Free Trade
Free trade is the movement of goods, services, labor, and
capital between countries, without government-imposed
trade barriers. It also refers to the efforts of the World
Trade Organization and various international agree-
ments to liberalize, or reduce barriers to, trade. Free
trade’s effect on economic and environmental sustain-
ability is unclear, and trade liberalization methods must
balance the needs of developed and developing countries
to achieve sustainability.
T he term free trade refers generally to the free movement
of goods, services, labor, and capital across national
borders without the interference of government-imposed
economic or regulatory barriers. Although it is often con-
sidered an antagonist to the goals of sustainability, many
economists and policy makers view fully implemented free
trade as the end goal of international economic relations.
But free trade in the purest sense is far from a reality, espe-
cially on a global scale.
Free trade, more specifically, refers to the multilateral
efforts at the World Trade Organization (WTO) to liber-
alize trade by reducing import taxes (tariffs) and removing
nontariff barriers globally. It also refers to the bilateral and
regional agreements that liberalize trade between trading
partners. Some critics blame these concrete trade liber-
alization efforts for aggravating the inequalities between
nations and putting additional strain on the environment
through rapid industrialization (Stenzel 2002). Others
claim that only free trade can promote worldwide sustain-
able growth and development.
Origins of Free Trade
The economist Adam Smith wrote in 1776 that “it is the
maxim of every prudent master of a family never to attempt
to make at home what it will cost him more to make than
© BERKSHI
RE,agl
obalpoi
ntofr
efer
enc
e,2011
to buy. . . . What is prudence in the conduct of every pri-
vate family can scarce be folly in that of a great kingdom”
(Smith 1904, 2:11–12). This logic became the foundation for
the nineteenth-century economist David Ricardo’s theory
of comparative advantage, which encouraged countries to
specialize in certain products while trading for others. By
the 1930s, economists began to embrace free trade as a way
to promote both peace and prosperity (Bhagwati 2008).
After World War II, economists and policy makers
rebuilding the global economic system proposed creat-
ing the International Trade Organization (ITO) to regu-
late trade between nations. Because the ITO was never
founded, the interim General Agreement on Tariffs and
Trade (GATT) became the “de facto institution” for gov-
erning international trade in the postwar era, until the
WTO replaced it. (Bhagwati 2008, 8).
These early efforts at liberalizing trade sought to pro-
mote development and economic growth. They were reac-
tions against the “beggar thy neighbor” economic policies
that characterized the 1930s. During that time, countries
devalued their currencies and increased import tariffs to
give their goods a price advantage over other countries.
Economists blame such protectionist policies, in part,
for exacerbating the Great Depression and the resulting
global economic downturn. Under the various negotiations
of GATT, more countries began to liberalize trade in the
latter half of the twentieth century.
In 1995, 123 countries formed the World Trade Orga-
nization. The WTO governs trade in services, goods,
intellectual property, agriculture, textiles, and many other
issues related to trade. In addition, the WTO established
the Committee on Trade and the Environment (CTE) to
examine the relationship between trade and environmental
policies. The committee recommends modifications where
trade liberalization measures do not promote sustainable
development and protect the environment.
239
www.
ber
kshi
republ
ishi
ng.
com
240 • Berkshire Encyclopedia of Sustainability: The Business of Sustainability
The Doha Round of WTO negotiations (named for
Doha, Qatar, the location of the first meeting) marks the
first time that environmental commitments were open
for negotiation. The Doha Development Agenda (DDA)
ambitiously advocates liberalizing trade in sensitive areas,
such as agriculture and intellectual property, while pro-
moting sustainable development and increasing incomes
for less developed countries (WTO 2001). Although opti-
mism surrounded the beginning of the Doha Round in
2001, many false starts have contributed to uncertainty
about the future of the WTO as a forum for trade liberal-
ization. Increasingly, countries are turning to bilateral and
regional agreements to remove trade barriers.
Aims of Trade Liberalization
Since the 1980s, countries have been interested in the
relationship between trade and sustainable development.
Although the trade–sustainability relationship is largely
indirect, the WTO argues that free trade leads to envi-
ronmental sustainability through economic development,
institutional stability and predictability, increasing inno-
vation, more-efficient resource allocation, and increased
incomes (WTO 2006). Trade liberalization, however, has
not had a completely positive effect on environmental (or
even economic and social) sustainability.
Since the mid-1990s, when bilateral and multilateral
trade liberalization increased, the resulting industrializa-
tion often led to environmental degradation. The North
American Free Trade Agreement (NAFTA), for exam-
ple, worsened air and water pollution by encouraging
the establishment of hundreds of export-focused maqui-
ladoras (foreign-owned factories in Mexico that employ
lower-paid workers; Stenzel 2002). Furthermore, gaps
between rich and poor countries have actually widened
since that time. Still, many policy makers view piecemeal
bilateral and multilateral agreements as building blocks
to attaining the promised benefits of fully implemented
free trade.
Most countries see the market access provided by free
trade as a benefit to their citizens. Market access includes
access to goods, cross-border services, capital, and intel-
lectual property (trademarks or patents, for example).
Unfortunately, provisions that promote market access
for one country may discourage it for another. Even fully
implemented free trade cannot improve every person’s or
every country’s welfare simultaneously. Instead, in theory,
it would reallocate resources so that the “winners” would
gain more than the “losers” would lose, thus leading to an
overall average increase in global welfare.
Since no one country, sector, or industry wants to
become the loser, each economic actor (i.e., seller, con-
sumer, worker, or investor) has different goals for trade
© BERKSHI
RE,agl
obalpoi
ntofr
efer
enc
e,2011
liberalization. Agricultural importers, for example, push
for eliminating subsidies (governmental financial support)
on developed countries’ agricultural products in order to
reduce the cost of imports. Members of the U.S. industrial
sector seek to increase and harmonize regulatory health,
safety, and environmental standards, in part so that com-
petitive industries in the developing world cannot inex-
pensively create the same products. The pharmaceutical
industry would like heightened protection for intellectual
property (i.e., drug patents) so that it receives due compen-
sation for the costs of research and development and is not
immediately undersold by generics producers who reverse
engineer the drugs.
Just as the interested economic actors prioritize certain
items on the liberalization agenda, they remain wary of
the priorities of others. Developing countries would like
trade liberalization to eventually lead to more sustain-
able economic and social development, but they resist
environmental commitments. The developed world,
meanwhile, pushes for environmental protection but
hesitates to allow flexibility for lesser developed coun-
tries, fearing the developed nations would be unable to
compete with countries conforming to lower environ-
mental standards.
Impacts on Sustainability
Economists accept that free trade generally has a positive
impact on trade flows. One study shows that trade vol-
umes were up 120 percent in 2000 alone, largely due to
the WTO’s trade liberalization. The same study indicates
that, in manufacturing, where trade barriers came down,
trade volumes increased, and where barriers remained
high, trade volumes were little or even negatively affected.
(Trade volume is measured by the number of goods and
services traded in a given time period.) For example, trade
in clothing, footwear, and agriculture has changed little
in recent years because the developed world has main-
tained protection over those sectors (Subramanian and
Wei 2007).
Although trade liberalization has led to increased trade
volumes and economic growth in a few cases, the sustain-
ability of that growth and its impact on the environment
are unclear. After the signing of NAFTA, incomes and
employment rose significantly in the northern part of
Mexico. Likewise, exports in manufacturing increased
quickly. But much of this improvement can be attributed
to the maquiladora industry, which is largely disconnected
from the rest of the Mexican economy (Salas 2001). Such
economic gains may not last unless the free trade poli-
cies encourage the transfer of valuable technology and help
build local economies through forward and backward eco-
nomic linkages. (Forward linkages are distribution chains
www.
ber
kshi
republ
ishi
ng.
com

between the producer and its customers, and backward
linkages are distribution chains between the producer and
its suppliers.)
Economic sustainability is not the only concern. As
trade flows increase so does the need to transport goods
and services, depleting fossil fuels that are not sustain-
able over time. Thus environmental concerns have begun
to play a more central role in international trade negotia-
tions. In addition to the CTE’s work, the WTO is engaged
in the issues that concern environmental interest groups.
The WTO maintains that its role is to continue to liber-
alize trade, while ensuring that environmental protection
does not interfere with trade and that trade rules do not
interfere with domestic environmental provisions (WTO
2006, 6).
In addition to the WTO, bilateral and regional agree-
ments have addressed the role of environmental pro-
tection in trade liberalization. NAFTA was the first
“significant trade agreement” to include environmen-
tal provisions—in a side letter to the agreement. Other
agreements that have more enforceable provisions fol-
lowed (Gallagher 2009).
Balancing Economic and
Environmental Sustainability
The principle of sustainable development has become a pri-
ority in global trade negotiations. Differences of opinion
remain, however, over the specific methods of promot-
ing such development and which pillar of sustainability
should take precedence. The primary controversy concerns
the capabilities of developing nations to conform to the
environmental commitments demanded by the developed
world.
Many argue that while the developing world needs
market access to enter the world economy, it also needs
specific policies that build up domestic industries and
institutions in order to be globally competitive. These
policies could provide developing countries with the flex-
ibility to control the movement of capital, encourage tech-
nology transfer, and “generate the resources they need
to protect the environment” (WTO 2006, 7). For low-
income nations, reducing poverty is the main priority.
But the developed world, responding to the pressures of
environmental interest groups, maintains that environ-
mental protection must accompany poverty reduction and
economic development. Some WTO members recognize
that environmental commitments must consider devel-
oping countries’ capacity to embrace and enforce those
commitments. Outside multilateral trade negotiations,
however, developing countries often must acquiesce to
the demands of their developed trade partners in order
to acquire market access.
© BERKSHI
RE,agl
obalpoi
ntofr
efer
enc
e,2011
free trade • 241
Growth and Change
The theory behind trade liberalization, when combined
with environmental awareness, shows promise despite the
antagonistic relationship between free trade and sustain-
ability. As countries continue to remove trade barriers,
global competition in all sectors should increase. The result
should be more-efficient markets and more opportunities
for technological and economic development in the devel-
oping world. Efficient markets could allow environmen-
tally friendly technology to transfer across borders. Since
poverty has been identified as a primary cause of environ-
mental destruction, true economic development from free
trade could have a positive effect on the environment in
the future.
A main critique of trade liberalization methods such as
the WTO and regional or bilateral agreements is that the
developed world demands liberalization from lesser devel-
oped countries without removing its own trade-distorting
barriers. For example, the developing world must reduce
tariffs on textiles and sensitive agricultural products, but
the United States and the European Union maintain sub-
stantial subsidies on agriculture (World Bank 2007, 40).
Thus, many argue that we will not achieve global sustain-
ability until we remove such barriers and approach fully
implemented free trade.
Many people doubt the fundamental principles of free
trade. The financial crisis that began in late 2007 has high-
lighted market flaws, leading people to question whether
markets should remain free of government intervention.
Countries have reintroduced protectionist measures to
guard their economies from a deeper recession. The DDA
has been stalled almost since its inception, and many coun-
tries’ negotiators no longer anticipate achieving multilateral
trade liberalization via the WTO. Meanwhile, small-scale
trade agreements proliferate as countries form bilateral and
regional trading blocs to gain market access.
As applied, free trade has not had a definitive positive
impact on sustainable development. Growing trade vol-
umes have increased global transportation, worsening air
and water pollution and depleting natural resources. Rapid
industrialization in places such as Mexico and China has
taken its toll on the environment. Economically, trade lib-
eralization has lifted some out of poverty but overall has
not been able to shrink the gap between rich and poor.
Still, sustainability concerns have gained importance
significantly since the U.N.’s Earth Summit in 1992.
Trade agreements, bilateral or multilateral, can no longer
ignore issues of sustainable economic and environmen-
tal development. If the growing network of bilateral and
regional agreements acts as a set of building blocks toward
global free trade, and those agreements contain flexible
provisions for environmental protection and economic
www.
ber
kshi
republ
ishi
ng.
com
242 • Berkshire Encyclopedia of Sustainability: The Business of Sustainability
development, then free trade in the future may prove sus-
tainable after all.
Rachel Denae THRASHER
Pardee Center for the Study of the
Longer-Range Future, Boston University
See also Agriculture; Base of the Pyramid (BOP); Con-
sumer Behavior; Development, Sustainable; Equator
Principles; Financial Services Industry; Global Reporting
Initiative (GRI); Information and Communication Tech-
nologies (ICT); Poverty; True Cost Economics; United
Nations Global Compact
Further Reading
Ackerman, Frank, & Gallagher, Kevin P. (2008). The shrinking gains
from global trade liberalization in computable general equilibrium
models: A critical assessment. International Journal of Political Econ-
omy, 37(1), 50–77.
Adler, Matthew; Brunel, Claire; Hufbauer, Gary Clyde; & Schott, Jef-
frey J. (2009). What’s on the table? The Doha Round as of August 2009
(Working Paper Series 09-6). Retrieved October 13, 2009, from
http://www.iie.com/publications/wp/wp09-6.pdf
Baker, Dean. (2008). Trade and inequality: The role of economists. Real-
World Economics Review, 45, 23–32. Retrieved September 22, 2009,
from http://www.paecon.net/PAEReview/issue45/whole45.pdf
Baldwin, Richard, & Low, Patrick. (Eds.). (2009). Multilateraliz-
ing regionalism: Challenges for the global trading system. New York:
­Cambridge University Press.
Bhagwati, Jagdish. (2008). Termites in the trading system: How preferen-
tial agreements undermine free trade. New York: Oxford University
Press.
Folsom, Ralph H. (2008). Bilateral free trade agreements: A critical assess-
ment and WTO regulatory reform proposal (Legal Studies Research
Paper No. 08-070). Retrieved September 22, 2009, from http://
papers.ssrn.com/sol3/papers.cfm?abstract_id=1262872
Gallagher, Kevin P. (2009, November). NAFTA and the environment:
Lessons from Mexico and beyond. In Kevin P. Gallagher, Timothy
© BERKSHI
RE,agl
obalpoi
ntofr
efer
enc
e,2011
A. Wise, & Enrique Dussel Peters (Eds.), The future of North American
trade policy: Lessons from NAFTA (pp. 61–69). Retrieved December
11, 2009, from http://www.bu.edu/pardee/files/2009/11/Pardee-
Report-NAFTA.pdf
Mol, Arthur P. J., & van Buuren, Joost C. L. (Eds.). (2003). Greening
industrialization in Asian transitional economies: China and Vietnam.
Lanham, MD: Lexington Books.
Salas, Carlos. (2001). The impact of NAFTA on wages and incomes
in Mexico. In Bruce Campbell, Carlos Salas, & Robert Scott,
NAFTA at seven: Its impact on workers in all three nations (pp. 12–20).
­Washington, DC: Economic Policy Institute.
Smith, Adam. (1904). An inquiry into the nature and causes of the wealth of
nations (Edwin Cannan, Ed.) (Vols. 1–2). London: Methuen.
Stenzel, Paulette L. (2002). Why and how the World Trade Organi-
zation must promote environmental protection. Duke Environmen-
tal Law and Policy Forum, 13(1), 1–54. Retrieved October 13, 2009,
from http://www.law.duke.edu/shell/cite.pl?13+Duke+Envtl.+L.+&
+Pol%27y+F.+1
Subramanian, Arvind, & Wei, Shang-Jin. (2007). The WTO promotes
trade, strongly but unevenly. Journal of International Economics, 72(1),
151–175.
Thrasher, Rachel Denae, & Gallagher, Kevin. (2008). 21st century trade
agreements: Implications for long-run development policy (Pardee Paper
No. 2). Retrieved October 13, 2009, from http://www.bu.edu/
pardee/files/documents/PP-002-Trade.pdf
World Bank. (2007). World development report 2008: Agriculture for devel-
opment. Retrieved September 22, 2009, from http://siteresources.
worldbank.org/INTWDR2008/Resources/WDR_00_book.pdf
World Trade Organization (WTO). (1994). Relevant WTO provi-
sions: Text of 1994 decision [Decision on trade and environment].
Retrieved October 13, 2009, from http://www.wto.org/english/
tratop_e/envir_e/issu5_e.htm
World Trade Organization (WTO). (2001). Doha WTO ministe-
rial 2001: Ministerial declaration. Retrieved October 23, 2009,
from http://www.wto.org/english/thewto_e/minist_e/min01_e/
mindecl_e.htm
World Trade Organization (WTO). (2006). Trade and environment at
the WTO. Retrieved September 18, 2009, from http://www.wto.org/
english/tratop_e/envir_e/envir_e.htm World Trade Organization
(WTO). (2009). Trade and environment. Retrieved ­September 21,
2009, from http://www.wto.org/english/tratop_e/envir_e/envir_e.
htm
www.
ber
kshi
republ
ishi
ng.
com