TCS Daily

High Sierra

By Radley Balko - July 11, 2003 12:00 AM

On its website for student activists, the Sierra Club makes the following criticism of free trade:

Countries cannot raise environmental or labor standards, because if they do, the corporations that have built factories in that country because of its cheap labor or lax enforcement of environmental laws will then threaten to move those factories to other places.

Similarly, in their 1994 book Global Village or Global Pillage, authors Jeremy Brecher and Tim Costello write:

The race to the bottom is contributing to environmental destruction worldwide. Global corporations' oil refineries, steel mills, chemical plants, and other factories, now located all over the world, are the main source of greenhouse gases, ozone-depleting chemicals, and toxic pollutants. Their packaging is a major source of solid waste...

...The proportion of the Philippines that is forested has decreased from 35 percent to 20 percent -- less than half the amount needed to maintain a stable ecosystem -- just since 1969.

The "race to the bottom" argument is common among anti-globalization activists. And, at first blush, it seems logical. Increase the number of market options in which a company can shop the location of a manufacturing plant, and those markets will begin to compete with one another for that company's patronage. In an effort to present the most lucrative offer, then, those countries will lower environmental and labor standards to lowball competing offers. Corporations can then choose the country with the most relaxed standards to set up shop.

It's a compelling and intuitive theory. It also happens to run contrary to all the available evidence.

As Dan Griswold points out in the Cato Institute paper "Trade, Labor, and the Environment: How Blue and Green Sanctions Threaten Higher Standards," if free trade were truly pushing the world into a "race to the bottom," we would expect to see one of two things:

1) Either corporations would flee rich, green-conscious countries for poorer, lax-standards countries,


2) Wealthy countries would lower environmental standards to keep businesses at home.

But neither is happening.


  • A 1998 study by Johann Albrecht in the journal Intereconomics found that the United States -- home to some of strongest environmental regulations in the world -- actually imports more pollution-creating industry than it exports. Albrecht also found that the dirtiest industries in the United States are no more likely to invest abroad than non-polluting industries.

  • The Organisation for Economic Cooperation and Development reports in its 1998 book Open Markets Matter that "...[t]he amount of [investment] in pollution-intensive industries in developing countries is actually that it was in 1972." This, despite the immense increase in international trade over the last thirty years.

  • In a 2000 article for the magazine Foreign Policy, trade expert Daniel Drezner writes that the phenomenon of U.S. multinationals exporting manufacturing to the developing world then bringing those manufactured goods back to the U.S. for sale represents less than 4 percent of total U.S. investment abroad.

So why aren't we experiencing a worldwide race to environmental catastrophe? Why aren't western multinationals seeking greener (or less green, you might say) pastures to set up shop?

As it turns out, the cost of compliance with environmental standards -- even stringent standards -- represents a tiny portion of the cost of doing business. Investing in developing countries may carry the benefit of low costs of compliance with environmental regulations, but such investment is also fraught with risks -- political instability, an unskilled labor force, and poor enforcement of contracts and property rights, to name just a few.

Occasionally, however, a developing country can offer incentives lucrative enough to offset those risks. Drezner points to China as one such example. Corporations are investing heavily in China because of its billion-plus people, Drezner writes, despite "formidable regulatory hurdles, a blatant disregard for copyright laws, high levels of corruption, and strict requirements for technology transfers."

India too has begun attracting western interest now that it has lowered its barriers to outside investment. Like China, the country's huge population and market potential attracts investors despite the oppressive bureaucracy and corruption that runs rampant throughout Indian government.

To attach strict environmental and/or labor standards to investment in markets like India and China, however, could be just enough to tip the scales against a corporation's decision to open operations there.

The Real Race: A Sprint to Higher Standards

Not only does the evidence point away from the theory of a global "race to the bottom," it in fact suggests that just the opposite is happening -- free trade is creating wealth the world over, and with wealth comes the luxury of no worries about sustenance and survival, but the comfort to worry about things like air and water quality, endangered species, and the health of rain forests.

There's no question that as a country matures from "developing" to "developed," it can expect some short-term damage to the environment. Factories and plants of course pollute more than farms; scooters and archaic automobiles pollute more than horses or camels. But as trade lifts incomes, newer technology can enable emerging economies to bypass the earlier, dirtier phases of development more quickly than ever.

Griswold, for example, points out that since the North American Free Trade Agreement was enacted in the early 1990s, air quality in Mexico City has improved substantially. Residents there can now afford emissions-reducing catalytic converters on their automobiles, and cleaner-burning gasoline is no longer a luxury. Consequently, the air in Mexico City is cleaner today than the air in Los Angeles was just thirty years ago.

In 1994, the economists Gene Grossman and Alan Krueger wrote a widely-cited paper for the National Bureau of Economic Research positing a "green ceiling," a point at which incomes in developing countries reached a level where citizens of those countries became comfortable enough to start demanding a cleaner environment.

Grossman and Krueger put the green ceiling at about $5,000 per capita GDP. But there's increasing evidence that even that figure may be falling, and that developing countries can make the jump to "green" at an earlier point on the road to affluence than ever before.

A World Bank briefing paper on globalization concludes, " is striking that many developing countries have already turned or are turning the corner in the fight against pollution at much lower levels of income than the rich countries did in their day."

And a recent World Bank study on water pollution found that "pollution intensity falls by 90 per cent as per capital income rises from $500 to $20,000, with the fastest decline occurring before the country reaches middle income status."

The challenge, then, is to lift those developing countries above the green ceiling as quickly as possible. And imposing strict environmental standards on western companies wishing to invest abroad only slows down the process.

To illustrate, let's take another look at logging and deforestation. In his book Free Trade Under Fire, Douglass Irwin explains that much of that deforestation lamented by Brecher and Costello in Global Village or Global Pillage results not from trade, but from poverty:

Almost all the logging in developing countries is for the domestic production of fuel and charcoal -- for the simple reason that fuel and charcoal are the cheapest source of energy for poor people. About 77 percent of forest timber production in Asia, 70 percent in South America, and 89 percent in Africa is for domestic fuel and charcoal.

If much of the world's deforestation is due to poverty, then, adding logging and timber restrictions to free trade agreements will do nothing to protect poor countries' untouched forests. Poor people will continue to clear land for fuel, charcoal and farm space so long as they continue to be poor. Forbidding western companies from doing business with countries whose people use forests for food and fuel only keeps those countries isolated. Isolation keeps them poor. And so long as they're poor, they'll continue to clear forests.

It's a cycle that's self-perpetuating. Only wealth can break it, and the best way to create wealth in poor areas is to give the poor access to international markets.

There's a reason most of the countries that top the various environmental sustainability indexes also happen to boast high per capita incomes: Environmentalism is a luxury that only comes with affluence -- or at least with a certain level of comfort.

Economic data show that the surest way to keep environmental standards low in the developing world is to keep the developing world poor. The obvious corollary: The best way to ensure that developing economies embrace the clean air, clean water and general environmental standards the western world demands of its own industry is to give those economies access to western markets, and allow them to grow enough wealth where such demands are feasible, affordable and prudent.

Radley Balko is a writer living in Alexandria, Virginia and publisher of the weblog This piece is a condensed version of a forthcoming essay for the globalization education website A World Connected.

TCS Daily Archives