World Trade and the Environment: Issues and Policies

• Date: 01 August 2017
• DOI: http://doi.org/10.1111/1468-0106.12100
• Published date: 01 August 2017
• Author: Winston W. Chang

WORLD TRADE AND THE ENVIRONMENT: ISSUES

AND POLICIES

WINSTON W. CHANG*State University of New York, Buffalo

Abstract. This paper provides an overview of trade, environmental and related public issues and

policies. It discusses the pollution problem, the recent global warming trend, the attempts of various

institutions, including the United Nations, the World Trade Organization, regional, national and

other organizations, to solve the global trade and environmental issues. The paper also discusses a

number of basic theoretical issues and empirical f‌indings, such as the free-rider problem, the tragedy

of the commons, the theory of second best, the relative eff‌icacy of price and quantity control, carbon

leakage, border carbon adjustments, the cap-and-trade system, the pollution haven hypothesis, the

optimal social discount rate and the environmental Kuznets curve. Some computable general

equilibrium models are reviewed and several notable World Trade Organization environmental and

health-related trade dispute cases are analysed, including the tuna–dolphin, shrimp–turtle, eco-

labelling, beef-hormone and genetically modif‌ied organism cases.

1. INTRODUCTION

Trade liberalization can have substantial ramif‌ications for the global environ-

mental policy regime. Lowering trade barriers and opening new markets can

boost economic growth and development, which may help or harm the environ-

ment. On the one hand, growth and development tend to increase resource and

energy demands, degrade natural resources and bring forth greenhouse gas

(GHG) emissions which contribute to global warning. Trade can also lead to the

pollution haven phenomenon because countries may relax their environmental

standards to gain a comparative advantage in producing pollution-intensive

products. On the other hand, trade may help the environment. Bigger markets

spur technological innovation and diffusion, which can reduce the intensity of

GHG emissions from growth and development. Trade enables a country to cut

its pollution-intensive domestic production and switch to imports that are pro-

duced with less-pollution-intensive methods. Moreover, trade creates higher

national incomes, which provide f‌inancial capabilities in their emission abate-

ment efforts. In principle, trade widens the scope of potential joint benef‌its

among countries and can, therefore, be a potential facilitator of global climate

negotiations.

Likewise, environmental policy can have signif‌icant ramif‌ications for trade

policy. For example, a climate policy that raises the costs of energy-intensive

*Address for Correspondence: Department of Economics, SUNY at Buffalo, Buffalo, NY 14260,

USA. E-mail: ecowwc@buffalo.edu. I am grateful to an anonymous referee and to Kenneth Chan

for constructive comments which have greatly helped the present version of the paper. I am also

grateful to Patrick Baude, Ishraq Dalton, Kevin Foltmer, Nicole Hunter, Hongxiu Li, Ying Liu,

Takashi Mita, James O’Day, Benjamin Osenbach, Eric Schles and Mae Seon for helpful comments.

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© 2016 John Wiley & Sons Australia, Ltd

doi: 10.1111/1468-0106.12 0

Pacif‌ic Economic Review, 2 : 3 (201 ) pp. 5–

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goods will affect a country’s economic competitiveness. To protect such sectors

from international competition, a country may use other policies to raise the

prices of the competing imports or to reduce the costs of its exports. This can run

afoul of World Trade Organization (WTO) rules. National policies addressing

GHG emissions or other environmental concerns can conf‌lict with trade rules

because these policies might affect domestic and imported products differently.

The intertwining nature of environmental and trade policy regimes suggests that

tougher environmental standards can also be a potential facilitator of stronger

trade disciplines.

There are some basic differences between the global trade policy regime and

the global environmental policy regime. The global trade regime mainly

addresses removing the barriers erected by mercantilism or protectionism. It

often seeks to disable or change trade policy instruments at the national level.

However, the global environmental regime frequently involves externality issues

such as endangered species, transboundary pollution and global warming, and

is, therefore, chief‌ly addressing the problem of market failure. Because of their

distinctive motivations, the targeted outcomes in the two regimes are likely to be

different. Although both regimes seek cooperation among nations, trade liber-

alization is generally in each country’s own interest, and ultimate voluntary

cooperation is more likely. In contrast, the climate regime requires a high degree

of inter-governmental cooperation to achieve a global environmental goal.

Because of externalities, free riding is likely in the environmental regime.

Although the two regimes carry different mandates, the goals of liberalizing

trade and raising environmental quality are not necessarily inconsistent. How to

coordinate the two regimes is a pressing issue for policy-makers.

An interesting case of the interactions among trade, the environment and

related public policies is the US ethanol programme. To increase the domestic

supply of oil and push toward biofuels the USA instituted its ethanol pro-

gramme by subsidizing corn production, which greatly benef‌ited Corn Belt

farmers. The programme, however, is not eff‌icient because production of corn

requires a lot of energy, increases smog pollution and consumes a vast amount

of water. It is less eff‌icient than the sugarcane ethanol programme that has been

successfully developed in Brazil. January 2012 marked the beginning of the end

of the US import tariff on foreign ethanol, previously at a rate of 54 cents per

gallon, which was meant to prevent cheaper Brazilian ethanol from entering the

US market. The ethanol subsidy paid to oil companies to encourage their

demand for corn ethanol also expired. In addition, the US Government bears

the cost of subsidizing crop insurance. As a result of heavy subsidies, corn has

become the largest agricultural crop in the USA. With approximately 40% of the

crop diverted to ethanol, the US exported 397 million gallons of ethanol over-

seas in 2010, while simultaneously importing foreign oil and subsidizing domes-

tic oil production. The Congressional Budget Off‌ice found that reducing carbon

dioxide (CO2) emissions with the use of ethanol costs at least US$750 per ton of

carbon dioxide, which is signif‌icantly more expensive than other methods. While

some studies have shown small savings in fossil fuels from the use of ethanol,

others have found that producing corn ethanol actually consumes more energy

W. W. CHANG

© 2016 John Wiley & Sons Australia, Ltd

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than the energy output from its f‌inal product (Rattner, 2011). Critics further

charge that the corn ethanol programme raises the price of corn for all consum-

ers and creates signif‌icant hardship for poor countries that rely on corn as a

staple for consumption.

Several studies provide insightful analyses on various aspects of trade and the

environment. Notable contributions include Chichilnisky (1994), WTO (1999),

Bagwell and Staiger (2001), Esty (2001), Charnovitz (2003), Copeland and

Taylor (2004), IISD (2005), Frankel (2008, 2009), Cottier et al. (2009),

Fredriksson (1999), Brennan (2010), WTO (2010), De Melo (2011), Gallagher

and Serrat (2011), Karp (2011) and Whalley (2011). These studies focus on

different issues, such as North–South trade, economic development and the

environment, and global environmental and trade policies, often with special

emphasis on global climate change policies. As public debate on global climate

change has intensif‌ied in recent years, the subject of trade and the environment

has become an important topic in economics and other social sciences. Even in

economics, trade and the environment straddle between the f‌ields of interna-

tional and environmental economics. There appears to be an urgent need for a

comprehensive overview of this subject for both academic and public readers.

The present paper provides such an overview.

This paper discusses various aspects of trade, the environment, and related

public issues and policies. A wide scope of topics are covered, including insti-

tutional arrangements and policy agenda, theoretical issues and empirical f‌ind-

ings, computable environmental general equilibrium models, and the WTO’s

environmental trade dispute cases. Specif‌ically, Section 2 provides a brief dis-

cussion on pollution and the global temperature and the recent global warming

trend. Section 3 discusses the United Nations Environment Program, including

the Intergovernmental Panel on Climate Change and the UN Framework Con-

vention on Climate Change. It also discusses the Kyoto Protocol’s Emissions

Trading and Clean Development Mechanism and the Convention on Interna-

tional Trade in Endangered Species. Section 4 discusses the roles of the General

Agreement on Tariffs and Trade (GATT) and the WTO in global trade and

environmental policies, and the different roles played by the United Nations

(UN) and the WTO in solving trade and environmental problems. Section 5

discusses regional, national, and other international trade and environmental

policies, including the European Union’s (EU’s) Emissions Trading System, the

North American Agreement on Environmental Cooperation, some major US

environmental regulations, and the engagements of the OECD and non-

government organizations (NGOs). The paper then discusses some basic theo-

retical issues and empirical f‌indings in Section 6, including the free-rider

problem, the benef‌it of collective action, market failure, the tragedy of the

commons, the theory of second best, the relative eff‌icacy of price and quantity

instruments in pollution control, carbon leakage, the border carbon adjust-

ments, the cap-and-trade system, the pollution haven hypothesis, debate on the

optimal social rate of discount, and the environmental Kuznets curve. Section 7

provides an overview of the popularly-used computable environmental general

equilibrium models such as GREEN, ENV-Linkages, GTAP-E, GDyn-E and

WORLD TRADE AND THE ENVIRONMENT

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