The “Preference for Pollution” and Other Fallacies, or Why Free Trade Isn’t “Progress” Absent the Harmonization of Environmental Standards

Abstract

The argument that environmental standards must be harmonized among countries involved in free trade in order to ensure a "level playing field" has been prominent in the recent political discourse surrounding globalization and the expansion of international trade. Among academic economists, however, the level-playing-field argument has been widely rejected. In their view, the whole point of free trade is to exploit inherent differences among countries. Differing environmental standards simply reflect the differing preferences for environmental protection among citizens of different countries and, like differences in natural resource endowments, can be exploited via free trade in order to increase overall social welfare. The economists are wrong in rejecting the level playing field argument, however. While it may be true that free trade without harmonization will increase social welfare in the ideal world of economic theory, there is little reason to think that it will do so in the real world. In particular, the economists' claim depends on the untenable assumption that the countries involved in free trade all set and enforce environmental standards at economically optimal - or efficient - levels. If we instead make the far more realistic assumption that environmental standards in one or more countries either are set too low to begin with or are under-enforced, the economists' claim - that free trade increases social welfare - no longer holds. Basic tenets of political and economic theory make clear that political and market dynamics tend systematically to skew environmental standard-setting and enforcement to sub-optimal levels. And where that is true, free trade between countries with differing standards is likely to decrease overall social welfare. Therefore, in order to avoid these negative welfare effects, upward harmonization of environmental standards should be a pre-requisite to free trade.