Implication of trade liberalization

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Trade liberalization leads to a "race to the bottom" in environmental standards.
Trade liberalization conflicts with morally-conscious environmental policies.
Trade liberalization encourages trade in products that create global pollution ("pollution havens").

Proponents of trade liberalization argue that freer trade might actually improve the quality of the environment. For example, the international environmental policy of the U.S. and other industrial nations is based on the "polluter-pays principle."

The major issues that are leading to this are:

Externalities and cost internalization

'Externalities' is the economic term for the costs (e.g. environmental and social) of an economic activity which are not borne by the operator, but instead by the wider community. For example, if a forestry operation contributes to species loss or habitat destruction and these 'costs' are not somehow paid by the operator and thus reflected in the price of the final product, they will be 'paid' by the wider community - locally, nationally or globally. They are thus 'externalities'. The theoretical idea that trade benefits all is partly based on the assumption that externalities do not exist because prices reflect the true costs of production (i.e. the costs have been 'internalized'). Such an assumption is a fallacy; the environment is being damaged, costs are not 'internalized' and thus trade is not benefiting all. Many now recognize that, for the trade system to work properly, costs must be internalized.
But this recognition has not been turned into reality. This is partly because, if anything, the world trade system encourages competition to reduce costs (which can include actively externalizing them) rather than encouraging the internalization (and thus increase) of costs through taxes, regulations or other mechanisms.

Trade and specialization

One of the central pillars of trade theory is that countries will specialise in producing those products, which they are comparatively better at making relative to other products and other countries. On the one hand, such specialization allows a country to take advantage of economies of scale (i.e. larger scale operations producing goods more cheaply) and become more efficient. On the other, such specialization can lead to ...