Trade and the Environment: A Dichotomy

Reviewed by Associate Editor Debbie Leung

There has long been a debate about the priority between economic growth and environmental conservation, with recent cases such as the Trans-Pacific Partner agreement. Ngoc Bao Pham Stefany in Trade and the Environment: A Dichotomy attempts to observe the correlation between free trade and environmental protection in the context of globalization by drawing on panel data of more than 170 countries. She first explains the four different channels through which trade influences the environment: income, composition, scale and technique effects, then elaborates on the 2 main existing opposing hypothesis that pinpoint the relationship between trade and environmental outcomes: gains from trade and race to the bottom. Next, she puts together the various indicators for trade and environmental impacts and analyzes their relationship based on the empirical results, upon which she draws her conclusion on relationship between trade openness in context of developmental level and environmental outcomes and puts forth recommendations to strike a balance between economic growth and environmental protection.


She first establishes the effects of the four channels through which trade impacts the environment by reviewing existing literature. Income growth, as she explains, is modeled in the Kuznets Curve, which indicates that pollution increases with increasing income per capita but the positive trend reverses when the income per capita reaches $8000 or above. Composition factor states that countries specialize in certain sectors with different pollution composition and could have both positive and negative impacts on the environment. The scale effect, however, posits that trade harms the environment as it facilitate more economic activity while the technique effect indicates that trade brings environmental benefits via worldwide green technology transfers. She also presents the two main theories about the impact of international trade on environmental protection. The “gains from trade” theory proposes that Trade can contribute positively to the environment through technique and income effects and policy convergence, known as “California Effects” in which powerful nations prod smaller nations into improving environmental policy through trade forum. On the other hand, the “race to the bottom” theory believes that trade openness and investment will lower environmental standards as countries would loosen their domestic regulations to increase their export competitiveness.


In trying to quantify the correlation between free trade and the environment, Stefany first introduces the different indicators of a country’s economic and environmental performance: Yale Environmental Performance Index (EPI) for a country’s environmental outcomes, ranging from water and sanitation, air quality, forest, biodiversity, climate, energy and more; GHG emissions for emission of air pollutants; import and export ratio over GDP for trade openness; GDP per capita and its square for national income given the hypothesis of the Kutznet Curve; political rights index from the Freedom House for political rights; and domestic trade in value added (TiVA) as % of gross export data. Using four tables to analyze the relationship between trade ratio and EPI (with and without TiVA) and that between trade ratio and GHG emissions (with and without TiVA), though Stefany concludes the correlation as insignificant given the constraints of her data, she explains trade openness alone does not account for the changes in environmental performance, trade openness in the context of development level influences environmental outcomes: as countries improve their development level, more trade openness can lead to better environmental outcomes and less greenhouse gas emissions. This is because their higher development level enables countries to take advantage of clean technology to reduce pollution, aligning with the Kuztnets Curve and the gain from trade hypothesis.


In light of her conclusion on the relationship between trade openness in context of developmental level and environmental outcomes, Stefany suggests the solution to environmental protection is not to limit trade; rather, we should focus on improving the level of development around the world so that countries can use their increasing income and technology transfer to enhance environmental outcomes. In Stefany’s view, this development process can be ultimately facilitated by trade.

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