The Environmental Potential of Free Trade

After returning from its holiday recess, the Senate Finance Committee voted to replace the North American Free Trade Agreement (NAFTA) — which President Trump had deemed the “worst deal in history” — with a strikingly similar deal: the United States-Mexico-Canada Agreement (USMCA). The bill is expected to become law with bipartisan support.

While USMCA has been celebrated by the US dairy industry, the environmental community has taken a decidedly different view. In December, nine environmental groups, including Earthjustice, the Sierra Club, and the Natural Resources Defense Council, penned a letter urging lawmakers to reject the agreement. Among their main objections were weak environmental standards, inadequate enforcement mechanisms, and the deal’s omission of the phrase “climate change.” These criticisms illustrate how little the progressive environmental community’s view of free trade has changed since the NAFTA negotiations and protests in the 90s, consistent with its affection for local production and aversion to international capitalism.

Absent from the dominant environmental narrative, however, is an appreciation that free trade agreements can serve as proactive environmental policy. The environmental community is so worried that production will be outsourced to countries with lower regulatory standards — the “pollution haven” or “race to the bottom” hypothesis — that it fails to consider the reverse. Domestic production with higher environmental efficiency can just as easily displace less efficient production elsewhere, reducing aggregate impacts.

One of the most publicized provisions of USMCA — the expansion of Canada’s import quotas for US dairy — illustrates this oversight well. The deal expands the quotas by over 100 percent for a number of US dairy products, including fluid milk, cream, cheese, yogurt, powdered milk, and ice cream.

The quota expansion made quite a splash, with US dairy celebrating its increased access to the Canadian market. And economists and dairy experts have attempted to project the change’s economic impact. (It will likely be a minor one — despite expanding Canada’s import quotas by over 100%, US dairy exports to Canada are only projected to increase by 5%.)

What coverage of and responses to USMCA have missed is that liberalization of US dairy also has the potential to improve climate outcomes.

Accurately projecting the magnitude of the dairy quota’s environmental impact would require a more in-depth analysis, but we can make some rough predictions based on the emissions intensities of milk production in Canada and the US.

The US produces milk with less carbon than Canada does. The emission intensity of raw milk production is about 21% higher in Canada, with a kilogram of raw milk resulting in 0.42 kg CO2eq and 0.51 kg CO2eq in the US and Canada, respectively.

As a thought experiment, we can predict what would happen if increased production in the US perfectly displaced production in Canada. According to one analysis, USMCA, relative to NAFTA, will increase output of raw milk production in the US by 0.28%. This increase would amount to around 95 thousand extra tons of CO2eq emissions in the US, but emissions in Canada would fall by about 20% more. While small, at least given the scale of emissions from the agricultural sector, that’s still the equivalent of taking around 4,000 cars off the road.

It’s difficult to predict how exactly increased US exports will impact production in Canada’s other dairy trade partners. Presumably, though, the additional US exports will displace at least some production either in Canada or its trade partners. And since, of the top ten dairy exporting countries, only one country, Denmark, has a lower emission intensity of raw milk production, any increase in US output that displaces production elsewhere will likely reduce global emissions.

While the liberalization of US dairy will likely yield unintended environmental benefits, we can’t assume that liberalization will be environmentally beneficial between all countries and for all goods. So it’s important that we be intentional about maximizing environmental efficiency when selecting goods for liberalization. But this would require the environmental community to look beyond what has become its default wariness of, if not downright opposition to free trade. Happily, there are some promising signs of this shift. The Sierra Club, for example, despite opposing USMCA, has advocated for using climate-friendly criteria to help select goods for trade liberalization. As yet, however, the Sierra Club is more the exception than the rule.

Trade inevitably changes humanity’s environmental impacts, for better or worse. We can’t afford to reflexively oppose free trade, when we could instead add it as a potentially powerful instrument to our climate toolbox.