Sustainable Development and Free Trade

Institutional Approaches

Shawkat Alam

• Publisher: Taylor & Francis
• Year: 2007
• Print ISBN: 9780415412940
• eBook ISBN: 9781134125333
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Examining institutions rather than themes, this critical book provides a comprehensive survey of the inter-relationship between trade-induced economic growth and the environment and its impact on the global quest for sustainable development. Focusing in particular on the interests and concerns of developing countries and the skewing of internationa

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Establishing the linkage

The trade–environment interface

Traditionally, economic growth and its ecological consequences have been treated as totally separate concepts within the broader paradigm of development. Economic growth through trade, investment, transferring finance and capital is one of the major vehicles for development, particularly at the international level and within the affluent nations. However, rising world poverty, economic inequalities, and the depletion of finite natural resources have challenged the traditional development paradigm that limitless economic growth is the universal solution to all of humanity’s most pressing problems. Instead, recent decades have been punctuated by a shift in focus and an increasingly widespread recognition of the need for the integration of economy and ecology. It has also become widely acknowledged that the existing process of development, based on present technologies, production, distribution and consumption patterns, is not sustainable for either the natural or the human environment. The most notable feature of this ideological shift is the widespread emergence of the concept of sustainable development.

Trade as a means of economic growth

International trade as a source of wealth and welfare gains has always been considered one of the major vehicles of economic growth. In fact, the final two decades of the twentieth century were marked by significant emphasis being placed on the development of world trade as an engine for economic growth and a key aspect of international economic development.

There are numerous commonly cited benefits that are often perceived to flow from the so-called free trade regime. First and foremost, it is argued that free trade and industrialization bring liberalization of the movement of goods, services, persons, capital and payments, and prohibitions of restrictions on competition by the market participants. The liberalization of trade by voluntary exchange of goods facilitates a country’s specialization in favourable proportions. According to the principle of comparative production advantage,¹ a country can produce more of the goods in which it is relatively more efficient and export them in return for goods in which its comparative advantage is less. The Leutwiler Report describes the concept of comparative advantage in the following words:

Trade allows countries to concentrate on what they can do best. No two countries are exactly alike in natural resources, climate or work force. Those differences give each country a ‘comparative advantage’ over the others in some products. Trade translates the individual advantages of many countries into maximum productivity for all. This is the classic theory of international trade. It is still valid today.²

Trade liberalization benefits all trading partners by increasing global output and economic growth. The whole world gains from trade and both sides of a trading partnership are at least as well off with some trade as with no trade. Liberal trade contributes to economic growth. Using comparative advantage trade brings about the highest possible welfare in the participating countries by facilitating specialization of production across national boundaries. Thus, an outcome of the free trade regime is the promotion of a mutually profitable division of labour, which in turn greatly improves the potential real national product of all nations. Ultimately, therefore, the free trade regime has the capacity to result in higher standards of living and a worldwide reduction of poverty.³

Gross National Product (‘GNP’) traditionally has been accepted as the primary method of measuring economic growth and indeed, a nation’s overall level of development. However, it is now recognized that GNP fails to adequately take into account some social and environmental considerations such as social equity, quality of life and other environmental issues. The Brundtland Report, among the most influential development studies written in the late 1970s and early 1980s, has explicitly shown the vital links between the state of our natural environment and economic growth, especially given the accelerating nature of economic and ecological interdependence between countries.⁴

There are a number of well identified reasons as to why, in this present era of globalization, the ecological interdependence of nations has become particularly apparent. Without doubt the most publicized international environmental phenomenon in recent times has been the occurrence of global warming due to human-induced carbon emissions. In light of the total disconnection between the source of the vast majority of carbon emissions (namely the Organization for Economic Cooperation and Development (‘OECD’) nations) and those least developed and small island developing states that are fully expected to be most adversely affected, it is evident that no issue more poignantly highlights the increasing ecological interdependence among nations than climate change. While, as a group, Small Island Developing States (‘SIDS’) contribute 95 per cent less per capita in carbon dioxide emissions than OECD countries, some SIDS are already suffering the negative effects of global warming. For example, parts of Papua New Guinea are presently experiencing 20 cm per annum loss of land area due to sea level rise.⁵

Other transboundary environmental issues such as international river management, desertification and the over-harvesting of global fisheries on the high seas are also demonstrative of the need for a holistic appraisal of the ecological impact of international economic, social and political systems.

It is argued that putting restrictions on trade through environmental regulation may offset the possibility of receiving international specialization and its contribution, which is necessary for protecting the environment. Sustainable development requires the efficient use of resources, which is fostered, among other factors, by free trade and international competition.⁶ This book contends that, despite current trends to the contrary, the establishment of a free trade regime does indeed have tremendous potential in serving as a catalyst for promoting ecological health and safeguarding the environment.

By contributing to economic growth, free trade has the potential to improve environmental quality. Such improvements are likely to occur as individuals, organizations and governments are more likely to raise funds and spend more money on environmental protection. By bringing about income growth, free trade is sometimes believed to have the potential to eradicate poverty.⁷ The simple and direct link between the eradication of poverty and decreased environmental degradation in developing countries has long been acknowledged, particularly in relation to issues such as impoverished farmers being forced to overexploit marginal lands thus resulting in the acceleration of desertification.⁸

By stimulating competition, free trade facilitates economies of scale and contributes to product and process innovation, further reducing manufacturing costs and expanding consumer choices. International trade, through a series of multilateral trade negotiations, has reduced import tariffs and other governmental distortions to trade and has increased the value of merchandise trade from one-fifth to one-third of global Gross Domestic Product (‘GDP’) during the post-war period.⁹

Environmental impacts of free trade

The positive view of liberal trade has been changing because of worsening regional and global environmental problems and the resulting conflicts of trade and environmental interests. With the rapid increase of international trade and investment in the post-war era, the degree of environmental degradation that can be directly attributed to various aspects of the international trading order has become acute. As a result, environmentalists and those who are concerned with development have challenged the free trade positions. Consequently, rather than realizing its potential as a promoter of environmental quality, an exponential increase in international trade over the last several decades has undeniably worsened environmental problems. Nonetheless, from the outset it is important to appreciate that the major problems to date at the trade and environment interface have not been free trade per se but rather the specific parameters in which the trade regime has operated and for the protection of certain developed nations interests.

Free trade is seen as substantially damaging to the environment as it does not include the total economic and environmental values of the natural resources in market transactions. The prices charged for non-renewable resources generally do not reflect the true scarcity and the need to replenish those resources, causing continuous and irreversible environmental degradation ranging from climate change and biological impoverishment to species extinction. This failure to encompass social costs may reflect:

the existence of spillover effects, unpriced resources, absent or thin markets, excessively high transaction costs that discourage otherwise beneficial exchanges, lack of information, technical uncertainty, the public good nature of many environmental resources or a lack of property rights.¹⁰

Another particularly concerning aspect of this market failure is that it prevents future generations from participating in economic processes and bidding for environmental values, which violates the principle of intergenerational equity. Hence the prerequisite of sustainable development, that it must take account of the interests of both present and future generations, is absent from market transactions.

Addressing the relationship between trade and the environment

This book is an examination of the complex relationship between the environment and free trade. It considers different aspects of the impact of international trade on the environment and the effects of environmental regulations on international trade from national, regional and global perspectives. This impact is studied primarily from the perspective of the marginalized trading plight of developing countries. The different perspective of free-traders, environmentalists, developed and developing countries are highlighted and commented upon. This book examines whether and/or how economic activity can be reconciled with concerns about the environment in order to promote sustainable development particularly in developing countries. In view of the concerns of developing countries regarding the interaction between trade and the environment, it is argued that the objectives of sustainable development can be achieved only by taking into account the broader context of social, economic, historical and ecological factors in trade–environment interactions.

Trade–environment discourse needs to be viewed within the broader framework of sustainable development, poverty alleviation, intergenerational equity and socio-environmental justice. Trade–environment issues have to be addressed in a pragmatic manner by considering the special needs and economic status of developing countries, the issue of global economic conditions and the common but differentiated responsibility principle.

The emergence of sustainable development

While a huge number of derivations are now in existence, the definition of sustainable development that has come to enjoy virtually universal acceptance is the persisting declaration of Our Common Future, a report published in 1987 and chaired by the former Prime Ministe...

Table of contents

• Routledge studies in development economics
• Contents
• Preface
• Acknowledgements
• Table of cases
• Table of international instruments
• 1 Establishing the linkage
• 2 The United Nations’ approach to trade, the environment and sustainable development
• 3 GATT/WTO approaches to trade, the environment and sustainable development
• 4 The trade–environment linkage in the post-Uruguay Round context
• 5 Regional approaches to free trade and sustainable development
• 6 Regional approaches to free trade and sustainable development
• 7 Regional approaches to free trade and sustainable development
• 8 Trade restrictions pursuant to multilateral environmental agreements
• 9 Free trade and sustainable development
• Notes
• Bibliography
• Index