The Association Between Trade and the Environment


Interest in research in the area of trade and the environment is revealed by Dean (1992) to have started around the 1970s. As such, there have been efforts that have led to a vast body of literature in these areas. Despite the increase in the interest regarding the impact of trade and environment, questions have emerged recently, with the increase in trade liberalization, which are yet to be answered. Particularly the Increase in economic integration is a topic of concern, especially the way the increase in trade and foreign investment harms the host countries’ environment (Copeland and Taylor 2004). The environment has been suggested as one of the victims of the increased interconnectedness of economies and the openness of national boundaries. There appears to be a consensus in research that there is a relationship between environment and trade, but the real nature of this relationship remains controversial (Dean 1992; Frankel and Rose 2005). Therefore, to understand the correlation, the paper will review related literature on the association between trade and the environment, providing evidence to prove that the connection is more negative than positive.

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Relationship Between Trade and Environment

The argument relating to the relationship between trade and the environment appears to involve environmentalists and economists on the other. While there is an immense pressure from the environmentalists to ensure that environmental standards are an important part of the drivers of capitalism and liberalization, economists maintain that environmental destruction does result from trade (Lee and Ronald-Host, 1997). They go ahead to suggest that, in fact, free trade could have environmental benefits based on the impact it has on income levels and allocation of resources. During the 1970s and 1980s, the most closed economies in the developing world went through fast shifts toward toxic-intensive structures. The reality was caused by import-substituting industrialization’s protection of mainly capital and pollution-intensive industries.

From the partial equilibrium analysis perspective, the production’s comparative advantage in a country emanating from pollution-intensive products can still occur in an environment of liberalization. However, this can only happen where there are optimal pollution taxes and effective trade policy (Lee and Ronald-Host, 1997). Dean (1992) supports the argument by citing success in a board of policies that have related trade and the environment in a positive way, including the trade bans as well as labeling programs for tropical wood aimed at decreasing the destruction of tropical forests. Evidently, the only way for the environment to benefit from free trade is to have effective policies nationally and internationally, something that is yet to be realized.

The capital’s social relation, as commonly known, is a conflicting one, the contradictions stemming from the internal laws of capitalist motion. Nonetheless, they normally expand to phenomena, which are normally perceived as being external to the system and a threat to the entire biosphere’s integrity, as well as all related aspects due to the relentless expansion of capital. Thus, the way of understanding the ecological-capitalism contradictions has gained major interest in research. In the heart of capitalism, there has been argued to be major ecological problems (Burkett & Foster 2006). Research appears to claim that the increase in the global environmental problems, to a huge extent, relates to the increase in capitalism and the free movement of capital and trade.

Trade Liberalization as an Environmental Issue

 Supporters of globalization and liberalization have tried to state their case by suggesting that an increase in the international trade could benefit the environment. In this case, the idea is that in the efforts to protect free trade, international standards could develop, which would ensure the protection of the environment. There have been efforts to achieve protection of the environment, including the climate change policies (Copeland and Taylor 2004). The reality, however, is that the environment has become more polluted and degraded in the wake of free trade. The recent international business model has gone contrary to the conventional protectionist movements. Trade liberalization has led to the birth of policies, including the Uruguay Round of GATT and the North American Free Trade Agreement, which work contrary to the protectionist regime, a system that would protect the environment from the negative effects of trade (Copeland and Taylor 2004). Free trade is aimed at improving the economic situations in countries, but instead, the policies are harming the economies through the destruction caused to the environment.

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Free trade is argued to be weakening the conditions of production. The argument beneficially borrows from the analysis of Marx of the three types of “conditions of production” (Gorz, 2013, p. 62). The first circumstance is the personal conditions of production, which is related to the human labor power production. The second situation is the external-natural production conditions (which includes the fields of oil, forests, bird species, and supplies of water among other issues). The last condition is the general communal production condition (the built environment, like cities, comprising the urban infrastructure). In fact, not all these aspects are given their place of production conditions based on capitalism’s productions, but because they are “fictitious commodities.” The claim means, for example, that capitalism does not generate humans or even their ability to labor. However, labor’s ability might be viewed like a commodity like all others. In addition, it does not generate external nature. For its part, the built environment comes in a manner uttered by temporal and spatial forces that are not directly subject to the value law (Gould & Lewis, 2009). In essence, not all these factors work in a manner that is aligned to the wellbeing of the environment.

For the production of capital, there is dependent on the utilization of the natural conditions of production. To some extent, these conditions correspond to natural scarcities. Additionally, the economic system is not able to preserve undamaged as well as in comparatively costless form. While capitalism is the cause of the degradation of the conditions of production, the ruin, in turn, leads to increased cost of capitalism. Therefore, the profits being squeezed on the supply or cost side lead to the second contradiction (Gould & Lewis 2009). An evident ecological crisis emanates from the degradation of capital on the conditions of production at a level that is always increasing. The environmental cost of capitalism cannot be ignored since the efforts to increase production are always detrimental to the environment.

Frankel and Rose (2005) propose an interesting way of looking at the relationship between free trade and the environment using the causal effect model. From the model being applied, there is evidence of a somewhat inverse relationship between carbon concentrations in the atmosphere and trade. From a study by Eiras and Schaeffer (2001, p. 4), it was revealed that “In countries with an open economy, the average environmental sustainability score is more than 30 percent.” In fact, this is “higher than the scores of countries with moderately open economies and almost twice as high as those of countries with closed economies” (cited in Frankel and Rose 2005, p. 1). However, the findings do not suggest that free trade has a positive relationship with the environment since it is possible for causality to move in other directions. The correlation revealed in the study could result from Porter hypothesis, which suggests that productivity is stimulated by environmental regulation and the positive impact of revenue on trade. It could also be possible that democracy plays a role in leading to greater environmental regulation, and the same factor relates to income and trade in a causal manner.

The Environmental Cost of Free Trade

The relationship between free trade and environmental issues can be explained from the dependency theory. Trade liberalization has led to the need for more products and services as well as technological developments, which have a major impact on the environment. Free trade has led to natural resources being used in such a rate that it is impossible to replenish. It has opened up free trade in which nations, including the developing ones, strive to participate. The result is countries in the South (the dependent countries) providing cheap natural resources and labor and being the recipients of surplus capital and manufactured goods (Muradian and Martinez-Alier, 2001). Natural resources are being extracted from these countries to allow the continued production in the developed economies (Robbins 2008). Under such conditions, it is hard to ensure the sustainability of natural resources. The creation of multinationals in the developing economies has led to a dependency that cultivates the host countries as a source of low-cost labor and raw materials for their production. Besides the firms depleting the natural resources in these countries, they are a major source of environmental pollution, which is the main contributor to climate change.

In fact, based on the environmental damage, there will be a loss in the long run for the contributors of the environmental destruction. The explanation can be made using the automobile industry, the greatest contributor to environmental degradation. The economic theory can be used in analyzing profits and losses related to the effects of the environmental impact of free trade. The comparative advantage theory suggests that the trading parties profit from business by dealing with products that they can produce efficiently. However, the theory excludes the environmental externalities relating to the production process (Harris 2004). The figure below is on the welfare impact of an imported product, using, as an example, the automobile.

Private costs are considered, where S is social costs, private costs, and externalities. P*denotes the domestic price where trade is not put into consideration, while Pw relates to the international price. Indeed, this will be the domestic price where free trade Q* denotes the quantity domestically produced without trade, and with free trade, the production is Q1. The import is (Q2 – Q1), for the overall domestic consumption of Q2. The shaded area A represent what is lost regarding production due to environmental destruction, as fewer cars will be sold at a reduced price. Local consumers gain A+B (shaded areas) as they can purchase more cars at the lower price. Thus, the net gain is (A+B) – A = B (Harris 2004).

It is worth noting that the environmental externalities emanating from trade are not considered so far. If the production of the cars causes environmental destruction, decreased production will assist the country in gaining (the crosshatched section C). The environmental cost is reduced by shifting it to producers of cars for the export market. The consumption of the automobile relates to environmental destruction and decrease in the real marginal benefits from their use, where then the consumption’s  environmental costs are increased by the section shaded and market D. Based on the trade theory; it can be safely assumed that there are major benefits of trade (Harris 2004). However, where there is environmental destruction, the gains are normally lost, although this depends with the level of destruction.

The Model to Explain the Relationship

A model with three features can be used to explain the relationship between the trade and the environment. Two products are used, which are different regarding their pollution intensity, to establish the differences in the effects of economic activities on the environment. The model includes two factors of production to establish the motive of free trade, which depends on environmental regulation. It also includes an endogenous pollution policy to establish the differences in pollution in different countries’ per capita incomes. The model is static, focusing on pollution generated by economic production. Production affects consumers but not the other producers’ productivity. The two products X and Y, using two production factors, capital (K) and labor (Y) are used. The price of X is p, while Y is considered a numeraire (Frankel and Rose, 2005). X is assumed to generate pollution for comparison, while Y does not. For good Y, the production function is denoted as:

Therefore, Z denotes the pollution emissions through the manufacture of product X. Hence, if no measures are taken to abate the pollution, one unit of pollution is generated for every unit of output given by    

In this case, F is increasing, concave and linearly homogenous and can be viewed as potential output, and if not abated, then from the output of X is

While pollution is a joint product, it can be considered as analytical convenience’s input (Frankel and Rose 2005). A company with constant output, using less polluting methods and increasing primary factors can reduce pollution. However, while this is possible, it can only work where adequate government policies abate pollution and other destructive environmental processes (Lee and Ronald-Host 1997). Such policies are missing, especially in the Southern region.

Inadequate Government Policies

World Trade Organization (1999) has made efforts to develop policies to reconcile trade and the environment, but those initiatives have remained inadequate. Such an argument could explain the reality suggested by Lee and Ronald-Host (1997) that in the developing countries where democracy has not been practically realized, there is a negative relationship between trade and the environment. International trade has been revealed to significantly impact the environment, but the role does not just occur. The setting within which the environmental degradation occurs is conducive based on the reality of the inadequate policies to protect the environment. The effect on the environment occurs through the domestic production activities’ composition given the less rigorous environmental regulations. Companies that are not mindful of the environment get the leeway since the operating environment is not stringent in protecting their environment from the detrimental effects. Given the room, the companies are using technologies which cause pollution on a large scale. For the less developed nations, pollution is being transferred across the life cycle in the course of trade.

Dean (1992) has reviewed literature indicating inadequacy of policies developed by the governments, especially in the South to protect the environment against the negative effects of international business. While environmental regulations are critical, they remain inadequate in the countries based on the policies that are aimed at protecting the multinationals operating in the countries. Many governments are, instead entering into a “race to the bottom” regarding the efforts to protect the environment. As such, the environmental policies are designed at the local level, leaving room for manipulation, especially where the government and policy makers seek biased economic benefits from the multinationals. In most cases, it is in the best interests of the policymakers that business in their countries continues regardless of the way they are likely to harm the environment, including the natural resources. Without adequate environmental regulations, amid selfish interests of the policymakers, environmental degradation has continued to be experienced.


Undoubtedly, the environment is in a crisis due to the effects of free trade. A relationship exists between free trade and the ecological system, as most of the conditions of production of capital are generated from the ecosystem. The consumption of the resources of the capitalist companies has brought up a great deal of problems for the environment, including climate change, pollution, soil erosion, and depletion of the Ozone layer, among others, especially given the fact that there are no adequate policies to protect the environment from the negative effects. As the multinationals strive to cater for the increasing demands for their products and services, this comes at a major cost to the environment, especially in the developing countries. Thus, there should be another alternative to reconcile economy and ecology to achieve capitalist expansion while conserving and restoring the environment, which can only be achieved with effective global and national policies.


Reference List

Burkett, P. & Foster, J.B., 2006. “Metabolism, Energy, and Entropy in Marx’s Critique of Political Economy,” Theory and Society 35(1), pp. 109-56,

Copeland, B. R. and Taylor, M. S. 1994. “North-South Trade and the Environment,” The Quarterly Journal of Economics, 109 (3), pp. 755-787.

Copeland, B. R. and Taylor, M. S. 2004. “Trade, Growth and the Environment” Journal of Economic Literature, 42(1), pp. 7-71.

Dean, J. 1992. “Trade and the Environment. A survey of the literature”, Policy Research Working Paper Series 966, The World Bank.

Frankel, J. A. and Rose, A. K. 2005. “Is trade good or bad for the environment? Sorting out the causality”, The Review of Economics and Statistics, 87(1), pp. 85–91.

Gorz, A. 2013. Capitalism, Socialism, Ecology (Radical Thinkers), New York: Verso

Gould, K.A. & Lewis, T. eds. 2009. Twenty Lessons in Environmental Sociology Oxford:     Oxford University Press

Harris, J.M. 2004. Trade and the Environment, Tufts University Global Development And Environment Institute

Lee, H., and Ronald-Host, D. 1997. The environment and welfare implications of trade and tax policy, Journal of Development Economics, 52, pp. 65-82.

Muradian, R. and Martinez-Alier, J. 2001. “Trade and the environment: from a ‘Southern’ perspective,” Ecological Economics, 36, pp. 281–297.

Robbins, R.H. 2008. Global problems and the culture of capitalism, Boston, Mass. [u.a.]: Pearson/Allyn & Bacon

World Trade Organization, 1999. “Trade and Environment,” WTO Publications.

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