Worldwatch Paper #113: Costly Tradeoffs: Reconciling Trade and the Environment

March 1993
Hilary F. French
ISBN: 1-878071-14-9
74 pages

World trade--growing far faster than the global economy itself--is an engine that currently accelerates the environmental degradation caused by unsustainable economic activity. But it also has the power to pull the world onto an environmentally sustainable track--if environmental protection is included in the evolving rules of international trade, according to Costly Tradeoffs: Reconciling Trade and the Environment, a study by the Worldwatch Institute, a policy research organization based in Washington, D.C.

World merchandise trade totalled $3.5 trillion in 1991, nearly a fifth of world output. It has grown eleven-fold since 1950, while economic output rose five-fold over the same period. Trade in services and foreign direct investment are also climbing rapidly.

Costly Tradeoffs documents a growing number of short-term clashes between protecting the environment and promoting free trade. Yet the report rejects the view that these aims are incompatible.

"The interests of trade and of environmental protection ultimately coincide," says Senior Researcher Hilary F. French, author of the report. "The world trading system requires a healthy natural resource base. And an environmentally sustainable global economy depends on some of the benefits of freer trade."

"A 'Green Round' of the General Agreement on Tariffs and Trade (GATT) is a high priority," according to French, "as are efforts through the proposed North American Free Trade Agreement (NAFTA) and in the European Community (EC) to step up environmental reforms."

Key recommendations of Costly Tradeoffs include making prices reflect the full environmental costs of production (such as energy use, resource depletion and waste generation); strengthening enforcement of existing environmental laws; tightening and standardizing environmental laws so that countries cannot reap a comparative advantage in pollution; and providing financial and technical assistance to help poorer countries meet stepped up environmental obligations.

The report cites a number of cases where trade now fuels unsustainable economic activity, including depletion of natural resources, and the creation of pollution havens where enforcement of environmental laws is lax.


Fish account for half of Iceland's export earnings. But overfishing is endangering the future prosperity of the industry.

Malaysia alone supplies over sixty percent of world tropical timber exports, which nets the country $1.5 billion in foreign exchange. But the trade is rapidly decimating forests in the state of Sarawak, homeland to the Penan.

Somalian exports of sheep, goats, and cattle have increased ten-fold since 1955, contributing to the breakdown of the traditional, more ecologically- sensitive nomadic system of livestock rearing.

Only 35 percent of the U.S. companies based in the "maquiladoras" zone along the U.S.-Mexican border are believed to comply with Mexican toxic waste laws.

"By spurring increased transport and economic growth, trade can lead to increased pollution--in the absence of internalizing of environmental costs and other policy reforms," says Costly Tradeoffs. If NAFTA is implemented, the U.S. government predicts that more than 12 million trucks per year--nearly seven times the present volume--could be crossing the border in both directions by the end of the decade. Under Europe's single market, economic growth is expected to boost sulfur dioxide emissions by 8 to 9 percent and nitrogen oxides emissions by 12 to 14 percent by 2010 without mitigating measures.

In addition, current rules of trade can allow tough national and international environmental laws to be attacked as "non-tarriff barriers."

A September 1991 GATT panel ruled that portions of the U.S. Marine Mammal Protection Act were at odds with the GATT agreement after Mexico challenged them. The law prohibits U.S. sales of tuna caught in a way that kills large numbers of dolphins. The GATT ruling raised concerns that a number of national laws--and several international environmental agreements could be jeopardized. These treaties include the Montreal Protocol on ozone depletion and the Basel Convention on hazardous waste exports, which employ trade measures as carrots and sticks.

Costly Trade-Offs documents a growing number of environmental trade disputes. For instance, the Association of Southeast Asian Nations has complained that an Austrian law requiring tropical timber to be labelled as such violates GATT, and the European Community has leveled similar charges against the U.S. "gas guzzler tax" and fuel economy standards.

"But despite the dangers, trade can also be a partner in the effort to develop a sustainable global economy," notes French. Foreign competition has spurred a spate of environmental innovations including improved auto efficiency, more water-conserving toilets, and more effective pollution control devices. Japan, the United States, and Europe collectively exported $20 billion worth of pollution control devices in 1990--about 10 percent of total world production. In 1992, producers exported $200 million worth of photovoltaic solar cells--more than half of world production. Foreign investment also helps distribute environmentally friendly technologies--ranging from compact florescent light bulbs to cleaner paper-making processes.

An added benefit of freeing trade is that it can produce income that could be used in part for environmental protection. Today, trade barriers to agricultural commodities alone cost developing countries $100 billion dollars annually.

"Perhaps the most important environmental benefit from trade is its potential to spur the development of stronger environmental laws worldwide," notes French. "In both the EC and the NAFTA, governments are increasingly concluding that economic integration calls for some political integration-- coordinated lawmaking and enforcement procedures, for example," says French.

The European Community has passed hundreds of common minimum environmental standards on products and processes. An side agreement to be negotiated under the NAFTA will create a new North American Commission on the Environment that may have the power to penalize lax enforcement of environmental laws as a trade violation.

"Trade is neither inherently good nor bad," concludes Costly Trade- Offs. "But how it is conducted is now a matter of deep concern--and an unprecedented opportunity. Trade can either contribute to the process of sustainable development, or undermine it. Given the rapidly accelerating destruction of the earth's natural resource base, there is no question what the choice must be."