Trade liberalization and climate change

Trade has been expanding in terms of volume for the past 50 years, and in this time it has been faster than the 19th and 20th century put together due to technological change and liberalization.  This liberalization of trade has increased the number of countries taking part in international trade, where developing countries contribution has doubled to 34% since the early 1960s. A study to examine the environmental impact of the North American Free Trade Agreement (NAFTA) broke down the effects into three (scale, technique and composition).

The scale of greenhouse gas emissions will increase as of the result of expanded level of economic activity, this can be viewed in the increase in the value of production, increase in energy use like fossil fuels and cross border transport. In 2004 transport contributed about 23% greenhouse gas emissions, where 74% came from road, 8.6% from marine and 12% from air transport (International Energy Agency).

Liberalisation will lead to improvements in the production process of goods and services, where emissions will be reduced during production. This will increase the availability of less emissions goods and services thus pushing their prices down. Incomes tend to increase in those liberalized countries, making them demand for lower greenhouse gas emissions goods thus reducing on greenhouse gas emissions in those countries.  

The composition will be affected by liberalization resulting to the expansion and contraction of some sectors. The level of greenhouse gas emissions will depend on whether the emission intensive sectors are contracting or expanding. Comparative advantage will determine the level of greenhouse gas emissions, if the comparative advantage is in less emission intensive sectors then greenhouse gas emissions will be low. Cases where a country has stringent environmental protection measures, liberalisation will push those sectors to relocate to countries with weaker regulations, this has put developing countries like Uganda at the receiving end. Cases where a carbon tax is imposed on energy intensive industries that sector would contract but that is not the case where subsidies and exemptions are given by their governments especially in developed countries.

In the above scenarios you will notice that composition depends on the comparative advantage of countries, while technique and scale work in opposite directions. Emphasis should be put on the technique effect to mitigate climate change.

By Kateregga Dennis, BA(ECON), Dip.IEL, Consultant

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