Trade liberalization will lead to changes in the composition of a country's economy, causing it to produce more of the goods it makes well or has in abundance, to trade for those it does not. For example, a heavily forested country that did not trade would produce only enough forest products for its own people. Under a trading scenario it might produce enough for export as well, increasing the size of forestry's slice in the nation's economic pie. This kind of structural effect can be either positive or negative for the environment and development.

On the positive side, if the composition of the economy changes so that less polluting sectors have a bigger share of the pie, then trade has resulted in environmental improvements (at least at the national level; the polluting firms may have simply moved to a different country). Similarly, trade liberalization would help foster development if the composition of the economy changed to include sectors or firms with stronger links to the domestic economy, increased employment prospects, or otherwise enhanced potential for creating income equity.

Trading with a country whose consumers demand green goods may also change the composition of the economy, if exporters respond by creating new products or sectors. A number of coffee producers in Mexico, for example, have collaborated on marketing organically grown coffee, which can be sold at premium prices. The potential environmental benefits are obvious. Usually the impetus for a green shift in composition comes not from final buyers of goods, but from other firms buying inputs. For example, Ford and GM, two giants of U.S. automobile manufacturing, have declared that they will soon buy only from suppliers that are certified as following the ISO 14001 environmental management system. If ISO certification leads to environmental improvements, then Ford and GM will have forced such improvements down the supply chain to foreign and domestic suppliers.

Also on the positive side, trade liberalization may remove subsidies, quotas or other trade-restrictive measures that frustrate allocative efficiency. To use the fictitious example cited in Box 4-1, if trade liberalization forced a Northern country to stop protecting its own coffee industry, the resources that had been used for that industry could go to other more productive uses. This would have significant development benefits for the countries where coffee grows naturally, which could increase their exports. It would also have environmental benefits. For example, far less heat (or none) from fossil fuels would be needed to grow the same value of more traditional produce in the former coffee greenhouses.

On the negative side, if the goods that a country makes well are based on natural resources, or are pollution-intensive, then trade liberalization would increase the share of such industries in the national economy. Without appropriate environmental policies this would mean increased pollution, or accelerated harvesting of natural resources such as fish or timber, perhaps at unsustainable levels. When liberalization creates opportunities for this type of trade, linking domestic natural resources to international demand, environmental degradation and resource depletion can be rapid. Adding to these direct effects, the resulting scale of activity can overwhelm existing domestic structures for regulation. Similarly, trade liberalization may change the mix of industries to attract those that do little to help advance development objectives.

Another set of possible negative effects of economic openness is related to timing of liberalization, and the transitional process of economic restructuring. These result from openness not only to trade in goods and services, but also to flows of investment (for example, direct investment, portfolio investment and currency speculation). More and more research shows that timing is crucial in liberalizing regimes for trade and investment. Small developing economies in particular may be hamstrung by geographical, sectoral or institutional problems that cannot be quickly overcome. In the meantime, liberalization may produce a painful and protracted transition. In these economies, experience has shown that economic openness must be properly staged, and accompanied by policies specifically designed to ease the restructuring process. Otherwise, liberalization may, at least in the short and medium term, actually work against growth, employment, poverty alleviation, environmental protection and other components of sustainable development.

Chapter 4: Suggested readings