Trade and environment is one of the most debated topics in management and economics studies over the years because of the increasing concerns on how international trade affects environment and vice versa (Copeland & Taylor 2004). That said, the debate on trade and environment is not new, and it emerged in the early 1970s with concerns such as environmental protection, environmental policies on trade, and the impact on trade on environment. Most of the developed economies expressed interests on environmental degradation linked with the globalization process for instance, industrial pollution. In the 1980s, environmental concerns increased as more complex environmental issues were raised such as the climate change and the depletion of the ozone layer. Later in the 1990s, the sustainable development concept was introduced as trade liberalization and the globalization process accelerated (Dean 1992).
Several theories in support of international trade such as the economic theory has rendered the debate complex as the proponents of the economic theory argue that international trade is vital to economies because it results into a robust economic growth and also generates greater wellbeing of its citizens. That said, environmental policies and goals have been difficult to achieve during these debates (Levinson & Scott 2008). Diverse arguments exist about international trade with a few ecologists in favour of environmental protection as they argue that international trade has resulted into environmental depletion as the demand of world natural resources continue to increase. Of the two perspectives, there is an intermediate concept which has been proposed, the sustainable development which means that as international trade results into economic growth, this growth must be accompanied by environmental policies and strict environmental protection rules. Some of the defenders of sustainable development have supported free trade but with the inclusion of restrictions in multilateral negotiations so as to control the degradation of natural resources (Copeland & Taylor 2004).
International trade involves the flow of goods and services across the border attributed with the growth in the globalization process and competition. Trade liberalization, as well as the lifting of of barriers to trade has led to the exploitation of natural resources into a more efficient use thus contributing to growth of most of the economies in the world (Dean 1992). International trade has economic benefits such as exploitation of resources, job creation, foreign direct investments, industrialization, and output growth, but as trade liberalization continues, the environmental impacts have become more complex thus requiring environmental policies to ensure that as economies grow, the environment is not depleted. By removing price distortions, trade boosts efficient use of resources and production techniques essential for growth of economies especially in the developing economies. That said, the discussion on trade and environment is, therefore, important.
Impacts of Trade on Environment
According to the Organization for Economic Development and Cooperation (OECD), the effects of international trade on environment has been grouped into different categories such as policy effects, technological effects, externality effects, scale effects, and combination effects (Copeland & Taylor 2004).
Effects of Scale
The effects of scale are those environmental impacts that have being linked with the changes in the scale of economic activities due to increase in international trade. As international trade continues to increase, the scale of economic activities continue to increase in all sectors of the economy thus resulting into increase in environmental depletion. A good example is the growth in the manufacturing industry in most of the developed and developing economies thus contributing to the emission of greenhouse gases (Levinson & Scott 2008). Research has shown that the developed economies are the greatest emitters of the greenhouse gases today, but as globalization and competition continues to increase, the developing economies in the next few decades will be the largest emitters as they follow the energy and carbon development path. Among these countries is China and India which are the most emerging economies in the world with intensive growth in the manufacturing sector. As the scale of economic activities continues to increase, technological transfer to developing economies is also increasing thus contributing to growth in exports in most of these economies. That said, the introduction of environmental policies is important so as to reduce the effects of scale attributed to growth in exports and technological transfer in most of the emerging markets (Frankel & Rose 2005).
Competition is one of the factors that have contributed to environmental degradation in most of the countries. There are those economies for instance, the developed economies with strong environmental standards while others, for instance, the less developed economies with poor environmental standards to sustain international trade. However, the compliance costs to these environmental standards vary because of the economies of scale which is high in the developed economies. Some of the countries with strong environmental standards in the North-South trade are the United Kingdom, United States, Russia, and Japan (Muradian & Martinez-Alier 2001).
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Table 1: Some of the determinants of environmental degradation from 1009 to 2005 (Frankel and Rose, 2005, p.88).
Table 1 clearly shows how international trade has resulted into environmental impacts. As economies grow, the scale effects arise implying that the governments need to come up with initiatives for environmental protection. Significant policies have been formulated so as to protect the environment for instance; the developing economies are addressing trade restriction although this is a violation of their sovereignty (Frankel & Rose 2005). GATT for instance, has allowed countries to restrict trade so as to conserve exhaustible natural resources and also to protect plant, animal, and human life. However, this move has experienced increased disputes from the member countries because of the benefits they achieve from free trade in terms of increase in exports and imports (McKibbin & Peter 2008).
Economists argue that there is a link between environmental concerns and trade barriers. For instance, the World Bank has estimated that a reduction of trade barriers especially in the developing economies translates into increased exports. This implies that the industries have to remain competitive so as to achieve a greater share in the market thus ignoring the environmental regulations so as to achieve this competitive advantage. As a result, the environmental impacts increase for instance, gas emissions and wastes from these firms (Levinson & Scott 2008). However, some people argue that the international environmental regulations affect international trade in the sense that they limit export and imports according to the national regulation. As a result, the level of world output decreases. These impacts are more prone to the developing economies who are striving hard to achieve a competitive advantage in the market. However, the developed economies such as the United States and Japan experience little impact on trade as a result of international environmental regulations. The environmental compliance cost is also high for most of the industries in developing economies because most of them focus on profit maximization implying that their level of export and import declines (Frankel & Rose 2005). There are also those who argue that environmental regulations affect international trade. Research shows that countries with environmental regulations have losses attributed to environmental degradation at 1 to 2 percent of GNP while those countries with less environmental regulations, the losses attributed to environmental degradation go as high a 3 to 5 percent (Levinson & Scott 2008).
The combination effects according to OECD refers to the environmental effects occurring as a result of the growing relationship between products produced and consumed as an outcome of international trade. A good example is the growth of the agricultural sector in most of the developing economies thus resulting into the release of greenhouse gases in the atmosphere occurring as a result of growth in international trade (Holtz-Eakin & Selden 2005).