The negative externalities of trade (2024)

Trade can also generate negative environmental externalities, as production for exports can result in unsustainable freshwater withdrawals, pollution, biodiversity loss and deforestation. Trade channels economic incentives to producers across countries and, combined with weak or inadequate regulatory frameworks, can lead to negative environmental outcomes.

Trade policies can be used as tools to address such shortcomings. Environmental protection is foreseen as a legitimate justification for trade measures under the WTO rules and many recent trade agreements embed environmental clauses in an attempt to balance economic and environmental trade-offs.

Unsustainable freshwater withdrawals

Nearly all water on the earth’s surface is found in the oceans, ice caps or glaciers, and only 1 percent is available freshwater.¹⁷⁶ Agriculture accounts for 72 percent of freshwater withdrawals worldwide, mainly for irrigation, and contributes to water stress. About 1.2 billion people live in areas where severe water scarcity challenges agriculture.¹⁷⁷ In sub-Saharan Africa, water availability per capita declined by 40 percent over the past decade, and most of the African continent reached per capita water levels considered insufficient to meet water demand for food and other sectors.¹⁷⁸

Agricultural production is a key driver of resource use and can lead to unsustainable water withdrawals. Because trade channels economic incentives to producers across countries to expand crop production, many observers postulate a relationship between trade and unsustainable water use. About 11 percent of groundwater depletion is estimated to be embedded in the international trade of crops.¹⁷⁹ Another study estimates that between 2000 and 2015, food trade grew by 65 percent, while the share of unsustainable irrigation embedded in agricultural exports increased proportionally less, by 18 percent.¹⁸⁰ This suggests that trade is not necessarily the leading driver of water scarcity and that, although it can generate a negative environmental impact, it is also efficiency enhancing, as unsustainable irrigation increased much less than agricultural exports.

Pollution

Agricultural intensification and the increased use of fertilizers and pesticides have contributed to soil pollution. Using nitrogen and phosphorous in excess of what is needed for optimal plant growth causes soil pollution and leads to soil acidification, salinization, and the contamination of groundwater and surface water bodies. Pesticides can also harm the environment and soil health, particularly when overused or applied using poor practices.¹⁸¹

Trade enables countries to outsource their pollution by importing agricultural products rather than producing them. A study using virtual grey water flows to explore the globalization of agricultural pollution points to wide differences across countries in terms of pollution distribution through trade.^ab While the grey water concept is not widely used, the study provides interesting insights, indicating that pollution is rising and increasingly concentrated in relatively few countries, and notes a positive relationship between increases in trade and increases in pollution. Importantly, the study suggests that external pollution footprints (that is, due to trade) are small compared to internal footprints (due to domestic production), indicating that local conditions are the key drivers that frame farmers’ practices.¹⁸²

Biodiversity loss and deforestation

Biodiversity loss is strongly linked to land use changes and, as markets do not account for its cost, insufficient regulation and law enforcement in the producing region can result in negative outcomes (see Box 3.1). Forests host most of the world’s terrestrial biodiversity, and reductions in forest cover imply a significant biodiversity loss. Forests contain over 60 000 different species of trees. They are habitats for 80 percent of the world’s amphibian species, 75 percent of bird species and 68 percent of mammal species. Tropical forests contain about 60 percent of all the world’s vascular plants.¹⁸³

Landscape transformation affects the natural habitat of fauna and flora, and while some species may adapt to such changes, many will not. A projection exercise on species extinction due to changes in land use (including the increase in cropland, pastures and urbanization) estimates that 25 percent of projected global extinctions could be due to changes in land use for agricultural production to meet export demand.¹⁸⁴

Two-thirds of global forests are located in only ten countries (Figure 3.3). This implies that the vast majority of global biodiversity is hosted by only a few countries, making local contexts the focus of discussion to secure global biodiversity. Nearly half the world’s forests are tropical (45 percent).¹⁸⁵ Humid tropical forests contain the highest biological density and stand out as highly significant reservoirs of global biodiversity. In the tropics, the conversion of forestland into other uses accelerated throughout the twentieth century, driven by demographic growth, technological innovation and economic development. In recent decades, increased market integration has also played a role in this process.

The sourcing of agricultural products can strongly impact local biodiversity and species conservation. Products originating from biodiversity hotspots have a disproportionate impact on local biodiversity and species conservation. A study estimated the biodiversity impact of soy exports originating from the Brazilian Cerrado by tracing the product to its origin down to the municipality level. The findings suggest that soy imports by the European Union had a significant impact on the habitat loss of the maned wolf and the giant anteater in the Mato Grosso region of Brazil between 2000 and 2010.¹⁸⁶ The impact of exports to the European Union on the habitat loss of these species was nearly as large as the impact linked to soy exports to China, despite the significant difference in terms of volume between them. This occurs because the exports destined for the European Union were sourced from locations that were richer in terms of biodiversity, and underlines the importance of local context in generating trade-induced environmental externalities.

Globally, the annual rate of forest area reduction has been declining from 0.19 percent during the period 1990–2000 to 0.12 percent between 2010 and 2020.¹⁸⁷ The unprecedented level of connectivity between economies places some of the economic drivers of land use changes beyond national borders, with global markets channelling the incentives for the expansion of agricultural land and land use change, including at the expense of forestland.¹⁸⁸

Agricultural expansion is seen as the leading cause of deforestation, and the literature on the interlinkages between trade, agricultural expansion and deforestation is vast.^ac Agricultural production of cattle, soybeans and palm oil – all products with sustained international demand – accounted for 40 percent of tropical deforestation between 2000 and 2010.¹⁸⁹ In some cases, an increase in agricultural exports can lead to decreases in forest cover, although the size of this effect depends on local conditions.¹⁹⁰ For example, a study focusing on Argentina, Brazil and Paraguay estimated that as much as 50 percent of agricultural land increase in these countries was driven by trade but the remaining half of the associated deforestation was tied to production destined for domestic markets.¹⁹¹ In addition to agricultural exports, the level of development and population pressures are also found to be drivers of deforestation. Trade openness contributes to amplifying economic activity, accelerating other trends that put pressure on land resources, such as income and demand growth, and urbanization and dietary changes.

Agrifood systems fare as the second-largest greenhouse gas emitting sector after the energy sector, and in 2019 accounted for 31 percent of global greenhouse gas emissions. Land use changes alone, including deforestation and peatland degradation, accounted for 7 percent of global greenhouse gas emissions in 2019.¹⁹² A recent global study on the linkages between trade and deforestation indicates that a portion of tropical deforestation-related emissions can be linked to trade (up to 39 percent).¹⁹³

Forests are an important part of the solutions to climate change. Through the process of photosynthesis, forests remove carbon dioxide (CO2) from the atmosphere and integrate it into their mass, acting as CO2 sinks when they grow.¹⁹⁴ Deforestation leads both directly to increased greenhouse gas emissions because the carbon stocked in trees is released when they are removed, and indirectly because of the loss of carbon sinks as land is geared towards other uses with lower carbon-storing capacity. Although deforestation takes place at the local level, climate systems are interconnected and the impacts of greenhouse gas emissions extend beyond national borders, making climate change a global externality. The international community has been addressing climate change for decades, but progress has been uneven across countries, in part because aligning global objectives with national priorities remains an extraordinary challenge (see Part 4).¹⁹⁵ In the last two decades, countries, subnational governments, civil society and the private sector have adopted the objective of reducing, halting and reversing forest loss, including through commitments and initiatives such as Sustainable Development Goal (SDG) 15, the Global Forest Goals, the New York Declaration on Forests, the Consumer Goods Forum Resolution, the Amsterdam Declarations, the United Nations Secretary General’s initiative on Turning the Tide on Deforestation and, more recently, the Glasgow Leaders’ Declaration on Forests and Land Use. Many of these initiatives define specific goals for decoupling agricultural production from deforestation.

Many importing countries are aware of their environmental footprints and have taken measures to reduce their role in deforestation and forest degradation pressures. The 2013 European Timber Regulation, for instance, disallows the commercialization of illegal timber and its derived products in the European Common Market. In 2021, the European Commission put forward a legislative proposal to ensure that palm oil, soy, wood, cocoa, coffee, cattle and their derived products entering the European Common Market are all “deforestation-free”, regardless of the legality of the related deforestation in the country of origin (see Box 3.2). As the location from which exports are sourced can determine the impact on the environment, the proposed legislation includes provisions for traceability and geo-referencing. Digital technologies can facilitate the traceability of products throughout the value chain, and better traceability can promote trust and foster the adoption of sustainable practices.¹⁹⁶

Many tropical countries are making efforts to curb deforestation and forest degradation, as well as to strengthen legal compliance and verification. The private sector sourcing in these countries is also increasingly engaged in finding solutions to weaken incentives for deforestation. The Soy Moratorium (SoyM) in Brazil serves as an example of private sector commitment to support the public sector in halting deforestation in the Brazilian Amazon. The SoyM is a permanent commitment by the major soybean traders in Brazil not to commercialize soybeans produced in areas deforested after 2006 in the Brazilian Amazon. The agreement was highly successful, and contributed, among other measures, to a significant decrease in deforestation in the Amazon between 2006 and 2014.¹⁹⁷ However, deforestation levels in the Amazon remain a concern and are difficult to address. For instance, there is indication that reductions in deforestation rates within the Brazilian Amazon increased deforestation pressure on neighbouring countries with less stringent regulation, accelerating forest loss in Colombia, Paraguay and Peru.¹⁹⁸