade agreements to enforce environmental standards for developing nations is fundamentally inconsistent with free trade. Sanctions and automatic trade barriers have no place in free trade agreements regardless of what goal they seek to achieve.

    Even more important, enforcing environmental standards through trade agreements would actually undermine efforts to increase environmental standards in the developing nations by reducing the probability that those countries would enter into trade agreements with the U.S., thereby also reducing prospects for the growth that is necessary to improve and sustain the environment. With a clean TPA, the President will be able to advance free trade and, with that, a means for countries to increase protection of their environment in a sustained way as their standard of living rises.

  • Address environmental concerns separately from free trade agreements. Concerns about the environment should be treated separately from free trade agreements or in parallel agreements, such as happened with the North American Free Trade Agreement (NAFTA). These environmental agreements, however, must not undermine free trade in any way. Countries may commit to meet their own environmental standards and to improve them over time as they become better able to afford the cost of that protection. If a country fails to meet its own standards, a system of fines or offsetting compensation9 is preferable to trade sanctions of any sort. In this way, both countries can address and cooperate on issues of mutual concern without undermining their primary goal: advancing free trade.

    By keeping trade unencumbered by environmental issues, Congress can pave the way for developing countries to increase their wealth and follow in the footsteps of wealthier nations, which adopted environmental protection as they became able to afford it.

Conclusion
Efforts to impose stricter environmental standards through trade sanctions or by imposing regulations through trade agreements are fruitless and counterproductive. Countries in general--but developing countries in particular--are able to protect their environment only if their economies prosper and the standard of living of their citizens improves.

The surest way to promote sustainable environmental policies around the world is to increase economic growth and the standard of living in poor countries. Economic growth is achieved through greater economic liberalization, including free trade. Therefore, those truly concerned with protecting the environment should support a trade promotion authority that effectively advances free trade.

Ana I. Eiras is an Economic Policy Analyst for Latin America, and Brett D. Schaefer is Jay Kingham Fellow in International Regulatory Affairs, in the Center for International Trade and Economics (CITE) at The Heritage Foundation.


1. A. A. Moghissi, "Testimony Before the Commission of International Financial Institutions," November 17, 1999, available from Institute for Regulatory Science, Columbia, Maryland.

2. Ibid.

3. Denise H. Froning, "The Benefits of Free Trade: A Guide for Policymakers," Heritage Foundation Backgrounder No. 1391, August 25, 2000, p. 4.

4. See Gene M. Grossman and Alan B. Krueger, "Environmental Impacts of a North American Free Trade Agreement," National Bureau of Economic Research, NBER Working Paper No. W3914, November 1991; see also Jagdish Bhagwati, "Trade and the Environment: The False Conflict?" in Durwood Zaelke, Paul Orbuch, and Robert F. Housman, eds., Trade and the Environment: Law, Economics, and Policy (Washington, D.C.: Center for International Environmental Law, 1993), pp. 159-190.

5. Gene M. Grossman and Alan B. Krueger, "Economic Growth and the Environment," National Bureau of Economic Research, NBER Working Paper No. W4634, February 1994, p. 14.

6. Daniel T. Griswold, "Trade, Labor, and the Environment: How Blue and Green Sanctions Threaten Higher Standards," Cato Institute Trade Policy Analysis No. 15, August 2, 2001, p. 10, at http://www.freetrade.org/pubs/pas/tpa-015b.pdf.

7. World Economic Forum, CIESIN, and Yale Center for Environmental Law and Policy Environmental Sustainability Index, January 2001, at http://www.ciesin.columbia.edu/indicators/ESI/.

8. Gene M. Grossman and Alan B. Krueger analyzed the relationship between environmental indicators (concentrations of urban air pollution, measures of the state of the oxygen regime in river basins, concentrations of fecal contaminants in river basins, and concentrations of heavy metals in river basins) and the level of a country's per capita income. Their analysis revealed that economic growth is accompanied initially by deterioration in environmental conditions but quickly improves as per capita income increases. According to Grossman and Krueger, "The turning points for the different pollutants vary, but in most cases they come before a country reaches a per capita income of $8,000." See Grossman and Krueger, "Economic Growth and the Environment," p. 14.

9. "Offsetting compensation" is a system already being contemplated under World Trade Organization (WTO) rules. Under this system, if a country is found to violate its obligations under the WTO, and then refuses to bring the policies in question into conformity with WTO requirements, that country should be required to offer `compensating' liberalization in some other area. Violations of a trade agreement under such a system would lead to trade expansion, not trade contraction.

About the Author

Ana I. Eiras Senior Policy Analyst on International Economics
Center for Trade and Economics (CTE)

Brett D. Schaefer Jay Kingham Senior Research Fellow in International Regulatory Affairs
The Margaret Thatcher Center for Freedom

Related Issues: Trade, Economic Freedom