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date: 25 March 2017

International Political Economy and the Environment

This is an advance summary of a forthcoming article in the Oxford Research Encyclopedia of Politics. Please check back later for the full article.

How does the liberalization of trade and investment (that is, economic globalization) affect the natural environment? Is economic globalization good or bad for the environment? 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 matter for the environment, the existing literature demonstrates that the effects of economic globalization on the environment are both theoretically and empirically ambiguous. One of the reasons for this ambiguity stems from the fact that the impact of economic globalization on the environment may materialize via different mechanisms, some of which are supposedly good for the environment, and some of which are bad.

Starting with adverse environmental effects induced by globalization, 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 that attract 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 will 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. In addition, 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 this theoretical ambiguity, empirical studies estimating the impact of trade and FDI on environmental standards and environmental quality per se have not yet delivered conclusive results. By and large, however, the empirical evidence available to data points towards non-significant to slightly positive effects of trade and investment liberalization on environmental standards and quality.

More recently, IPE scholars have begun to study 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 evaluate whether economic or environmental concerns prevail in trade disputes over environmental standards. 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.

We review the existing research in each of these areas and conclude by highlighting and assessing some of the theoretical and empirical challenges and pointing to avenues for further research.