The International Council for Trade & Development

©2018 by The International Council for Trade & Development.

  • Various Authors

The Relationship Between Trade & Climate Change

Since the end of World War 2, international trade has become an increasingly pivotal aspect of economic growth. As of 2006, international trade made up for 20.5% of gdp compared to 5.5% of gdp in 1950. Technology has also played a massive role in elevating the role of trade by reducing trade barriers and reducing cost of transportation. These inventions include containerization of fuel, jet engines, and information technologies that make trade easier. However as the global economy becomes more interconnected and trade becomes more commonplace, the use of greenhouse gases and expansion of ecologically disruptive industries have emerged. In recent years that have been more voices citing concern about the effect trade liberalization has on Earth’s climate. Many environmental activists and climate scientists worry that if the current trajectory stays the same, then Earth is on track to have a global temperature increase of around 1.8 to 2 degrees Celsius. Although the public discourse on the impact of climate change is often framed as a long-term problem, countries who are based in the tropics and in the equator are facing the disruptive effects of climate change.

In a report written by the WTO on trade and climate change, there are three factors that explain the effect trade liberalization has on the climate. These effects are scale, composition, and technique. The scale effect is the ecological impact caused from increased output or activity due to trade liberalization. The idea behind this effect is that increased economic activity in the form of production of new goods or from increased consumption would result in higher greenhouse gas emissions due to the consumption of certain goods like meat or cars. Another factor that may affect environmental impact is the composition effect. When trade is liberalized and countries shift the composition of their economy into sectors that they have a comparative advantage, the amount of greenhouse gas emissions that are released will change depending on what type of sectors are being changed. For example, Costa Rica changing its economy from an agriculture and ranching to tourism has made Costa Rica’s economy less impactful on the environment. A third factor that may affect climate is the technique effect, which is the impact of improved efficiency or access to environmentally friendly goods. When trade barriers are reduced from liberalization, countries that previously could not access environmentally friendly goods now has access to goods and services that reduce environmental impact.

This includes green energy, the ability to export trash for incineration, or technology that reduces the environmental impact of agriculture. When assessing the impact of trade liberalization on climate change, a case by case basis is necessary as trade liberalization may exacerbate or reduce impact on Earth’s climate.

When accessing the effect of climate change on trade, there are three industries that come to mind: tourism, agriculture, and trade infrastructure. Tourism and climate change are interrelated because attractive tourist destinations requires the preservation of wildlife and environment to stay beautiful in the eyes of tourists. Tourism and climate change are also interrelated because governments who are reliant on tourism need to maintain policies that protect endangered species and reduce waste caused by tourists. An example of government policy designed to protect the tourism from environmental impact of climate change and tourism is New Zealand’s policy to protect endangered species in New Zealand such as the Kea.

Another sector that is impacted heavily by climate change is agriculture, this is especially true in countries that are lower income and based in the global south. These countries are also more vulnerable to the effects of climate change due to the lack of funding or government institutions that can effectively manage climate change. Climate change already has a lasting effect on poorer countries in the global south due to the rising incidents of droughts, famines, and fires occurring in these countries. This has resulted in increased political instability and mass displacement of people from one place to another. These outcomes have a negative impact on trade because poorer countries are less able to engage in equitable trade agreements on the world stage due to labor shortage and weakened government institutions.

A third industry that is threatened by climate change is infrastructure including sea and land-based infrastructure needed for trade routes. Infrastructure can be damaged from the effects of climate change due to floods, rising sea levels, and forest fires damaging nearby infrastructure. The WTO report shows that this would increase the risk of conducting free trade between countries and especially for lower income countries that might not have funding to repair damaged infrastructure.

However, the damage caused by climate change might also represent a powerful incentive for rich and poor countries to modernize their infrastructure to be more resistant to climate change and less ecologically damaging as well. As shown by the WTO report on climate change and trade, trade liberalization can worsen or lessen the effect of climate change. The combination of increased efficiency from technology and investment in ecologically friendly sectors of the economy may contribute in reorienting global trade to benefit the environment rather than damage it. Work still needs to be done for poorer countries ensure a clean transition to a greener economy within the context of the global trade system. In the wake of climate change, trade can be a curse or a blessing for climate depending on what action is taken.