The linkage between trade and environment

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Trade liberalization leads to a "race to the bottom" in environmental standards.
Environmentalists have said technical and human capacity to meet trade and environmental requirements consistently are a concern in relation to new environmental measures, but risks to the environment in relation to investment obligations in Chapter 11 are far greater, as disciplines are broader and have been given wide meaning by the first arbitral panels that considered them. They draw attention to the fact the dispute resolution is initiated by private corporations without regard to other national perspectives, and said that if the trend in Chapter 11 interpretations continues, this would pose a major threat to environmental law making.
Environmentalists have found some evidence that US states along the Canadian and Mexican border responded differentially to environmental changes in neighboring US states in terms of sulfur dioxide emissions and compliance costs,
One potentially important linkage between trade liberalization and the environment occurs through the impact of higher levels of economic activity. Specifically, trade liberalization can be expected to result in a faster expansion of the economies of the free trade area than would otherwise take place. As a consequence, there will be an even greater demand for all factors of production including environmental amenities. In the absence of precise estimates of the impacts of trade liberalization on the three countries, it is impossible to infer the net impact of the NAFTA on sulphur dioxide emissions; however, analysts tend to agree that the major economic impacts of a NAFTA will be realized by Mexico. Hence, it is at least plausible to argue that sulphur emissions will increase as a result of the NAFTA, at least in the short run. To be sure, some forms of environmental pollution increase with higher national income levels. For example, carbon-dioxide emissions tend to increase fairly uniformly with higher income levels, as does solid waste. Another important empirical relationship relates to the environmental dumping issue or the relocation of pollution intensive activities to Mexico. As noted earlier, one argument holds that a reduction in Canadian and U.S. tariffs will, on the margin, make it more attractive for polluting firms to relocate to Mexico in order to serve the North American market. A related concern is that increased competition associated with trade liberalization will lead domestic producers to "cheat" with respect to obeying environmental standards or that it will lead to increased and effective lobbying efforts to have environmental standards relaxed. Another scenario is that national governments will be less inclined to pass and enforce environmental standards given industrial dislocations and any short-term increases in unemployment associated with adjustments to trade liberalization.
Although in David Ricardo's time economists regarded the regulatory powers of the state as being more destructive than beneficial, the economic shocks of the later nineteenth century, the early twentieth century and the Great Depression produced a strain of economists led by John Maynard Keynes who criticized laissez-faire capitalism as itself destructive. After the war these Keynesians assisted the state in the development of regulatory institutions that limited the excesses and mitigated the failures of the free market and which were intended to sustain free trade through regulation. The later twentieth century saw the development of new economic theories that criticized the stress on regulatory institutions, though it is an uncommon opinion even among modern neoclassical economists to wholly regard all such regulatory functions of state as damaging to the economy.
These regulatory institutions, and indeed the rule of law itself, are costs to the development of industries. Although a number of laws - the protection of property rights, for instance - are strongly beneficial to corporations interested in the development of an industry in a foreign country, many other laws, regulatory laws in particular, can produce litigation risks or greatly increase the cost of operating in that country. Environmental regulations, labor laws, minimum wages, safety regulations, and (arguably) basic human rights can effectively increase the cost of operating in a country. As a result, these regulations often lead to a competitive disadvantage in the world economy for countries implementing those laws.
Similar arguments can be made for tax laws; corporations can evade high taxes by moving operations to countries with lax tax structures. In countries where the integrity of the state is weak, there can be an incentive for corporations to subvert governments through corrupt means and further undermine the rule of law in those countries in their favor. Accounting, banking, and investment regulations can take a similar direction; countries very interested in attracting investment may make their financial institutions more lax for short term political benefits. Some economists, such as Frederic Mishkin, point to this as an underlying cause of the Asian financial crisis of 1997-1998.
Many developing countries have not developed the financial institutions that developed countries rely on for the efficient functioning of their economies. The financial institutions that do exist in developing countries are often designed for economies with a strong role built for the state, and often with a great deal of corruption already existing. The influx of large amounts of investment capital from developed countries can put a considerable strain on financial institutions as they cope with enlarging their regulatory role, separating it from old state functions. The capital influx creates lucrative opportunities for corruption, especially within the regulating institutions. The development of these institutions runs a difficult course with investors who are interested both in the rule of law as it improves investment opportunities, and also in limiting their risk as investors. The development of these institutions can be a low priority for a poor county, which must bear the cost of modifying its business code, essentially for the benefit of foreign capitalists.
Free trade, then, creates an economic incentive for a race to the bottom in regulatory institutions; countries with lax, lenient, non-enforced, or selectively enforced regulatory legal structures will have a competitive advantage in attracting investment to their countries, and not merely in wages. From the capitalist's point of view, an ideal legal environment would have these features:
1. Weak or un-enforced labour and environmental protection laws.
2. Low or uncollected taxes.
3. Strong legal protection for property rights.
4. Changes to the legal code should be few and predictable, allowing business planning. The government should not be likely to override the rule of law, or impose exchange controls.
Counter arguments
· Trade agreements do not dictate U.S. environmental law or undermine U.S. environmental laws. International trade agreements require the United States only to apply the same standards to imported products that it applies to domestic products. Trade agreements do not prevent other countries from applying the same environmental standards to U.S. goods that they apply to their own goods.
· To achieve environmental sustainability, countries need good environmental laws and effective enforcement of those laws. ...