10 June 2021

Free trade can be good for the environment – here’s how

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Readers of this site will need no convincing of the benefits of international free trade for economic growth. In a list of reasons why global poverty rates have nosedived since the mid-twentieth century, it ranks as number one.

What is less well understood, however, is the dynamic between international free trade and green objectives. Indeed, if it is considered at all, it is usually in a negative light – after all, how can lugging goods halfway around the world on a container ship ever be good for the environment?

A new report, published today by the Centre for Policy Studies, seeks to counter that narrative. We identify a host of reasons why international free trade can actually help us all to tread more lightly on the planet.

Our first argument in support of the environmental credentials of free trade draws upon the work of two renowned British economists. David Ricardo, in the early 19th century, popularised the notion of comparative advantage. He lucidly set out why it makes sense for countries to produce that which they are most adept at, and then trade the fruits of their labour with each other. His theory boils down to the idea of productive efficiency, an obviously important concept in environmental economics – given how much of what we consume is originally derived from the natural world (be that food, timber, minerals and metals, and so on). If we can produce the goods we demand in as efficient a way as possible, it stands to reason that pressures on ecosystems will diminish as a result.

Writing decades before Ricardo was Adam Smith, who famously expounded his theory of the division of labour, and how it can beget enormous increases in productivity. By allowing individuals to specialise they can turn any given bundle of resources into more useful goods than a novice could. Again, this process of maximising efficiency can help the environment by ensuring we eek out as much as possible from as little as possible – conserving nature and minimising our footprint on the planet.

Smith didn’t stop there, however – and this brings us onto our second argument. In what has turned out to be an incredibly pertinent passage, the economist notes how it would, technically, be possible to grow grapes in Scotland – provided they were sufficiently shielded from the elements and kept warm artificially. But – as I have noted before on these pages – Smith explains to do so would be 30 times as costly as simply importing grapes from more hospitable climes. Even in the 18th century, it was apparent that it can often be better from an environmental perspective to import goods from places where they occur naturally, than trying to produce them for oneself locally.

A more contemporary example might be how it could make environmental sense for a country not blessed with renewable energy resources – such as abundant sunshine – to import energy-intensive goods which have been made in countries which do. Imported hydrogen made via solar powered electrolysis, for instance, will almost certainly be better for the climate than locally produced hydrogen made via fossil fuels. One must remember that the ability to do this, however, is entirely predicated on nations being able to trade freely with each other. Without free trade, the whole proposition collapses. 

Our third argument is that free trade is essential for the development and spread of technologies which will allow us to put an end to all sorts of environmental issues. Britain is a scientific superpower, boasting first-rate research labs and universities which have produced a host of emissions busting innovations. But nobody would suggest the country has been able to do it in isolation. Ideas and components have had to be shared across borders. Iconic environmental technologies – from solar panels to electric vehicles – have complex supply chains which stretch around the world, critically reliant on international trade to ship parts and raw materials to where they need to be. 

So international trade doesn’t have to be the object of fear some environmentalists are keen to make it out to be. Thankfully, those in government seem well aware of this, and have already made good headway on staking out a policy platform which simultaneously boosts trade flows and protects the environment. 

But that isn’t to say ‘job done’. And to that end, our report culminates with a series of recommendations the Government should adopt to further liberalise trade policy and reap the environmental benefits. For the sake of brevity, I’ll focus on just one here – cutting tariffs on all environmental goods and services. 

Last year, while the UK Global Tariff removed import taxes on hundreds of green goods, it stubbornly left some in place for select items. Hybrid vehicles, for instance, still attract a rate of 10%, while bicycles must pay 14%. Tariffs are nothing more than economic self-harm, and particularly when levied on green goods, environmental self-harm too. They should be junked as quickly as possible.

The Government is always at pains to promote the idea of ‘Global Britain’. But in truth, the message has often rung hollow – an admirable gesture, but one lacking in real substance. That needn’t be the case going forward. As Britain hosts the G7 and COP26, the Government has the perfect opportunity to demonstrate its leadership on climate change in global conversations – and make the case that free trade is the key to global prosperity and a green future.

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Eamonn Ives is the Head of Energy and Environment at the Centre for Policy Studies. His report, 'Clean Free Trade', was published today. 

Columns are the author's own opinion and do not necessarily reflect the views of CapX.