Do Trade Liberalization and International Trade Law Constrain Domestic Environmental Regulation?
| Date | 01 September 2013 |
| Author |
9-2013 NEWS & ANALYSIS 43 ELR 10823
Do Trade
Liberalization
and International
Trade Law
Constrain
Domestic
Environmental
Regulation?
by Hajin Kim
Hajin Kim is a J.D.-Ph.D. student at Stanford University.
Summary
Environmentalists and free trade proponents sharply
disagree on t he role that trade plays in impacting
environmental welfare. Contrary to environmen-
talist contentions, trade liberalization can improve
environmental regulations, and WTO jurisprudence
is more welcoming of domestic environmental regu-
lations than popularly perceived. But, counter to free
trader claims, trade’s positive impact often works
through stronger regulation—not through simple
increases in wealth. In addition, though evolving
WTO principles welcome fairly applied environmen-
tal regulations, specic decisions have applied these
principles inconsistently and have been too quick to
nd unfair trade protectionism. Both sides can gain
from a more nuanced understanding. Domestic regu-
lators can achieve both improved environmental wel-
fare and WTO-legality of environmental standards
by ensuring their measures are fairly applied, and
the WTO can advance its reputation a nd encourage
more trade with more consistent application of safe-
guards against protectionism.
Do trade liberalization and World Trade Organiza-
tion (WTO) trade law hamper domestic environ-
mental protections? Environmentalists and free
traders disagree sharply. is Article examines empirical
evidence and WTO jurisprudence to conclude that neither
extreme is quite right and that both camps stand to gain
from a more nuanced perspective on the subject.
e lines of debate a re roughly as fol lows. Environ-
mentalists champion the Pollution Haven Hypothesis,
positing that trade rewards countries with weak envi-
ronmental standards, because industries ee to t hese
“pollution havens” in search of lower production costs.1
Trade proponents counter with t he Factor Endowment
Hypothesis, contending that industries weigh factor
endowment and technology dierences more heavily
than they do d isparitie s in environmental regulat ions.2
As a result, companies ee not to pol lution havens, but
to capital-inten sive countrie s, which tend to be more
developed and have higher stand ards. Envi ronmental-
ists assert that, regard less, incentives to retain industry
drive countries to lower regulations —resulting in rac es
to the bottom3—or create “regulator y chills,” whereby
countries do not raise standards as much as they might in
autarky for fear of hamstringing industrial competitive-
ness.4 Free trade proponents respond that evidence points
to races to the top, as countries seek to ooad environ-
mental harms on outsiders, and to a “Ca lifornia eect,”
whereby jurisdictions match stricter standards exercised
by trading partners.5 Moreover, economists argue that
trade liberalization leads to economic growth,6 which in
turn correlates with better environmental outcomes. is
growth-environmenta l welfare relationship is an empiri-
cal nding dubbed the “Environmental Kuznets Cur ve,”7
and suggests that trade itsel f c an lead to environmenta l
1. E.g., Herman E. Daly, e Perils of Free Trade, S. A., Nov 1993, at 50;
Brian R. Copeland & M. Scott Taylor, Trade, Growth and the Environment,
42 J. E. L 7, 9 (2004).
2. Werner Antweiler et al., Is Free Trade Good for the Environment?, 91 A.
E. R. 877, 896 (2001).
3. Brian R. Copeland & M. Scott Taylor, Trade, Growth and the Environment,
42 J. E. L 7, 9 (2004).
4. Erik Neumayer, Do Countries Fail to Raise Environmental Standards? An
Evaluation of Policy Options Addressing “Regulatory Chill,” 4 I’ J. S-
D. 231, 232 (2001).
5. David Vogel, Trading Up and Governing Across: Transnational Governance
and Environmental Protection, 4 J. E. P. P’ 556, 561 (1997).
6. While economists largely agree that trade leads to growth, there is a heated
debate on the subject. See, e.g., Francisco Rodriguez & Dani Rodrik, Trade
Policy and Economic Growth: A Skeptic’s Guide to the Cross-National Evidence,
15 NBER M A. 261 (2001).
7. Brian R. Copeland & M. Scott Taylor, Trade, Growth and the Environment,
42 J. E. L 7, 8 (2004).
Author’s Note: I am grateful to Prof. Alan Sykes, of the New York
University School of Law, for inspiring this Article and providing
invaluable guidance, and to Beth Colgan, a Stanford University
Law Fellow, for her thoughtful and probing review.
Copyright © 2013 Environmental Law Institute®, Washington, DC. Reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120.
43 ELR 10824 ENVIRONMENTAL LAW REPORTER 9-2013
improvements. Fina lly, environmentalists take issue wit h
WTO decisions that they allege constitute “attacks” on
environmenta l regulations.8 WTO proponents retort that
legitimate, nondiscriminatory environmenta l regulations
are welcome within t he WTO framework.
is Article follows this debate. Part I examines
whether trade liberalization impacts environmenta l regu-
lations, exploring the Pollution Haven Hypothesis, Fac-
tor Endowment Hypothesis, reg ulatory races, and the
Environmental Kuznets Curve. Part II explores WTO
jurisprudence to understand whether trade law constrains
domestic protections.
Both sides are exaggerated. Trade appears to play a more
positive role than environmentalists contend, with more
support for regulatory races to the top than to the bottom.
But trade proponent assertions that trade raises income
and thus environmental welfare also appear overstated;
these eects are disputed a nd, even if as hypothesized,
apply only to local pollutants, require a long lead time, and
likely work through increased regulation.
Similarly, WTO law appears more internally conicted
than trade proponents might suggest, but less hostile to
environmental protections than environmentalists claim.
e notorious 1991 U.S.-Mexico Tuna-Dolphin dispute
ignited a debate that cast the WTO as anti-environment.
Subsequent disputes striking down environmental regula-
tions as unfairly applied hidden restrictions against trade
often relied on convoluted reasoning to do so, further ta r-
nishing the organization’s reputation. Nonetheless, W TO
jurisprudence has demonstrated growing acceptance for
environmental regulations in principle: Extraterritorial
application of environmental regu lations appears easy to
maintain, process and production method-based regu-
lations are WTO-legal if countries can justify them as
evenly applied, and— perhaps most importantly—t he
burden of justifying environmental regulations generally
has lig htened.
Both sides can benet from understanding this nuance.
e WTO can repair its “anti-environment” reputation
by applying more consistent principles to its safeguards
against protectionism. e resulting predictability can
also encourage more trade. Environmentalists pushing
for domestic regu lations can be more careful to ensure
even application of these standards. Nondiscriminatory
standards should survive WTO disputes and have added
environmental benets, because evenly applied standards
reduce what incentives there a re for companies to ee to
pollution havens and countries to engage in destructive
regulatory races.
Trade and trade law do not necessarily constrain domes-
tic environmental regulations. Indeed, trade can play a
positive role in encouraging stronger standards.
8. Statement from Margrete Strand Rangnes, Sierra Club Press Release
(May 16, 2012), http://action.sierraclub.org/site/MessageViewer?em_
id=239390.0 (last visited July 18, 2013).
I. Does Trade Liberalization Hamper
Domestic Environmental Regulation?
Environmentalists argue that trade liberalization impedes
domestic environmental regulation through two mecha-
nisms. First, trade impairs regulatory results because
industries ee to areas of lower regulation. Second, trade
alters regulatory levels themselves by motivating countries
to reduce or maintain already low standards. I address the
impact of trade liberalization on industry location and
regulatory levels, including studies on the Environmental
Kuznets Cur ve, in turn. Studies suggest little evidence of
pollution havens, more evidence of regulatory races to the
top than to the bottom, and only qualied evidence of an
Environmental Kuznets Curve.
A. Industry Location: Pollution Haven Hypothesis
Versus Factor Endowment Hypothesis
Empirical studies provide little support for the Pollution
Haven Hypothesis (PHH), suggesting that la rger gaps in
factor endowments outweigh dierences in environmen-
tal regulations. Both the PHH and the Factor Endow-
ment Hypothesis (FEH) are rooted in traditional theories
of comparative advantage: As trade liberalizes, countries
specialize in the industries in which they have a compara-
tive advantage. e ideas dier only in their predictions
on which sources of comparative advantage dominate. e
PHH suggests that the costs of environmental regulations
are sucient to prompt industries to relocate to areas of
looser regulation as trade barriers ease.9 In contrast, the
FEH suggests that traditional areas of comparative advan-
tage, such as factor endowment and technological dier-
ences, dominate disparities in environmental regulations.10
us, the question is mostly empirical: Does trade liberal-
ization lead to industry relocation based on environmental
regulations? Evidence suggests that the FEH largely wins
out. Trade liberalization can increase incentives for relo-
cation, but disparities in regulations are often not large
enough for signicant shifts to actually occur.
Early cross-sectional studies found little support for the
PHH. James Tobey, using 1975 data, regressed the strin-
gency of environmental regulations on the net exports of
the most polluting industries across 23 industrialized and
developing nations but found no signicant eect. He
dened polluting industries using U.S. pollution abate-
ment costs and environmental stringency through sur veys
ranking the countries’ regulatory regimes.11 Robert Lucas
et al. found toxic intensity increasing for fast-growing,
closed developing economies but declining for fast-grow-
ing, open developing economies, a contrary result to PHH
9. Brian R. Copeland & M. Scott Taylor, Trade, Growth and the Environment,
42 J. E. L 7, 9 (2004).
10. Id. at 29.
11. James A. Tobey, e Eects of Domestic Environmental Policies on Patters of
World Trade: An Empirical Test, 43 K 191, 194, 196-97 (1990).
Copyright © 2013 Environmental Law Institute®, Washington, DC. Reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120.
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