99-4242 MOREPRESS RELEASE
PRESS/140
8 October 1999
TRADE LIBERALIZATION REINFORCES THE NEED FOR
ENVIRONMENTAL COOPERATION
A new WTO Secretariat report argues that international economic integration and growth
reinforce the need for sound environmental poli cies at the national and international level.
International cooperation is particularly important in addressing transboundary and global
environmental challenges beyond the control of any individual nation.  This would be true even if
nations did not trade with one another.
The WTO Secretariat's Trade and Environment Report,1 to be released on 14 October 1999,
addresses the economic and political economy dimensions of the interface between trade and
environment.2  The report argues that there is no basis for the sweeping generalizations that are often
heard in the public debate, arguing that trade is either good for the environment, or bad for theenvironment. The real world linkages are a little bit of both, or a shade of grey.  "Win-win" outcomes
can be assured through well designed policies in both the trade and environmental fields.
"Every WTO Member Government supports open trade because it leads to higher living
standards for working families which in turn leads to  a cleaner environment.  This report underscores
that trade and environment need not be contradictory but can indeed be complementary," said WTO
Director-General, Mike Moore.
                                                     
1 The report, published in the Special Studies series of the WTO, is authored by Håkan Nordström of
the Economic Research and Analysis Division of the WTO and Scott Vaughan, formerly with the United
Nations Environmental Program (UNEP), and currently with the NAFTA Commission for EnvironmentalCooperation.
2 Legal issues, such as the extent to which WTO rules accommodate trade measures for
environmental purposes, are not addressed in the main  text.  However, an overview of the continuing
deliberations in the WTO Committee on Trade and Environment is included in an annex to the study.PRESS/140
Page 2/3
MOREAmong the questions the report seeks to answer  are the following: is economic integration a
threat to the environment?  Does trade undermine the regulatory efforts of governments to control
pollution and resource degradation?  How can we ensure that economic growth driven by trade will
help us to move towards a sustainable use of the world's environmental resources?
Some of the main findings of the report include the following:
- Most environmental  problems result from polluting production processes, certain
kinds of consumption, and the disposal of waste products – trade as such is rarely the
root cause of environmental degradation, except for the pollution associated with
transportation of goods;
- Environmental degradation occurs because producers and consumers are not always
required to pay for the costs of their actions;
- Environmental degradation is sometimes accentuated by policy failures, including
subsidies to polluting and resource-degrading activities – such as subsidies to
agriculture, fishing and energy;
- Trade would unambiguously raise welfare if proper environmental policies were in
place;
- Trade barriers generally make for poor environmental policy;- Not all environmental standards should necessarily be harmonized across countries;- The competiveness effects of environmental regulations are minor for most industries;
- A good environmental profile is often more of an asset for a firm than a liability in the
international market-place, notwithstandi ng somewhat higher production costs;
- Little evidence bears out the claim that polluting industries tend to migrate from
developed to developing countries to reduce environmental compliance costs;
- Yet, environmental measures are sometime defeated because of concerns about
competitiveness, suggesting a need for improved international cooperation on
environmental issues;
- Economic growth, driven by trade, may be part of the solution to environmental
degradation, but it is not sufficient by itse lf to improve environmental quality – higher
incomes must be translated into higher environmental standards;
- And not all kinds of economic growth are equally benign for the environment;- Public accountability and good governance are essential to good environmental
policy, including at the international level;
- Effective international cooperation is essential to protect the environment, especially
in respect of transboundary and global environmental challenges.
- The cooperative model of the WTO, based on legal rights and obligations, could
potentially serve as a model for a new global architecture of environmental
cooperation.PRESS/140
Page 4
MORE- Meanwhile, even within its current mandate, the WTO could do a few important
things for the environment.  The most obvious contribution would be to address
remaining trade barriers on environmental goods and services in order to reduce the
costs of investing in clean production technologies and environmental management
systems. Another contribution would be to seek reductions in government subsidies
that harm the environment, including energy, agriculture and fishing subsidies.
A number of these points are elaborated briefly in the attached annex.PRESS/140
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MOREAnnex
• Environmental degradation is driven by market and policy failures.  While trade itself
may be associated with environmental problems, such as pollution arising through the
transportation of goods, most problems occur during production, consumption, and/or the
disposal of waste products. Appropriate regulations and taxes can ensure that environmental
impacts are accounted for by producers and consumers – the “Polluter Pays Principle”.However, governments may not only omit to correct market failures, they may also aggravate
the problems through subsidies.
• Trade would unambiguously raise welfare if proper environmental policies were in
place.  Without adequate environmental policies, trade can prejudice environmental quality.
For example, demand from the world market may encourage unsustainable logging when noproper management scheme is in place. In other instances, trade liberalization may mitigate
the underlying distortions. For example, a reduction in fishing subsidies, amounting to some
$54 billion annually, would reduce overcapitalisation in the industry and lessen overfishing.
• Trade barriers are poor environmental policies. Environmental problems are best
addressed at source, whether they involve polluting production processes or undefined
property rights over natural resources. Targeting indirect linkages, such as exports or imports
of goods, can only partially correct market and policy failures, and at a higher price to society.
At the same time, governments have found trade measures a useful mechanism for
encouraging participation in and enforcement of multilateral environmental agreements in
some instances, and for attempting to modify the behaviour of foreign governments in others.
However, the use of trade measures in this way is fraught with risks for the multilateral
trading system, unless accompanied with rules agreed by all parties.
• Environmental standards should not necessarily be harmonized.  This conclusion refers
only to local  pollution problems that are arguably best addressed by standards targeted to the
specificities of the local conditions. Neither poor nor rich communities (countries) are well
served by setting standards at the average. The case is different for transboundary and global
problems where policy harmonization and collective management of common resources is
perhaps the only effective policy option.
• The environmental repercussions of trade are theoretically ambiguous , and depend on
three interacting factors: (i) trade-induced changes in industrial composition, and hence the
pollution intensity of national output, (ii) changes in the overall scale of economic activity,
and (iii) changes in production technology. The net outcome is a priori undetermined.
Sweeping generalisations about the linkages between trade and environment, whether positiveor negative generalisations, must therefore be rejected.
• The gains from trade are sufficient to  pay for additional abatement costs. The income
gain associated with trade could in principle  pay for the necessary abatement costs and still
leave an economic surplus. This has been shown in various economic simulations. In other
words, by combining trade and environmental re forms one can find ways to raise income and
consumption without compromising the natural environment. At least in this sense, there is noinherent conflict between trade and environment. Rather, the conflict arises as a result of the
failure of political institutions to address environmental problems, especially those of a global
nature which require a concerted effort to solve.PRESS/140
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MORE• The competitiveness effects of environmental regulations are minor .  The direct cost of
pollution control in the OECD is minor, just a few percentage points of production costs formost industries. No corresponding estimates are available for developing countries, but unless
the regulatory cost is zero, the cost savings of moving offshore are less than suggested above.
Moreover, some observers have noted that these numbers are in any event exaggerated. The
"Porter hypothesis" holds that regulatory pressure, just like competitive pressure, encourages
industrial innovations that make production both leaner (less energy and resource demanding)and cleaner at the same time, thereby offsetting the direct compliance costs. The empirical
evidence partly supports this hypothesis, although it would be wrong to conclude that
environmental regulations do not cost anything. They do cost, but they also bring significant
benefit to society and the quality of life.
• Environmental leaders are not less profitable . Studies that have compared the profitability
of firms in the same industry have not found much evidence that environmental leaders pay aprice in terms of reduced profitability. For several reasons, environmental leaders can often
recoup costs in the marketplace. Firstly, a growing number of consumers are willing to pay a
premium for "green labels."  Secondly, firms that accord with the environmental management
standards promulgated by the Internationa l Organization for Standardization (ISO 14000)
seem to enjoy certain competitive advantages, including lower liability insurance, lessregulatory oversight, and increased access to customers (including the public sector) that care
about their own environmental reputation.
• Polluting industries are not migrating from developed to developing countries to reduce
environmental compliance costs , although there are of course exceptions. While it is
certainly true that developing countries are net recipients of foreign direct investment, the
composition of investments they receive is not biased towards polluting industries, but rather
to labour-intensive industries that are less polluting on average. What the data tell us is that,
to the extent developed countries are exporting their dirty industries, they are exporting them
to each other, not to less developed economies . This suggests that environmental regulations
are at most of secondary importance for international investment decisions.
• Multinational firms are moving towards a policy of standardised technologies for all
their production plants in the world . The reason is simple. It is less costly to duplicate the
home technology than to modify the process in each country. What is more, the choice oftechnology is not just based on current standards, but on what is expected in the future. It
makes commercial sense to install state-of-the -art technology at the time an investment is
made rather than retrofitting abatement equipment at a later stage at a much greater expense.
Finally, multinationals are becoming more sensitive to the reputation they earn in the market
place, at least those multinational firms that are based in countries with an active
environmental community. Market forces often reward good environmental performance
rather than cost savings at any price, including financial markets that react negatively toenvironmental mishaps. It has not always been this way, but the tide has changed in recent
years. Much of this advance is thanks to the relentless efforts of non-governmental
organizations around the world that have made consumers sensitive to the environmental
profile of products and producers. In s hort, when consumers care, producers care.
• Yet, environmental measures are sometimes defeated because of competitiveness
concerns . Market forces cannot be entrusted to solve all problems themselves. Governments
must do their part by regulating polluting and resource degrading activities appropriately.
This creates a difficult political dilemma. If policy makers and voters think  that domestic
industry is crumbling under environmental regulations at the expense of domestic investmentsand jobs, it may be difficult to forge the necessary political support for new regulatory
initiatives. And this problem may become wors e still when trade and investment barriers are
removed, since industries then become more mobile and more difficult to regulate. Indeed,PRESS/140
Page 7
MOREsome evidence suggests that industries often appeal to competitiveness concerns when
lobbying against environmental regulations, and on occasion with some success.
• How serious is this problem?  It would clearly be a serious problem if competitiveness
concerns prevented environmental standards from being raised to appropriate levels, or if
governments were compelled to build in protect ionist elements in environmental regulations
to "compensate" industry for alleged adverse competitive effects. However, competitivenessconcerns could potentially be a positive force if governments that find it difficult to act
individually for political reasons seek cooperative solutions to environmental problems. The
growing number of multilateral environmental agreements (currently some 216) may be one
indication of the trend in that direction. The lasting effect of "regulatory chill" may then be
more procedural than substantial. That is, initi ative may have to shift from the national to the
supranational level, just as we saw a shift from the local to the central level in federal states in
the 1970s to overcome environmental policy foot-dragging at the local level. Admittedly,however, international cooperation in these matt ers is not easy to achieve unless governments
are convinced of its urgency.
• Is economic growth, driven by trade, part  of the problem or part of the solution?  One
reason why environmental protection is lagging in many countries is low incomes. Countriesthat live on the margin may simply not be able  to afford to set aside resources for pollution
abatement, nor may they think that they should sacrifice their growth prospects to help solve
global pollution problems that in large part have been caused by the consuming life style of
richer countries. If poverty is at the core of the problem, economic growth will be part of the
solution, to the extent that it allows countries to shift gear from more immediate concerns tolong run sustainability issues. Indeed, at least some  empirical evidence suggests that pollution
increases at the early stages of development but decreases after a certain income level has
been reached, an observation that has become known in academic circles as the
Environmental Kuznets Curve (EKC).
3
• How does trade enter the growth and environment debate? Trade enters into this debate
for several reasons.  The most direct reason is that trade is one cylinder that propels the
engine of growth. Another reason is that trade may affect the shape and relevance of the EKC.
It is at least conceivable that the turning point enjoyed by developed countries as far as certain
pollutants are concerned is partly due to migration of polluting industries to developingcountries, although the evidence does not seem to support this position. A third reason why
trade comes into the picture is the political economy of environmental policy making.
Competitive pressure may prevent environmental standards from being upgraded to turn
around the pollution path. Growth driven by liberalization of the world economy may then
defeat the mechanisms that in principle coul d generate an environmental Kuznets curve. As
observed before, there is some evidence of a "regulatory chill" which may call for increased
policy coordination among governments.
• Economic growth may be part of the solution, but primarily for local pollution
problems . The empirical evidence in support of the EKC hypothesis is mixed. The evidence
suggests that the EKC hypothesis may be valid for some types of environmental indicators,
but equally untrue for other important indicators. Those indicators that appear to demonstratesome characteristics of an inverted U-shape pollution path are certain types of local, primarily
urban air pollution, and to a lesser extent some types of freshwater pollutants. In contrast,
pollutants of a more global nature do not seem to accord with the EKC hypothesis, notably
                                                     
3 The hypothesis is named after Simon Kuznets, who received the Nobel Prize for economics in 1971
for his work on the relationship between the level and inequality of incomes, which tend to follow an invertedU-shaped relationship. That is, income inequality tend s to become worse as a country grows out of poverty,
stabilizing at a middle-income level, and then gradually becoming more equal.PRESS/140
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MOREemissions of carbon dioxide. In essence, countries seem more prone to act on pollutants that
affect their own backyard than pollutants that  degrade the global environment, although there
are also some encouraging developments in re spect of the latter, such as the reductions in
ozone-depleting substances rendered possible by international cooperation under the Montreal
Protocol.
• Economic growth is not sufficient for turning environmental degradation around . It
should also be emphasised that nothing in the EKC literature suggests that environmental
degradation will turn around with increasing income by compelling necessity. If economic
incentives facing producers and consumers do not change with higher incomes, pollution will
continue to grow unabated with the growing scale of economic activity. In other words,
income growth, while perhaps a necessary condition for allowing countries to shift gear from
more immediate economic and social concerns to more long term sustainability issues, is not
sufficient to reverse environmental degradation. Environmental polices must be brought tobear.
• Accountability and good governance is critical. The importance of a democratic political
process cannot be underestimated in this regard. Governments that are not held accountable
for their actions, or rather inaction in this case, may fail to deliver the necessary upgrading ofenvironmental polices.  Comparing countries at the same income level, pollution tends to be
worse in countries with skewed income distribution, a high degree of illiteracy, and few
political and civil liberties. Moreover, these "political access" variables considerably weaken
the relationship between per capita income and environmental quality. This suggests that the
EKC relationship is not so much dependent on income levels per se , but rather on institutional
and democratic reforms that tend to go hand in hand with increased income, and which are
necessary for allowing ordinary citizens to articulate their preferences for environmental
quality and influence the political decision-making process.
• Good governance is also needed at the international level. One of the disturbing
conclusions of the empirical literature is that the turning points of global environmental
problems, such as global warming driven by CO
2 emissions and other greenhouse gases, are
estimated at considerably higher incomes than more localized problems. One interpretation of
this is that people do not care much about global warming and climate change. They would
rather accept the consequences (on behalf of their children and their children's children) thanthe costs of curbing emissions. Another possible reason for political foot-dragging is that
governments seek to free ride in the context of weak political institutions at the international
level, including weak enforcement mechanisms. Indeed, one reason why the WTO has
become the focal point for environmental disputes is that the WTO has an integrated
adjudication mechanism backed by trade sanctions as the ultimate enforcement tool.
• Environmental degradation will turn around when political conditions are ripe . The
political obstacles to sound environmental policy should not be exaggerated. The turning
points that have been estimated for different kinds of pollutants have a tendency to fall within
the income range of leading countries at the time the specific problems became an issue of
intense public debate. For example, there may be nothing special about a turning point for
CFC emissions at some $12,000 to $18,000 – it just happened to be the income range of theleading countries (which have also assumed the fastest phase-out commitments) at the time
the Montreal Protocol was signed in 1987.  And although we find estimates of a turning point
for CO
2 emissions of up to several hundred thousand dollars in per capita income, the fact that
global warming has now risen to the forefront of public attention may result in a curbing of
emissions at an earlier date.  This will re quire, however, that countries go from words to
actions and honour their commitments under the Kyoto Agreement. In the end, the
environmental Kuznets curve may not have a "natural" turning point – it will turn whenever
political conditions are ripe for delivering the necessary policies to address environmentalPRESS/140
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ENDdegradation effectively, including through transfers of resources and technologies to allow
developing countries to modernize their production.
• Not all kinds of growth are equally benign for the environment . Economic growth
requiring ever more inputs of natural resources is obviously not as benign for the environment
as economic growth driven by technological progress that saves inputs and reduces emissions
per unit of output. This kind of growth will not necessarily emerge spontaneously, but mayrequire economic incentives that steer development in a sustainable direction.
• Trade could play a positive role . Trade could play a positive role in this process by
facilitating the diffusion of environment-friendly technologies around the world. Of course,
this would require that countries are ready to scrap trade barriers on modern technologies and
suppliers of environmental services to reduce the cost of investing in clean technologies and
environmental management systems. A new round of trade liberalization negotiations couldmake a contribution here. Another potential contribution of such a round would be to address
subsidies that harm the environment, including energy, agricultural and fishing subsides. This
would yield a double dividend by benefitting the environment and the world economy at the
same time.
• The way forward is multilateral environmental cooperation . Let us conclude with an
observation quoted by Long (1995), which summarizes the core of the trade and environment
debate.  During an OECD meeting of Environment Ministers, one Minister noted that "his
country, along with most others, had committed itself at the 1992 Earth Summit in Rio to the
pursuit of sustainable development. However, whenever he tries to promote the behaviouraland technological changes necessary to move in that direction, i.e., when he attempts to
internalise the costs of environmental pollution and resource degradation, he is branded a
'green protectionist' outside his country, and a destroyer of national competitiveness at home."
In short, trade is really not the issue, nor is economic growth. The issue is how to reinvent
environmental polices in an ever more integrated world economy so as to ensure that we livewithin ecological limits. The way forward, it would seem to us, is to strengthen the
mechanisms and institutions for multilateral environmental cooperation, just like countries 50
years ago decided that it was to their benefit to cooperate on trade matters.