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The impact of trade opening on climate change

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Note: This webpage is prepared by the Secretariat under its own responsibility and is intended only to provide a general explanation of the subject matter it addresses. It is in no way intended to provide legal guidance with respect to, or an authoritative legal interpretation of, the provisions of any WTO agreement. Moreover, nothing in this note affects, nor is intended to affect, WTO members' rights and obligations in any way.


Expansion of international trade

The past half century has been marked by an unprecedented expansion of international trade. Since 1950, world trade has grown more than twenty-seven fold in volume terms. By way of comparison, the level of world GDP rose eight-fold during the same period. As a consequence, the share of international trade in world GDP has risen from 5.5 per cent in 1950 to 20.5 per cent in 2006.  More

A number of factors have given rise to this spectacular expansion in world trade. Foremost is technological change, which has considerably reduced the cost of transportation and communications. In the second half of the 20th century, the introduction of the jet engine and containerization significantly reduced the cost of air and maritime transportation, thereby expanding the range and volume of goods that are traded. The information technology revolution has made it easier to trade and to coordinate production of parts and components of a final good in different countries.

A second factor is more open trade and investment policies. Countries have opened up their trade regimes unilaterally, bilaterally, regionally, and multilaterally. Measures that taxed, restricted or prohibited trade have either been eliminated or reduced significantly. These changes in economic policies have not only facilitated trade, they have also broadened the number of countries participating in global trade expansion. In particular, developing countries now account for 36 per cent of world exports, about double their share in the early 1960s.

Thus, technological innovations and changes in trade and investment policies have both democratized trade and made it easier to “unbundle” production. The parts and components that make up the final product can be manufactured in different locations around the globe. Many of these manufacturing plants are located in developing countries that, in turn, have become increasingly integrated in global supply chains. Compared to the past, more trade can be embodied in the manufacture of a final product and more countries can be involved in the process.

The expansion of world trade may be one reason why trade is increasingly being raised in climate change discussions and may also help to explain why there are concerns about the impact of trade on greenhouse gas emissions. But to what extent are the concerns justified?  Less

 

How does trade affect greenhouse gas emissions?

Trade economists have developed a conceptual framework for examining how trade opening can affect the environment. This framework, first applied to study the environmental impact of the North American Free Trade Agreement (NAFTA), separates the impact of trade liberalization into three independent effects: scale, composition and technique. This framework can be used therefore to study the link between trade opening and climate change.  More

The “scale” effect refers to the impact on greenhouse gas emissions from the increased output or economic activity resulting from freer trade. The general presumption is that trade opening will increase economic activity and hence energy use. Everything else being equal, this increase in the scale of economic activity and energy use will lead to higher levels of greenhouse gas emissions.

The “composition” effect refers to the way that trade liberalization changes the mix of a country’s production towards those products where it has a comparative advantage. This re-allocation of resources within a country is how trade improves economic efficiency. The effect on greenhouse gas emissions will depend on the sectors in which a country has comparative advantage. The composition effect will result in less greenhouse gas emissions if the expanding sectors are less energy intensive than the contracting sectors. Whether the composition effect results in higher or lower greenhouse gas emissions is therefore difficult to predict in advance.

Finally, trade opening can lead to improvements in energy efficiency — the “technique” effect — so that the production of goods and services generates less greenhouse gas emissions. This decline in emission intensity can come about in two ways. First, freer trade will increase the availability and lower the cost of environmentally-friendly goods, services and technologies. This is particularly important for countries that do not have access to these goods, services and technologies or whose domestic industries do not produce them in sufficient scale or at affordable prices. For exporters, additional market access can provide incentives to develop new products, services and technologies to mitigate climate change. Second, the increase in income that trade brings about can lead society to demand better environmental quality — in other words, less greenhouse gas emissions.

Since the scale and technique effects tend to work in opposite directions, and the composition effect depends on the comparative advantage of countries, the overall impact of trade on greenhouse gas emissions cannot be determined in advance. It will depend on the magnitude or strength of each of the three effects.

The technique effect reflects the principal avenue through which trade opening can help mitigate climate change, hence the importance of the current Doha Round and in particular the negotiations to liberalize environmental goods and services. By increasing the availability of goods, services and technologies that are likely to be important in improving energy efficiency, trade can help to meet the challenge of global warming.  Less

 

Trade and transport

One concern about trade's role in greenhouse gas emissions is its link to transportation services. International trade involves countries specializing in and exporting goods in which they have a comparative advantage and importing other goods from their trade partners. This process of international exchange requires that goods be transported from the country of production to the country of consumption. So international trade expansion is likely to lead to increased use of transportation
services.  More

Petroleum supplies 95 per cent of the total energy used by world transport — making it a significant source of greenhouse gas emissions. The International Energy Agency (IEA) has estimated that, in 2004, transport was responsible for 23 per cent of world energy-related greenhouse gas emissions. But there are important differences in the contribution of various modes of transport. About 74 per cent of energy-related CO2 emissions in the transport sector comes from road transport with another 12 per cent from air transport.

Since the International Maritime Organization estimates that around 90 per cent of global merchandise trade by volume is transported by sea, and the bulk of CO2 emissions in the transport sector comes from road transport, international trade does not seem to play a major role in the generation of emissions from the transport sector. The IEA's 2007 study on CO2 emissions from fuel combustion suggests that international marine transport generates about 8.6 per cent of the emissions of the transport sector.

In the context of the carbon footprint of international transportation, “food miles” is an emerging concept that involves the calculation of CO2 emissions associated with the transport of food over long distances to arrive at the final consumer. Therefore, some advocate that products should be sourced as much as possible locally and that labels of food products should include information on the origin of the product.

However, the real “carbon footprint” of domestically produced versus imported foodstuffs is very complex. Transport mode (air, road, maritime or rail) and distance are not the only significant contributors to CO2 emissions. Life cycle of the products, including production methods (e.g. heated greenhouses vs. open-air production; energy-intensive modern techniques vs. hand labour) also plays a big part.

Indeed, some studies conducted on the “carbon mileage” of traded goods have shown that the effect can be the opposite of what is commonly believed. For instance, it has been argued that Kenyan flowers air-freighted to Europe would generate less CO2 emissions than flowers grown in the Netherlands; or New Zealand lamb transported to the United Kingdom would generate 70 per cent less CO2 than lamb produced in the United Kingdom. Therefore, food miles may be an issue in need of case-by-case analysis, and empirical verification.  Less

 

Introduction
WTO and the challenge of climate change
Climate change measures and potential relevance of trade disciplines

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