Trade and trade liberalization can expand the level of economic activity possible by making that activity more efficient. Box 4-1 explains the ways in which trade can increase efficiency, producing more goods with the same given set of natural resources, labour, machines and technology.

This expansion—essentially creating additional wealth—can have positive effects on the environment and development. It has obvious development benefits; although development is more than economic growth, such growth is essential for development in most Southern countries. We should note, however, three important qualifications to this positive link between trade and development:

• First, distributional considerations matter. That is, if trade increases inequity by creating wealth that is mostly concentrated in the hands of the wealthy, then it works against important development objectives.
• Second, not everyone will benefit from trade liberalization; inherent in the wealth-creating process is destruction of inefficient firms and sectors.
• Third, the potential of trade to increase wealth is just that: potential. To enjoy trade's full potential countries may need to devote, for example, a large amount of resources to building capacity in their export sectors.

Where trade creates wealth two types of environmental benefits may follow. First, increased efficiency can directly benefit the environment, since efficient firms need fewer natural resource inputs and produce less polluting waste. In this sense, the basis of comparative advantage—efficient use of resources—also underlies the goal of sustainable development.

Second, efficiency can benefit the environment indirectly by making people wealthier, and thus more likely to demand stronger environmental protection. This is not to say that the poor do not value the environment; indeed, their poverty may mean they depend on it more directly than do the rich. But it may be a lower priority than it would for those with stable employment and adequate income, food and housing. Much evidence suggests that richer economies will likely have lower levels of some harmful emissions than poorer ones (though this relationship does not hold for pollution and environmental degradation whose effects are felt far away in time or in space, such as greenhouse gas emissions). Where trade alleviates extreme poverty, it may save people from a vicious cycle whereby they are forced to degrade their environment to survive, in the process becoming increasingly impoverished.

An increased scale of economic activity can also have negative environmental effects. Most economic activity damages the environment, whether in extracting raw materials, harvesting renewable resources, or in creating waste and pollution. Increasing the scale of economic activity means increasing the levels of environmental damage, unless regulations are in place to ensure that the additional activities cause no harm—an unlikely scenario.

Another possible negative effect stems from the additional wealth created by trade—the same wealth that, as noted above, can benefit the environment and development. For some types of pollution, increased wealth may mean more, not less pollution. The richer countries of the world, for example, have far higher per capita emissions of all types of greenhouse gases than do developing countries, and far higher per capita emissions of such toxins as PCBs, dioxins and furans. With enough wealth comes the opportunity to consume at levels and in ways that are worse for the environment.

4.3 Structural effects