United States: Revisiting Free Trade And Climate Change Under The Paris Agreement And The Trump Administration

Last Updated: September 8 2017
Article by Daniel P. Hido

As a candidate, President Trump was critical of past trade agreements entered into by the United States, and he expressed his intent to negotiate more favorable trade deals as President. One of the earliest actions of the Trump Administration was to withdraw from the proposed Trans-Pacific Partnership. And, on May 18, 2017, the Administration formally notified Congress of its intent to renegotiate the North American Free Trade Agreement ("NAFTA"). 

On June 1, 2017, President Trump announced the United States' withdrawal from the Paris Agreement. More than 190 countries are party to the Paris Agreement, which is aimed at reducing global greenhouse gas emissions in an effort to combat the effects of climate change. This article explores the relationship between free trade and climate change, and how the international community may attempt use future trade negotiations to combat climate change. 

The precise effect that free trade has on climate change is not a settled point. The World Trade Organization's 2009 Trade and Climate Change Report explains that free trade has competing effects on climate change, leaving it difficult to determine the overall impact. The report identifies three main areas where trade affects climate change: (i) scale effect; (ii) technique effect; and (iii) composition effect.  

First, free trade tends to promote greater economic output and consumption of fossils fuels, which consequently increases greenhouse gas emissions. WTO refers to this as the "scale effect."  

Second, free trade can increase the availability and lower the cost of climate-friendly goods and services, thus leading to improvements in production methods and consequently lowering greenhouse gas emissions. WTO refers to this as the "technique effect."  

Finally, free trade tends to concentrate economic activities in a country that has a comparative advantage in those industries. WTO refers to this as the "composition effect." WTO explains that this factor can have both positive and negative effects on climate change. For example, whether opening trade in a given country increases or decreases emissions will depend on whether that country's comparative advantage lies in less emission-intensive or more emission-intensive sectors. Further, the "pollution haven" hypothesis asserts that high-emission industries may relocate to countries with less stringent environmental regulations.  

WTO notes that "most studies to date have found that the scale effect tends to outweigh the technique and composition effect in terms of CO2 emissions," but noted that additional research is needed. This is even more so the case today—recent technological developments in solar, wind, and other clean energy sectors could potentially strengthen the positive impacts of the technique and composition effects while mitigating the negative impacts of the scale and composition effects. 

Aside from the noted effects of free trade, free trade agreements themselves may also contain built-in environmental standards meant to address climate change and emissions leakage. Based on recent international developments like the Paris Agreement, such provisions in free trade agreements are likely to become more common and more protective of the environment. 

Countries may also use trade to further climate goals through the areas identified in the WTO report—that is, by using trade to consolidate production in countries with comparative advantages in climate-friendly practices and technologies, and to bring climate-friendly goods, services, and technology to countries lacking such resources. 

Given the international community's stated desire to fight climate change, U.S. negotiation or renegotiation of trade agreements may require the United States to consider climate policy commitments. For example, trade partners with significant climate commitments may insist upon more stringent trade agreement provisions to minimize shift of emissions intensive activities from the trade partner to the United States. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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