The Case for Free Trade

Economists are reconciled to theconßict of absolutes: that is whythey invented the concept of trade-

oÝs. It should not surprise them, there-fore, that the objective of environmen-tal protection should at times run afoulof the goal of seeking maximum gainsfrom trade. In fact, economists would besuspicious of any claims, such as thosemade by soothsaying politicians, thatboth causes would be only mutuallybeneÞcial. They are rightly disconcerted,however, by the passion and the feroci-ty, and hence often the lack of logic orfacts, with which environmental groupshave recently assailed both free tradeand the General Agreement on TariÝsand Trade (GATT), the institution thatoversees the world trading system.

The environmentalistsÕ antipathy totrade is perhaps inevitable. Trade hasbeen central to economic thinking sinceAdam Smith discovered the virtues ofspecialization and of the markets thatnaturally sustain it. Because markets donot normally exist for the pursuit of en-vironmental protection, they must bespecially created. Trade therefore sug-gests abstention from governmental in-tervention, whereas environmentalism

suggests its necessity. Then again, tradeis exploited and its virtues extolled bycorporate and multinational interests,whereas environmental objectives areembraced typically by nonproÞt orga-nizations, which are generally wary ofthese interests. Trade is an ancient occu-pation, and its nurture is the objectiveof institutions crafted over many yearsof experience and reßection. Protectionof the environment, on the other hand,is a recent preoccupation of nationaland international institutions that arenascent and still evolving.

Last year the environmentalistsÕ hos-tility to trade exploded in outrage whenan impartial GATT Dispute SettlementPanel ruled in favor of Mexico and freetrade and against the U.S. and the wel-fare of the dolphin. The U.S. had placedan embargo on the import of Mexicantuna on the grounds that the Þsh hadbeen caught in purse-seine nets, whichkill dolphins cruelly and in greater num-bers than U.S. law permits. The GATTpanel ruled, in eÝect, that the U.S. couldnot suspend MexicoÕs trading rights byproscribing unilaterally the methods bywhich that country harvested tuna.

This decision spurred the conserva-tionistsÕ subsequent campaigns againstfree trade and GATT. GATT has noshortage of detractors, of course. In fact,some of its recent critics have feared its impotence and declared it Òdead,Ó re-ferring to it as the General Agreement toTalk and Talk. But the environmentalistattacks, which presume instead GATTÕsomnipotence, are something else again.

An advertisement by a coalition ofenvironmental groups in the New YorkTimes on April 20, 1992, set a new stan-dard for alarmist, even scurrilous, writ-ing, calculated to appeal to oneÕs in-stincts rather than oneÕs intellect. It talksof Òfaceless GATT bureaucratsÓ mount-ing a Òsneak attack on democracy.Ó Thisveiled reference to Pearl Harbor pro-

vides an example of a common tactic intrade controversy: Japan-bashing. Theinnuendos have continued unabatedand are manifest in the endless battlesin Congress over the supplemental envi-ronmental accords for the North Amer-ican Free Trade Agreement (NAFTA).The hostility is also intruding on theconclusion of the Uruguay Round ofGATT talks, now in their seventh year,with the environmentalists opposing theestablishment of the new MultilateralTrade Organization, which is meant toprovide eÝective discipline and a nec-essary institutional structure for GATT.

It is surely tragic that the proponentsof two of the great causes of the 1990s,trade and the environment, should be

42 SCIENTIFIC AMERICAN November 1993

JAGDISH BHAGWATI is Arthur LehmanProfessor of Economics and professor ofpolitical science at Columbia Universityand was Ford International Professor ofEconomics at the Massachusetts Instituteof Technology. He has served as the eco-nomic policy adviser to the director-gen-eral of the General Agreement on TariÝsand Trade. Five volumes of his collect-ed essays have been published by MITPress. His most recent books are Protec-tionism (MIT Press, 1988) and The WorldTrading System at Risk (Princeton Uni-versity Press, 1991). He also writes fre-quently for the New York Times, the WallStreet Journal and the New Republic.

The Casefor Free Trade Environmentalists are wrong to fear the e›ects of free trade. Both causes

can be advanced by imaginative solutions

by Jagdish Bhagwati

DOLPHIN VERSUS FREE TRADE: the U.S.outlaws Þshing methods that result inthe death of dolphins such as this one,

Copyright 1993 Scientific American, Inc.

locked in combat. The conßict is large-ly gratuitous. There are at times philo-sophical diÝerences between the twothat cannot be reconciled, as when someenvironmentalists assert natureÕs au-tonomy, whereas most economists seenature as a handmaiden to humankind.For the most part, however, the diÝer-ences derive from misconceptions. It isnecessary to dissect and dismiss themore egregious of these fallacies be-fore addressing the genuine problems.

The fear is widespread among envi-ronmentalists that free trade increaseseconomic growth and that growth harmsthe environment. That fear is misplaced.Growth enables governments to tax andto raise resources for a variety of objec-

tives, including the abatement of pollu-tion and the general protection of theenvironment. Without such revenues, lit-tle can be achieved, no matter how pureoneÕs motives may be.

How do societies actually spend theseadditional revenues? It depends on howgetting rich aÝects the desire for a bet-ter environment. Rich countries todayhave more groups worrying about en-vironmental causes than do poor coun-tries. EÛcient policies, such as freertrade, should generally help environ-mentalism, not harm it.

If one wants to predict what growthwill do to the environment, however,one must also consider how it will aÝectthe production of pollution. Growth af-

fects not only the demand for a goodenvironment but also the supply of thepollution associated with growth. Thenet eÝect on the environment will there-fore depend on the kind of economicgrowth. Gene M. Grossman and Alan B.Krueger of Princeton University foundthat in cities around the world sulfur di-oxide pollution fell as per capita incomerose. The only exception was in coun-tries whose per capita incomes fell be-low $5,000. In short, environmentalistsare in error when they fear that trade,through growth, will necessarily increasepollution.

Economic eÝects besides those attri-butable to rising incomes also help toprotect the environment. For example,freer trade enables pollution-Þghtingtechnologies available elsewhere to beimported. Thus, trade in low-sulfur-con-tent coal will enable the users of localhigh-sulfur-content coal to shift fromthe latter to the former.

Free trade can also lead to betterenvironmental outcomes from ashift in the composition of pro-

duction. An excellent example is provid-ed by Robert C. Feenstra of the Universi-ty of California at Davis. He has shownhow the imposition of restraints on Jap-anese automobile exports to the U.S.during the 1980s shifted the compo-sition of those exports from small tolarge cars, as the Japanese attemptedto increase their revenues without in-creasing the number of units they sold.Yet the large cars were fuel ineÛcient.Thus, protective eÝorts by the U.S. ef-fectively increased the average amountof pollution produced by imported cars,making it more likely that pollutionfrom cars would increase rather thandiminish in the U.S.

Although these erroneous objectionsto free trade are readily dismissed (butnot so easily eliminated from public dis-course), there are genuine conßicts be-tween trade and the environment. Tounderstand and solve them, economistsdraw a distinction between two kindsof environmental problems: those thatare intrinsically domestic and those thatare intrinsically transnational.

Should Brazil pollute a lake lying whol-ly within its borders, the problem wouldbe intrinsically domestic. Should it pol-lute a river that ßows into Argentina,the matter would take on an intrinsi-cally transnational character. Perhapsthe most important examples of trans-national pollution are acid rain, createdwhen sulfur dioxide emissions in onecountry precipitate into rain in anoth-er, and greenhouse gases, such as car-bon dioxide, which contribute to globalwarming wherever they are emitted.

SCIENTIFIC AMERICAN November 1993 43

ensnared oÝ the U.S. Atlantic coast. But when the U.S. attempted to apply its stan-dard to Mexico by imposing an embargo on tuna imported from that country, aninternational tribunal rejected the policy last year as an illegal restriction of trade.


Why do intrinsically domestic envi-ronmental questions create internation-al concern? The main reason is the beliefthat diversity in environmental stan-dards may aÝect competitiveness. Busi-nesses and labor unions worry that theirrivals in other countries may gain anedge if their governments impose lowerstandards of environmental protection.They decry such diÝerences as unfair.To level the playing Þeld, these lob-bies insist that foreign countries raisetheir standards up to domestic ones. Inturn, environmental groups worry thatif such Òharmonization upÓ is not un-dertaken prior to freeing trade, pres-sures from uncompetitive businessesat home will force down domestic stan-dards, reversing their hard-won victor-ies. Finally, there is the fear, drama-tized by H. Ross Perot in his criticismsof NAFTA, that factories will relocateto the countries whose environmentalstandards are lowest.

But if the competitiveness issue makesthe environmentalists, the businessesand the unions into allies, the environ-mentalists are on their own in otherways. Two problem areas can be distin-guished. First, some environmentalistsare keen to impose their own ethicalpreferences on others, using trade sanc-tions to induce or coerce acceptance

of such preferences. For instance, tunaÞshing with purse-seine nets that killdolphins is opposed by U.S. environmen-tal groups, which consequently favorrestraints on the importation of suchtuna from Mexico and elsewhere. Sec-ond, other environmentalists fear thatthe rules of free trade, as embodied inGATT and strengthened in the UruguayRound, will constrain their freedom topursue even purely domestic environ-mental objectives, with GATT tribunalsoutlawing disputed regulation.

Environmentalists have cause forconcern. Not all concerns are le-gitimate, however, and not all the

solutions to legitimate concerns are sen-sible. Worry over competitiveness hasthus led to the illegitimate demand that environmental standards abroad betreated as Òsocial dumping.Ó OÝendingcountries are regarded as unfairly sub-sidizing their exporters through lax en-vironmental requirements. Such implic-it subsidies, the reasoning continues,ought to be oÝset by import duties.

Yet international diÝerences in envi-ronmental standards are perfectly nat-ural. Even if two countries share thesame environmental objectives, the spe-

ciÞc pollutions they would attack, andhence the industries they would hin-

der, will generally not be identical. Mex-ico has a greater social incentive thandoes the U.S. to spend an extra dollarpreventing dysentery rather than re-ducing lead in gasoline.

Equally, a certain environmental goodmight be valued more highly by a poorcountry than by a rich one. Contrast, forinstance, the value assigned to a lakewith the cost of cleaning up eÜuentsdischarged into it by a pharmaceuticalcompany. In India such a lakeÕs watermight be drunk by a malnourished pop-ulation whose mortality would increasesharply with the rise in pollution. In theU.S. the water might be consumed byfew people, all of whom have the meansto protect themselves with privately pur-chased water Þlters. In this example,India would be the more likely to pre-fer clean water to the pharmaceuticalcompanyÕs proÞts.

The consequences of diÝering stan-dards are clear : each country will haveless of the industry whose pollution itfears relatively more than other coun-tries do. Indeed, even if there were nointernational trade, we would be shrink-ing industries whose pollution we de-ter. This result follows from the policyof forcing polluters of all stripes to payfor the harm they cause. To object, then,to the eÝects our negative valuation ofpollution have on a given industry is tobe in contradiction: we would be refus-ing to face the consequences of our en-vironmental preferences.

Nevertheless, there is sentiment forenacting legislation against social dump-ing. Senator Davil L. Boren of Oklaho-ma, the proponent of the InternationalPollution Deterrence Act of 1991, de-manded import duties on the groundsthat Òsome U.S. manufacturers, such asthe U.S. carbon and steel alloy industry,spend as much as 250 percent more onenvironmental controls as a percentageof gross domestic product than do oth-er countries. . . . I see the unfair advan-tage enjoyed by other nations exploit-ing the environment and public healthfor economic gain when I look at manyindustries important to my own state.ÓSimilarly, Vice President Al Gore wrotein Earth in the Balance: Ecology and the

Human Spirit that Òjust as governmentsubsidies of a particular industry aresometimes considered unfair under thetrade laws, weak and ineÝectual enforce-ment of pollution control measuresshould also be included in the deÞni-tion of unfair trading practices.Ó

These demands betray lack of eco-nomic logic, and they ignore politicalreality as well. Remember that the so-called subsidy to foreign producersthrough lower standards is not givenbut only implied. According to Senator


PERVERSE CONSEQUENCES for the environment may result from trade restrictions.This graph shows Japanese car exports to the U.S. before and after JapanÕs acqui-escence in voluntary export restraints. Sales of small , fuel-eÛcient models declined,whereas those of the larger Ògas guzzlersÓ soared.

MIL

ES

PE

R G

ALL

ON

(19

82)

40

CHANGE IN QUANTITY OF CARS EXPORTED, 1979–1982 (PERCENT)–100

JAPANESE EXPORTS OF AUTOMOBILES TO THE U.S.

0 100 200 300 400

38

36

34

32

30

28

26

24

22

20

DODGE COLT (MADE BY MITSUBISHI)

DATSUN200 SX TOYOTA

CRESSIDANISSANMAXIMA

HONDA CIVIC

MAZDA GLC

DATSUN 310

MAZDA 626

SOURCE: Robert C. Feenstra, University of California, Davis


Boren, the subsidy would be calculatedas Òthe cost that would have to be in-curred by the manufacturer or produc-er of the foreign articles of merchandiseto comply with environmental standardsimposed on U.S. producers of the sameclass of merchandise.Ó Anyone familiarwith the way dumping calculations aremade knows that the EnvironmentalProtection Agency could come up withvirtually any estimates it cared to pro-duce. Cynical politics would inevitablydictate the calculations.

Still, there may be political goodsense in assuaging environmen-talistsÕ concerns about the relo-

cation of factories to countries withlower standards. The governments ofhigher-standards countries could do so without encumbering free trade byinsisting that their businesses accedeto the higher standards when they goabroad. Such a policy lies entirely with-in the jurisdictional powers of a higher-standards country. Moreover, the gov-ernments of lower-standards countrieswould be most unlikely to object to

such an act of good citizenship by theforeign investors.

Environmentalists oppose free tradefor yet another reason: they wish to usetrade policy to impose their values onother communities and countries. Manyenvironmentalists want to suspend thetrading rights of countries that sanc-tion the use of purse-seine nets in tunaÞshing and of leg-hold traps in trap-ping. Such punishments seem an in-appropriate use of state power, howev-er. The values in question are not wide-ly accepted, such as human rights, butidiosyncratic. One wonders when theopponents of purse-seine nets put theinterests of the dolphin ahead of thoseof MexicoÕs people, who could prosperthrough more productive Þshing. Toborrow the campaign manifesto of Pres-ident Bill Clinton: Should we not putpeople Þrst?

Moreover, once such values intrudeon free trade, the way is opened for an endless succession of demands. En-vironmentalists favor dolphins; Indi-ans have their sacred cows. Animal-rights activists, who do not prefer one

species over another, will object to ourslaughterhouses.

The moral militancy of environmen-talists in the industrialized world hasbegun to disillusion their closest coun-terparts in the undeveloped countries.These local environmentalists accusethe rich countries of Òeco-imperialism,Óand they deny that the Western nationshave a monopoly on virtue. The mostradical of todayÕs proenvironment mag-azines in India, Down to Earth, editorial-ized recently: ÒIn the current world re-ality trade is used as an instrument en-tirely by Northern countries to disciplineenvironmentally errant nations. Surely, ifIndia or Kenya were to threaten to stoptrade with the U.S., it would hardly af-fect the latter. But the fact of the mat-ter is that it is the Northern countriesthat have the greatest [adverse] impacton the worldÕs environment.Ó

If many countries were to play thisgame, then repeated suspensions oftrading rights would begin to underminethe openness of the trading system andthe predictability and stability of interna-tional markets. Some environmentalists


EMPLOYMENT IN MEXICAN TUNA FISHERY may oÝset the sav-ing of dolphins that would result were the industry to forgo

purse-seine nets. Countries should not be faulted for placinghuman welfare ahead of our culture-speciÞc concerns.


assert that each country should be freeto insist on the production methods of its trading partners. Yet these envi-ronmentalists ignore the certain con-sequence of their policy: a PandoraÕs boxof protectionism would open up. Rare-ly are production methods in an indus-try identical in diÝerent countries.

There are certainly better ways to in-dulge the environmentalistsÕ propensityto export their ethical preferences. TheU.S. environmental organizations canlobby in Mexico to persuade its govern-ment to adopt their views. Private boy-cotts can also be undertaken. In fact,boycotts can carry much clout in richcountries with big markets, on whichthe targeted poor countries often de-pend. The frequent and enormously ex-pensive advertisements by environmen-tal groups against GATT show also thattheir resources far exceed those of thecash-strapped countries whose policiesthey oppose.

Cost-beneÞt analysis leads one to con-clude that unilateral governmental sus-pension of othersÕ trading rights is not

an appropriate way to promote oneÕslesser ethical preferences. Such sanc-tions can, on the other hand, appropri-ately be invoked multilaterally to defenduniversal moral values. In such casesÑas in the censure of apartheid, as prac-ticed until recently in South AfricaÑitis possible to secure widespread agree-ment for sanctions. With a large major-ity converted to the cause, GATTÕs waiv-er procedure can be used to suspendthe oÝending countryÕs trading rights.

Environmentalists are also worriedabout the obstacles that the cur-rent and prospective GATT rules

pose for environmental regulationsaimed entirely at domestic productionand consumption. In principle, GATTlets a country enforce any regulationthat does not discriminate against oramong foreign suppliers. One can, forexample, require airbags in cars, provid-ed that the rule applies to all automo-bile makers. GATT even permits rulesthat discriminate against trade for thepurpose of safety and health.

GATT, however, recognizes threeways in which regulations may be setin gratuitous restraint of trade; in fol-lowing procedures aimed at avoidingsuch outcomes, GATT upsets the envi-ronmentalists. First, the true intentionÑand eÝectÑof a regulation may be toprotect not the environment but localbusiness. Second, a country may im-pose more restrictions than necessaryto achieve its stated environmental ob-jective. Third, it may set standards thathave no scientiÞc basis.

The issue of intentions is illustratedby the recently settled Òbeer warÓ be-tween Ontario and the U.S. Five yearsago the Canadian province imposed a10-cents-a-can tax on beer, ostensiblyto discourage littering. The U.S. arguedthat the law in fact intended to discrim-inate against its beer suppliers, whoused aluminum cans, whereas local beercompanies used bottles. Ontario hadomitted to tax the use of cans for juic-es and soups, a step that would haveaÝected Ontario producers.

The second problem is generally


PURE DRINKING WATER is essential for Mexican villagers,who wait in line to collect it rather than risk contracting chol-era from local sources. The relative value of environmental

beneÞts varies in diÝerent countries: Mexico can better im-prove public health by concentrating its resources on the puri-Þcation of water than by reducing the lead in gasoline.


tougher because it is impossible to Þndalternative restrictions that accomplishexactly the same environmental resultsas the original policy at lower cost. Anadjudicating panel is then forced to eval-uate, implicitly or explicitly, the trade-oÝs between the cost in trade disruptionand the cost in lesser fulÞllment of theenvironmental objective. It is thereforelikely that environmentalists and tradeexperts will diÝer on which weights thepanel should assign to these divergentinterests.

Environmentalists tend to be fearfulabout the use of scientiÞc tests to de-termine whether trade in a product canbe proscribed. The need to prove oneÕscase is always an unwelcome burden tothose who have the political power totake unilateral action. Yet the trade ex-perts have the better of the argument.Imagine that U.S. growers sprayed ap-ples with the pesticide Alar, whereas Eu-ropean growers did not, and that Euro-pean consumers began to agitate againstAlar as harmful. Should the EuropeanCommunity be allowed to end the im-portation of the U.S. apples withoutmeeting some scientiÞc test of its healthconcerns? Admittedly, even hard scienceis often not hard enoughÑdiÝerentstudies may reach diÝerent conclusions.But without the restraining hand of sci-ence, the itch to indulge oneÕs fearsÑand to play on the fears of othersÑwould be irresistible.

In all cases, the moderate environ-mentalists would like to see GATT adoptmore transparent procedures for adjudi-

cating disputes. They also desire great-er legal standing to Þle briefs when envi-ronmental regulations are at issue. Thesegoals seem both reasonable and feasible.

Not all environmental problemsare local ; some are truly global,such as the greenhouse eÝect

and the depletion of the stratosphericozone. They raise more issues that re-quire cooperative, multilateral solutions.Such solutions must be both eÛcientand equitable. Still, it is easy to see thatrich countries might use their econom-ic power to reach protocols that maxi-mize eÛciency at the expense of poor-er countries.

For instance, imagine that the draft-ers of a protocol were to ask Brazil torefrain from cutting down its rain for-ests while allowing industrialized coun-tries to continue emitting carbon diox-ide. They might justify this request onthe grounds that it costs Brazil less tokeep a tree alive, absorbing a unit ofcarbon dioxide every year, than it wouldcost the U.S. or Germany to save a unitby burning less oil. Such a trade-oÝwould indeed be economically eÛcient.Yet if Brazil, a poorer country, were thenleft with the bill, the solution would as-suredly be inequitable.

Before any group of countries impos-es trade sanctions on a country thathas not joined a multilateral protocol,it would be important to judge whetherthe protocol is indeed fair. Nonmemberstargeted for trade sanctions should havethe right to get an impartial hearing of

their objections, requiring the strong todefend their actions even when they ap-pear to be entirely virtuous.

The simultaneous pursuit of the twocauses of free trade and a protectedenvironment often raises problems, tobe sure. But none of these conßicts isbeyond resolution with goodwill andby imaginative institutional innovation.The aversion to free trade and GATTthat many environmentalists display isunfounded, and it is time for them toshed it. Their admirable moral passionand certain intellectual vigor are betterdevoted to building bridges between thecauses of trade and the environment.

SCIENTIFIC AMERICAN November 1993 49

FURTHER READING

AMERICAN RULES, MEXICAN JOBS. JagdishBhagwati in New York Times, Section A,page 21, col. 1; March 24, 1993.

ÒCIRCUMVENTINGÓ DEMOCRACY: THE PO-LITICAL MORALITY OF TRADE NEGOTIA-TIONS. Robert E. Hudec in New YorkUniversity Journal of International Lawand Politics, Vol. 25, No. 2, pages 401Ð412; September/October 1993.

ENVIRONMENTAL IMPACTS OF A NORTHAMERICAN FREE TRADE AGREEMENT.Gene M. Grossman and Alan B. Kruegerin The Mexico-U.S. Free Trade Agree-ment. Edited by Peter M. Garber. MITPress, 1993.

TRADE AND ENVIRONMENT: DOES ENVI-RONMENTAL DIVERSITY DETRACT FROMTHE CASE FOR FREE TRADE? JagdishBhagwati and T. N. Srinivasan. Mimeo-graph. Yale University, 1993.

BENEFITS OF TRADE ßow from the economies achieved whencountries specialize in enterprises in which they enjoy compar-

ative advantage. Such specialization will proceed better whenall sides trust in the stability of the trading regime.


The Case for Free Trade

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