An companies operating in their county. With

international trade agreement between two countries can bring in a lot of economic benefits between the trading
countries but also has an impact on the environment. As discussed in the earlier chapter,
trade agreements can open up the borders of countries which were initially
closed to international trade and did not allow international companies
operating in their county. With the demand for export increased, these
countries allowed opening of more industries to meet the demand. These can
produce both positive and negative impacts on the environment depending on the
terms of the agreement, environmental
laws in the producing country, the level of economic development whether the country in its early stage of economic and
technological development or not, existing industries, availability of
renewable energy, season, transportation, and so on. With respect to the
effects caused by international trade, it can cause positive externalities like
reduction in air pollution because of better automobile technology transfer or
negative externality like an increase in
air pollution because of increased energy-intensive
industries. The externalities arising from international trade can be
categorized into the local, national and international level externalities
based on the areas where effects are pronounced.


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 (Frankel 2009) In a local level, it is about
the externalities occurring at the household
level. It could include the air pollution occurring due to inefficient
cooking methods, dumping of harmful waste in a local area excessive depletion of
local natural resources. The local environment can get damaged due to
unrestricted usage of natural resources like forest, coal, water etc. Similar
to the vast patches of forests that are
being cut down and burned in Indonesia to plant Oil palms to meet the rising
global demand for palm oil in the international market. In a national level, an
externality is occurring mainly due to
the pollution especially air pollution and water pollution. Since the effects
of these air and water pollutions are affecting the whole nation. For example
the smog in the Chinese capital, it
arises from the particulate emission from industries around but affects the
entire city. International externalities arise when the pollution has for more
global effect affecting the whole world. Like the greenhouse gas emissions from
industries, they have a far more reach on the impacts it causes. These
emissions increase global warming thus posing
a threat to the whole world rather than to a local or national boundary. Thus
there are several factors that determine whether a particular trade is good for
the environment or not.


Theory and Hypothesis

In the
below section, it describes different theory and hypothesis that shows how
different factors can turn international trade to be of positive externality or
negative externality. (Frankel 2009). It looks into the
Environmental Kuznets Curve, which shows the relation
between Environmental Quality and Economic development. Then into different hypotheses on how trade can produce
negative effects on the environment like ‘Race
to the bottom’ hypothesis and ‘Pollution
Haven’ hypothesis. Then into ‘Gain from trade’ hypothesis which suggests how
trade can bring positive effects to the environment.


1.1  The Environmental Kuznets Curve

discussed before, the economic growth associated with trade has both harmful
effects and beneficial effects on the environmental quality. With an
international trade agreement, there will
be an increase in the scale of industries to meet the growing demand. This
increase in a number of industries will
lead to a faster rate of resource depletion and environmental pollution if
strong environmental laws are not in
place in the producer country. But on the other side, international trade can
bring in more technological advancements in the industry
with the help of more foreign investments thus leading to cleaner production
techniques. To describe this negative and positive effect of international trade
the best way is to look at an Environmental Kuznets Curve.

Figure 1
Environmental Kuznets Curve (Source: Govinddelhi is licensed under CC BY 3.0)

This curve shows the how environmental
quality varies with an increase in
economic development. When a host country opens its borders to international trade in the early phase of
economic development, there will be worsening of its environmental quality as seen in the first phase of the above graph. This is because the country is still developing and do not have any
stringent environmental laws in place. As more industries start and the
economic development increases in the country, the government proposes more stringent environmental laws. Thereby,
reducing the environmental degradation and the quality of environment increases
as seen in second part of the graph. (Frankel 2009)

China would be the perfect example to view
the uphill and downhill curve of Environmental Kuznets Curve. In the early
phase of liberalization in China, a lot of industries started. This increased
depletion of vast natural resources like coal to meet the energy demand of these new industries
and thereby also increasing the pollution in the country. But later as
economic development increased pollution levels came down in China as shown by the study conducted by (Dean 2002). The study was conducted to analyze
the impacts of trade liberalization on water pollution. The study suggests that environmental damage aggravated in the
initial years but with openness in trade income-per-capita
in the country increased leading stronger regulation. The study found that environmental damage in
China would have been higher without trade openness.

1.2 Race
to bottom hypothesis

As per the ‘race to bottom’  hypothesis, the
environmental quality in a developing country would reduce further on opening
the borders for international trade. (Nemati et al. 2016). This hypothesis suggests
that environmental regulations in a developing country will be lowered to
attract more international firms to operate in their country (Jonathan M. Harris 2004) and also the hypothesis state
that domestic companies put pressure on the government
to reduce the existing environmental standards to overcome the competition
arising from international firms. (Frankel 2009)  

For example, take the
case of environmental standards in India and China. They both are competing
against each other to attract more foreign industries to set up their manufacturing facility in their
countries. As per the report from (World Economic Forum 2017) for the year 2017 on Stringency
of environmental regulations. The stringency for environmental standard in China is at an index of 4.1 which is
comparatively less stringent than in India which is at an index of 4.3. Then
this would be an incentive for foreign
industries to set up their facility in China since they do not have to spend more money on environmental protection.
This would force India to reduce their environmental standards to
compete with China, thus deteriorating the environmental conditions in the
country. In order to avoid such problems where one country has to reduce their
environmental standards to compete with another country; one of the best
solutions is to have universal consensus among
nations. International organizations like
United Nations (UN) and World Trade Organisation (WTO) can play an important
role in bringing nations together to find a common consensus on global
environmental standards.

1.3 Pollution
Haven Hypothesis

It states that with the opening of trade
agreements with a developed country and developing country, the environmental
quality of developing country goes down because of lower environmental
regulations in the country. The developed country produces all the dirty goods
in the country with less environmental regulation. Many of the developed
countries around the world have very stringent environmental standards. Such
stringent standards prevent energy-intensive
and polluting industries to operate in these countries. Then these industries
shift their operating bases to countries with lower environmental standards.


Figure 2
Graph UK GDP vs Co2 emissions for the year

The above graph
shows how carbon dioxide emissions have decoupled from the economic growth of
United Kingdom. From the early years of
industrial revolutions,  the economic
development of United Kingdom was associated
with the CO2 emissions from the
industries in the country. With more industries came more economic development and more pollution and emissions.  But according to (World Economic Forum 2017) environmental stringency
report for the year 2017, United Kingdom ranks at the 19th stringent country in the world. The UK has been successful in reducing carbon
emissions by outsourcing their manufacturing activities to China and other
developing countries with lesser stringent environmental standards (Fiona Harvey 2012). Thus it would mean that the UK is still contributing to greenhouse gas
emissions. The only difference is that the UK
is not directly producing it but indirectly China is producing the emissions
for the UK since they are producing large
quantities goods for the UK

1.4 Gains
from trade hypothesis

This hypothesis shows how trade agreements
and international trade can be beneficial for the environmental conditions of
the host country. It states that with openness in international trade there
will be an improvement in the environmental standards in the host country.
Two main reasons on how international trade agreements prove beneficial for the
quality of environmental conditions are
the improvement of technological and managerial innovations and also the requirement
of following international environmental standards. With new multinational
corporations enter the domestic market they bring in new clean production
technologies to host countries. Also,
formal international cooperation among countries leads to higher environmental
standards. (Frankel 2009)

In India, liberalization,
and opening to international trade
started from the year 1991. With the liberalization,
more international companies came into India for trading and they started to set up their manufacturing facilities in India.
One such industry was the auto industry, before the liberalization, there were strict restrictions on the entry of foreign companies in the Indian auto
industry. (W K Sarwade).This limited the availability of efficient
automobile technologies in the Indian auto market. With liberalization and globalization,
many foreign companies made a joint venture
with Indian companies to produce cars for Indian industries. With new foreign
companies started their production in Indian market there was a transfer of new
automobile technologies into the market thus producing cars which are more
efficient and cost-effective. With the
availability of more efficient technologies in the market, the government increased the automobile emission
standards in the country. In 1991, the government
introduced the first emission norm called Bharat 1 and these norms are a reference to
Euro norms. Currently, until the year 2020, Bharat 4 is been followed
and from 2020 Bharat 6 reference from Euro 6 will be followed. (B. S. Murthy 2005). Thus it could be seen that
International trade bring in positive benefits for the environment.

Impact of Trade Agreements and Trade Organisation

2.1 Positive
impact of Trade Agreement

A trade
agreement can have a positive impact
on the environment based on the terms and
conditions of environmental protection in
the agreement. One case where WTO acted in favour
of environmental protection was a case between Canadian Asbestos industry and
French Government. In 1996, French banned the import
of Canadian Asbestos to their market citing the harmful
impact of asbestos on public
health. Canada approached WTO for appeal and a panel was set up to study.  According to the provision of Article XX(b)
of the GATT, WTO agrees to the ban
imposed on Canadian asbestos by French. (WTO Rules in Favour of French Asbestos
Ban 2000).
This ruling show how International trade agreements and organisations can support environment.

2.2 Negative
impact of Trade Agreement

Even though international trade organizations and trade agreements seem to have
a positive impact on the environment, it can also turn out to have
negative impacts. This happens when environmental regulations set forth in the
trading agreement is very lax. When conflicts arise between trading partners
regarding the environmental regulation, the decision making authorities like
WTO could rule against the interest of environmental protection.  A case reported by (Jonathan M. Harris 2004) being the conflict between U.S.
pesticide company Ethyl Corporation and Canadian pesticide regulations.
Canadian environmental regulations had put a ban on the import of a chemical
citing that it can cause nerve damage. So the company challenged the ban under North
American Free Trade Agreement suggesting stringent environmental regulations
are posing threat to free trade. Finally,
the authorities, ruled against the ban and Canadian Government even had to pay
a compensation for loss of sales to the Company.


How can governments
increase the nature conservation?

With this
last question, we were trying to find the solutions from students on what the
Governments can do to green the trade between countries. They proposed that the
behavior of consumers as the main way to reduce the environmental problems
arising due to international trade. It suggests that once the demand for goods
produced and transported in an unsustainable manner reduces, then supply will
reduce and suppliers will be forced to bring out products produced in a sustainable manner. Next solution was the
introduction of stringent environmental standards from the Government’s side.
When stricter regulations are in place, then international trade becomes
greener. Another important point proposed was the inclusion of better
environmental standards when creating trade agreement between the countries.
Such agreements will force the producer country to implement better and
efficient technologies in the producer country. But one of the concerns was not
to force very stringent regulations on countries which are still developing and
poor. They should be allowed to develop their own environmental standards as
conditions in one country will not be similar to another country. Rather
developed countries should support them by providing cleaner technologies and
financial support as suggested in ‘Gain from Trade’ hypotheses.


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