Will The Emerging Trade War Reorient How We Think About Sustainability?

by Brent Sohngen (sohngen.1@osu.edu)

The world has been on a hot streak over the last 70 years. Global income growth shot up at an average annual pace of 2% per year (Figure 1). This fast pace of wealth accumulation more than doubled the speed of increase over the previous 150 years. At the same time, population tripled. Today, there are more of us, but we humans are far better off now than we ever have been.

This rapid growth in income also means we consume more. Sustainability experts call the last 70 years the “Great Acceleration” because the rapid increase in income spurred massive new consumption in transportation, buildings, food, computing, data, social media, and just about anything you can imagine.

The causes of this income growth are varied, but one element that has had an undeniable impact is international trade. As trade barriers fell over the last 70 years, goods and services moved more freely across the world and wealth rose as we took advantage of specialization and trade.

But trade and income growth have not been all good. Some environmental impacts – deforestation, biodiversity loss, ozone depletion, and climate change, for example – have scaled up too.

Figure 1: Global Income derived from the Maddison Data Project, housed at University of Groningen (https://www.rug.nl/ggdc/historicaldevelopment/maddison/)

At many points in history, philosophers, scientists, and regular people have wondered if we can keep all this consumption going. Are humans and our enterprises sustainable?

In the past, societies only thought about this question when they were forced to. For example, German foresters invented the word sustainability when tree supplies had dwindled due to increased demand for lumber, heat, and land for food production. They needed to find ways to increase wood production in the same area, so developed new concepts of sustained yield forestry. These new management techniques allowed them to maximize production on a limited land base.

Similar worries emerged in the 1970s when energy shocks, high prices, and slow productivity growth suddenly shook confidence in the boundlessness of our planet. And that picture from space showed us just how small our planet really is.

Doubts that society could sustainably manage growing consumption were punctuated by publication of The Limits to Growth in 1972. This report by a group of prominent scientists argued that humans were multiplying too rapidly, consuming too much, and polluting in a way that would make Earth uninhabitable.

The warning in Limits could not have been clearer: the sharp upward trajectory in Figure 1 was not sustainable, and if we stay on that path, growth would inevitably cease. However, few people bought into the draconian recommendations made by the authors of Limits – rapid reductions in population growth, a slowdown in industrial output, and a reorientation of global economic activity from growth to other measures.

Instead, from the 1970s to 1990s, the major economies of the world ratcheted up environmental regulation with techniques designed not to slow growth. At first, the tools were heavy-handed and clunky – for example, requiring factories to install specific control technologies deemed best – but over time, we switched to approaches like pollution trading that were cheaper and encouraged innovation. Pollution taxes never caught on in the United States, but their twin, subsidies, did.

Instead of following the decrees in Limits, for the last 50 years we have been trying to achieve a definition of sustainable development suggested by the Brundtland Report – issued in 1987 by the United Nations: “Development which meets the needs of the present without compromising the ability of future generations to meet their own needs.”

Yet the question Limits asks lives on: Can society continue growing along the rising path in Figure 1 and meet the requirements of sustainability or must we flatten the income growth curve and significantly curtail consumption to survive?

Most people – including most mainline environmental groups – believe we can find ways to improve the environment while continuing to grow our economies. The great acceleration of incomes can continue if technology and innovation allow us to make more from less while maintaining or improving the environment.

In fact, some people think that increasing income may be our best solution to environmental problems – because wealthier people demand a cleaner environment. After all, mostly the rich buy hybrid or electric cars, green energy, organic food, or worry about their food waste.

Ardent environmentalists aren’t so sure, especially where climate change is concerned. They believe the sustainability will be achieved only by leveling off the rising income curve of figure 1, and maybe even reversing income growth.

These hard-core environmentalists are now getting the experiment they have long wanted. An emerging trade war brought on by tariffs implemented by the current U.S. Administration is set to slow economic growth for the foreseeable future. The administration appears to be attempting to reorient production of goods and services in the US, suggesting the tariffs will be in place for the long-haul. Compounding the issue, other countries will follow our lead with new tariffs of their own.

How will the resulting changes affect the environment? In general, bringing production of stuff the U.S. currently buys from other countries home will raise costs and make things more expensive, so we will almost certainly consume less. Indeed, the first economic estimates find that U.S. GDP could decline 1.45%. Canada and Mexico fare worse, but others, like the EU, Brazil, and Australia, do slightly better.

The secondary effects of tariffs on the environment are less clear. Tariffs make production less efficient, meaning more inputs will be used to make the stuff we consume. The question is, which inputs and how do they affect the environment?

The US has strong environmental regulations and has improved efficiency by following free trade historically, so the US economy is now cleaner than many places where the stuff we buy abroad is produced, so those items could be more cleanly produced here.

For instance, suppose electronics and apparel manufacturing moves from Vietnam to the U.S. Currently, Vietnam emits 0.81 tons CO2 per $1000 GDP while the US emits 0.21. At least on CO2 emissions, moving some production from Vietnam to the US could be good for the environment. In contrast, Germany boasts a carbon intensity of 0.16 tons CO2 per $1000 GDP, so moving automobile or chemical manufacturing from there to the US could have negative effects on the environment.

Because this trade war is just beginning, it is hard to say how it will play out for the environment. However, this new approach will have strong implications not just for our economic well-being, but also for sustainability and the long-standing debate about the interaction between income growth, consumption, and environmental outcomes.