International Trade - Theory and Policy, 2010a

This statement points out that many environmental problems are made worse by government
interventions designed to serve some other purpose. For example, subsidies to agricultural production,
designed to support the income of farmers, can have the unintended effect of encouraging the greater use
of pesticides and fertilizers, thus causing a negative environmental effect. Again, this suggests that the
source of environmental problems is typically not international trade.
Trade would unambiguously raise welfare if proper environmental policies were in place. [7]
Here, “proper environmental policies” means first-best domestic policies targeted at the environmental
market failures and the elimination of other domestic policies with the unintended environmental
consequences mentioned above. If these domestic policies were in place, then free trade would
unambiguously be the first-best trade policy.
Trade barriers generally make for poor environmental policy. [8]
Why? Because of the theory of the second best. It is generally better to correct environmental externality
problems using first-best domestic taxes, subsidies, or regulations than to use second-best trade policies.
Thus, although trade policies canhave favorable environmental effects, governments can achieve the same
results more efficiently—that is, at a lower resource cost—by using domestic policies instead.
This is one of the strongest arguments for excluding an explicit link between environment and trade in the
WTO accords and more generally in free trade area agreements. Linking the two together in a trade
agreement will surely lead to the avoidance of trade liberalization in some sectors in order to secure a
favorable environmental outcome, and this will mean using trade barriers as a tool for environmental
policy.
So what can or should be done? First, it is important to recognize that the WTO agreement does not
prohibit countries from setting their own environmental standards. What the WTO accord does require is
that countries apply most-favored nation (MFN) and national treatment in their application of
environmental laws. For example, the WTO agreement does not allow a country to set one environmental
standard with respect to goods imported from Argentina and another for goods from Mexico. This would
violate MFN. Also, the WTO agreement would not allow a country to treat imported goods differently
from goods produced at home. This would violate national treatment.
In fact, most of the WTO dispute settlement rulings (if not all) identified by environmental groups as
forcing countries to change (and make more lenient) their environmental laws were not decisions to force
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