International Political Economy and the Environment
Authors: Spilker Gabriele , Koubi Vally , Bernauer Thomas 
Published: May 2016

How does liberalization of trade and investment (i.e., economic globalization) as well as membership in international organizations (i.e., political globalization) affect the natural environment? Does economic and/or political globalization lead to ecological improvement or deterioration? This article reviews the existing literature on international political economy (IPE) and the environment in view of these and related questions.

While globalization has various dimensions—economic, social, and political—IPE focuses mainly on the economic dimension when analyzing the effect of globalization on the environment. In particular, IPE puts most emphasis on the environmental implications of trade in goods and services as well as foreign direct investment (FDI). Even though both trade and investment are thought to have a substantial impact on the natural environment, the existing literature demonstrates that the effects of economic globalization on the environment are neither theoretically nor empirically one-dimensional. This means that existing research does not allow for a clear-cut overall assessment in terms of whether globalization leads to an improvement or deterioration of the environment. This is the case because the impact of economic globalization on the environment materializes via different mechanisms, some of which are supposedly good for the environment, and some of which are bad.

On the one hand, economic globalization may improve environmental quality via its positive effect on economic growth, since trade and FDI facilitate specialization among countries according to their comparative advantage and the transfer of resources across countries. On the other hand, relevant economic theory gives little reason to believe that free trade and FDI will influence all countries in the same way. Instead, when considering the relationship between economic globalization and the environment, it is important to consider the interactions between scale, composition, and technique effects created by different national characteristics and trade and investment opportunities. In particular, the scale effect of openness to trade and capital mobility increases environmental degradation through more intensive production. The technique effect predicts a positive effect of trade and FDI on the environment through the use of cleaner techniques of production. And the change in the sectoral composition of a country as a consequence of trade and FDI, the composition effect, could positively or negatively affect the environment of a country (e.g., a change from agriculture to industry may lead to higher energy consumption and air pollution while a change from industry or agriculture to service is expected to decrease environmental degradation). Consequently, the overall effect of trade and FDI on environmental quality can be positive, negative, or nonexistent strongly depending on the specific situation of the country under investigation.

Furthermore, both theory and empirical research highlight the potential for government policy and environmental regulations to affect the relationship between trade/FDI and the environment. On the one hand, increased competition between economic actors (usually companies) due to increased market openness (globalization) might cause a race to the bottom or at least regulatory chill in formal and informal environmental standards as well as pollution havens attracting foreign direct investment. The reason is that countries might weaken (or at least not increase) their environmental policies in order to protect industries from international competition or attract foreign firms and FDI motivated by the expectation of lower costs of environmental protection. Hence the (theoretical) expectation here is that developed countries will refrain from adopting more stringent environmental regulations and might even reduce existing standards due to competition with countries that have laxer environmental regulation. And less-developed countries will adopt lax environmental standards to attract FDI flowing into pollution-intensive sectors and export the respective goods to jurisdictions with higher environmental standards.

In contrast, the Porter hypothesis states that a tightening of environmental regulations may stimulate technological innovation and thus help improve economic competitiveness. In addition, trade openness may induce an international ratcheting up of environmental standards (trading up) as higher environmental standards of richer and greener countries spread—via trade and investment relationships—to countries starting out with lower environmental standards. Furthermore, multinational corporations engaging in FDI and applying universal environmental standards throughout their operations tend to transfer greener technology and management practices to host countries, thus promoting the upgrade of local environmental standards and improving the environmental quality in those countries (the so-called pollution halo effect).

Echoing the many theoretical pathways through which globalization can affect the natural environment, empirical studies estimating the impact of trade and FDI on environmental standards and environmental quality deliver quite heterogeneous results. In particular, the literature points to various factors mediating the effect of trade and FDI on the environment, such as differences in technology between industrial and developing countries, stringency of environmental regulations, property rights and political institutions, corruption levels as well as the pollution intensity of multinationals.

More recently, IPE scholars have started to study the political dimensions of globalization and how they are related to environmental protection efforts. Memberships in international organizations are at the center of this research and recent studies analyze, for example, how they may affect the quality of the environment. Other studies focus more on specific organizations, such as the World Trade Organization, and, for instance, evaluate whether in trade disputes over environmental standards economic or environmental concerns prevail. Finally, a new strand of the IPE and environment literature deals with the micro level and studies how citizens evaluate economic openness in light of potential environmental concerns.