When Standards Differ: The Effects of Free Trade on Environmental Regulation

Abstract

This analysis focuses upon the differing environmental standards between countries and the likelihood, direction, and implications of any harmonization of these standards. There are certainly numerous issues concerning trade and the environment; the prospect of harmonizing standards, however, has sparked intense debate and seems to remain a central issue. It is believed that these issues transcend the context of NAFTA; for this reason, the issues are treated in a general context and any reference to NAFTA is for purposes of illustration. The conclusions reached by this paper are disturbing. Most of the evidence suggests that free trade between nations with differing standards could be environmentally destructive. Corporations forced to compete with firms regulated by less stringent standards could be placed at a competitive disadvantage. Both this disadvantage and the mobility of capital could significantly pressure domestic governments to lower standards; countries with relatively lax regulations would have no incentive to raise those standards. Perhaps most importantly, both NAFTA and GATT deliberately attempt to harmonize environmental standards, usually at a level significantly lower than many nations have determined to be optimal.