Policy Brief

Balancing Trade and Sustainability: Finding the Right Path

Introduction

The 2030 Agenda for Sustainable Development stresses international trade as a means to drive inclusive economic growth, leading to reduction in poverty and promotion of sustainable development. Though international trade directly and indirectly impacts all the SDGs, it is reflected in the 17^th Sustainable Development Goal, namely, “Strengthen the Means of Implementation and Revitalize the Global Partnership for Sustainable Development”. With trade being one of the related goals, it discusses the integration of trade and environment through promotion of greater liberalized trade and making trade and environment mutually supportive, among others¹ .

This policy brief studies the relationship between trade and sustainable development with focus on poverty and environment. It provides insights into achieving the following Sustainable Development Goals.

• Goal 1, “No Poverty”
• Goal 13, “Climate Action”
• Goal 17, “Strengthen the Means of Implementation and Revitalize the Global Partnership for Sustainable Development”

Trade and Poverty

Through the growth effect, international trade creates a positive impact on mitigating poverty. According to World Bank data, global trade increased at a Compound Annual Growth Rate (CAGR) of 6.51% from USD 4.70 trillion in 1981 to USD 62.32 trillion in 2022. This significant increase in trade is in line with a substantial fall in the poverty headcount ratio from 44% of population living on less than USD 2.15/day (2017 PPP) in 1983 to 9% in 2022.

The strong inverse relationship between poverty headcount ratio and global trade of goods and services with correlation of -0.97 makes trade an important measure to stimulate growth and reduce poverty. In particular, the Least Developed Countries (LDCs) are encouraged to adopt a more liberal and trade oriented industrial policy to achieve SDGs and mitigate poverty.

Figure 2: Total Trade of Goods and Services and Poverty, World, 1981-2022

Source: Calculations based on World Bank Open Data Platform
Note: The World Bank adopted the International Poverty Line of USD 2.15/day in September 2022².

However, this relationship varies with region. For example, in the Sub-Saharan African region, increase in total trade of goods and services mitigated the poverty headcount ratio in the region, but the fall of the latter remains significantly lower than the global reduction in poverty. Total trade in the region increased from USD 0.17 trillion in 1990 to USD 0.86 trillion in 2019 at a CAGR of 5.79%, however, it remained lower than the global increase in trade with a CAGR of 6.12% over the same period. Subdued increase in trade had a limited impact on poverty reduction, which on average declined by only 1.36% each year from 1990 to 2019 and remained lower than the world’s fall in poverty headcount ratio of 4.91%. This is evident from the following table.

Table: Comparison of Trade and Poverty for the World and Sub-Saharan Africa, Compound Annual Growth Rate (CAGR), 1990-2019

A study by Shao et al., 2024 indicates that more liberal trade policies through elimination of tariff and non-tariff barriers and unfair trade pacts will foster the trade ecosystem of Africa and increase the participation of the region in Global Value Chains. The study suggests that growth and trade in the primary sector has failed to increase the income of the under-privileged and recommends greater intra-Africa trade through the African Continental Free Trade Area and progressive taxation reforms³ .

Figure 2: Total Trade of Goods and Services and Poverty, Sub-Saharan Africa, 1990-2019

Source: Calculations based on World Bank Open Data

According to the World Trade Report 2023 by the World Trade Organization, the impact of increased trade on poverty has been substantial. However, trade leads to an increase in demand for skilled labor, positively impacting only a certain section of the economy by creating urban centers of development. Such fragmentation reduces the possibility of greater reduction in poverty, implying the need for enhanced international cooperation through re-globalization. The report further recommends that a robust multilateral trading system coupled with digitally driven services trade can help Sub-Saharan Africa and LDCs to eliminate miscellaneous expenditures such as transportation costs and enable an inclusive trade ecosystem⁴.

Trade and Environment

According to the Emissions Gap Report 2024 published by the United Nations Environment Programme (UNEP), Greenhouse Gas (GHG) emissions peaked in 2023 with 57.10 gigatons of CO2 equivalent (GtCO2e) with electricity generation contributing 26% followed by transport (15%), agriculture (11%), industry (11%), among others.

For the G20 region, GHG emissions stood at 40.90 GtCO2e accounting for almost 77% of total global emissions (excluding African Union)⁵. The following figure highlights the trend in GHG from 2010 to 2022 for the G20 and the African region, suggesting that CO2 emissions increased by 5.94% from 38.32 GtCO2e in 2012 to 40.59 GtCO2e in 2022 for the G20 region and by 14.23% from 3.02 GtCO2e in 2012 to 3.45 GtCO2e in 2022 for the African region.

Figure 3: Trends in Annual Greenhouse Gas (GHG) Air Emissions Accounts for G20 and Africa, Gigatons of CO2 equivalent (GtCO2e), 2012-2022, Total Industry and Households⁶

Source: International Monetary Fund. 2022.Climate
Change Indicators Dashboard. [Annual Greenhouse Gas (GHG) Air Emissions Accounts], https://climatedata.imf. brorg/pages/access-data. Accessed on [2025-02-10].

Weak environmental regulations in Africa⁷ are now leading to greater deterioration of the environment, partly due to economic development and partly due to the Pollution Havens Hypothesis (PHH) according to which countries with a carbon-intensive production process shift their manufacturing base to regions with weaker environmental regulations⁸. A study by Jeetoo et al., 2023, confirms the hypothesis by concluding that liberal trade measures negatively impact environmental quality. The analysis in the study is based on a balanced panel of 35 Sub-Saharan African nations from 2002 to 2015 with panel data aggregates on CO₂ emissions as proxy for environmental quality⁹ . Such studies reaffirm the PHH that companies shift their production process to developing economies with weaker environmental regulations, leading to greater GHG emissions in such economies.

According to the World Trade Report 2022 by the World Trade Organization, Sub-Saharan Africa and LDCs export agricultural and mineral products which reflect greater exposure to extreme climate events in the region. International trade, in this regard, plays a pivotal role in ensuring timely availability of consumer essentials to the vulnerable sections of the population. Further, increase in trade of low-carbon technology products plays a significant role in intensifying the positive aspect of international trade¹⁰.

There is a need to promote greater trade in low-carbon technology products (such as wind turbines and solar panels) as it fosters cleaner manufacturing capabilities among countries, stimulating innovation and deeper technological advancements. It is reassuring to note that the trade of such products increased at a CAGR of 7.81% from USD 247 billion in 1994 to USD 2209 billion in 2023¹¹.

Figure 4: Total Trade, Exports, Imports of Low Carbon Technology Products, 1994-2023, USD billion

Source: International Monetary Fund. 2022.Climate Change Indicators Dashboard. [Trade in Low Carbon Technology Products], https://climatedata.imf.org/pages/
access-data. Accessed on [2025-02-06].

Conclusion: G20 Principles on Trade and Sustainable Development 2024

The G20 Principles on Trade and Sustainable Development 2024 provide a roadmap for countries to pursue trade as a means to achieve the SDGs, thereby promoting inclusive economic growth in a manner that remains consistent with each country’s unique needs and concerns at various stages of development.

Though trade has a lasting impact on all SDGs, policy formulation related to trade and sustainable development with the following principles in consideration will help governments across the globe to adopt appropriate measures to foster an optimal trade and investment infrastructure.

Figure 5: G20 Principles on Trade and Sustainable Development 2024

Source: G20 Information Centre, provided by the G20 Research Group; University of Toronto Library¹²

Note: