International trade is not inherently anti-environment, and the best solution to environmental problems is seldom one that involves trade policy. The rules of the WTO are generally consistent with this application of the specificity rule. They permit countries to impose environmental standards on domestic production activities and on domestic consumption activities (including environment-based product standards). The WTO also offers limited environmental exceptions to its free-trade thrust. The WTO places strict requirements on a single country that attempts to use trade policy to punish what the country views as environmentally damaging production activities in other countries. The WTO seems willing to accept trade limits that are part of multilateral environmental agreements.

Because environmental problems like pollution involve an externality, government policies are usually needed to get markets to be efficient. In fact, if a country’s government fails to implement a policy to limit pollution, free trade may make a country worse off and the country may end up exporting the wrong products.

Transborder pollution is an example of an international externality, in which production (or consumption) activities in one country impose external costs on other countries. As with all external costs, the best solution is one that addresses the pollution directly, by imposing a tax on the pollution, or by establishing property rights (to water or whatever is being polluted, or as limited rights to pollute). However, it is often challenging for the government of the country hurt by the pollution to gain the cooperation of the government of the country doing the pollution. For instance, little progress has been made in reducing environmental problems along the Mexico-U.S. border, even though a side agreement to NAFTA established a commission and a bank for this purpose.

In some cases the environmental problem is global: Global production or consumption is imposing a worldwide external cost. The best approach to a global environmental problem is a global cooperative agreement, but achieving one is usually difficult. Often, there are differences of opinion about the size of the external costs or the appropriate policies to adopt. Countries that suffer little or no harm have little incentive to cooperate and impose costs on themselves. More generally, countries have an incentive to free-ride on the efforts of others. Often an agreement has no real enforcement mechanism. Trade sanctions provide a possible threat against countries that do not abide by an agreement, but, as we saw in Chapter 12, sanctions often do not work.

The chapter concluded with four examples of global environmental problems. Two have been addressed by successful global agreements. An agreement (CITES) on using trade limits and trade bans to prevent the extinction of species has been fairly effective. But the ultimate solution may well involve creating economic incentives for "sustainable use" (the propagation and management of the previously endangered species), as the discussion of elephants and ivory suggested. The global agreement on CFCs (the Montreal Protocol) has also been effective and should reverse the ozone damage over time. Success here seems to be based on clear scientific evidence, the rather small number of CFC producers, the availability of substitutes at reasonable cost, and the fact that the major producing countries were also those likely to suffer the most damage.

Two problems have not been addressed successfully. Because no one owns the oceans and their resources, overfishing has led to declines in fish stocks. The large number of fishing firms and their political activity to resist limits have prevented effective global agreements. Global warming as a result of the atmospheric buildup of CO2 and other greenhouse gases is the most daunting global environmental problem. Science does not provide clear guidance on the magnitude of the problem and its likely effects on different countries. All countries contribute to global emissions of greenhouse gases. The Kyoto Protocol is an attempt to address the problem, but it probably will have little effect. Most developing countries prefer to pursue growth and rising incomes and are not willing to constrain their development by taking actions to reduce their emissions. More important, the United States withdrew from the Kyoto Protocol.