International Trade - Theory and Policy, 2010a

9.9 Trade and the Environment
LEARNING OBJECTIVES
1. Learn that environmental externalities are a type of market imperfection.
2. Recognize that a trade policy can be used to correct for an environmental imperfection.
3. Learn the first-best and second-best policy options to correct for an environmental
imperfection.
One contentious issue in international trade policy discussions concerns the connection between
international trade and the environment. Many environmental groups claim that freer trade, as
implemented through the World Trade Organization (WTO) agreements or in free trade agreements such
as the North American Free Trade Agreement (NAFTA), results in negative environmental outcomes. For
example, the Sierra Club argues, “Economic globalization ties the world together as never before. But it
also poses serious new threats to our health and the environment. Trade agreements promote
international commerce by limiting governments’ ability to act in the public interest. Already food safety,
wildlife and pollution control laws have been challenged and weakened under trade rules as illegal
‘barriers to trade.’” [1]
In contrast, the WTO, a frequent target for criticism by environmental groups, points to the WTO
agreement, which states, “[WTO member] relations in the field of trade and economic endeavor should be
conducted with a view to raising standards of living…while allowing for the optimal use of the world’s
resources in accordance with the objective of sustainable development, seeking both to protect and
preserve the environment and to enhance the means for doing so in a manner consistent with their
respective needs and concerns at different levels of economic development.” [2]
Arguably, the stated goals of free trade–oriented groups and environmental groups are very similar, at
least as highlighted in the documents produced by both sides. What differ are the methods used to achieve
the objectives. For reasons to be elucidated below, the WTO has argued that environmental concerns are
not directly within the purview of the WTO agreement, but despite that, environmental policies and
international environmental agreements are neither prohibited by nor inconsistent with the WTO
accords. In essence, the argument by some has been that the WTO agreement, and free trade agreements
more generally, is intended to be about trade and is not intended to solve tangential problems related to
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