Trade and Environment

Conflict or Compatibility

Duncan Brack

• Publisher: Routledge
• Year: 2013
• eBook ISBN: 9781134187973
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Can trade liberalization and environmental protection be pursued together, or do the two objectives inevitably conflict? The rapid evolution of international regimes and institutions is increasingly bringing such conflicts to the fore. A consensus, both on the extent of the clash, and on how it can be resolved, does not yet exist.

This volume includes the proceedings from the RIIA's April 1997 conference on trade and the environment, which brought together prominent contributors from all sides of the debate, including industry, governments, academics, NG0s and intergovernmental institutions such as the World Trade Organization, UNEP, UNCTAD and the OECD. They examine the background to the issue; the impacts of trade-related environmental measures; the relationship between environmental policy, competitiveness and investment; industry and developing country concerns; and the evolution of dispute settlement procedures in the EU and the WTO. The concluding chapter features a wide-ranging discussion on the future of the debate and of the WTO's Committee on Trade and Environment.

Chapter 1
Introduction:The Trade and Environment Debate

1.1 Guide to the issues¹

Duncan Brack

Introduction

The gradual evolution of global trade and environmental regimes continues to raise the possibility of conflict. The international community is in theory committed both to trade liberalization, through the Uruguay Round extension of the General Agreement on Tariffs and Trade (GATT) and the creation of the World Trade Organization (WTO), and to environmentally sustainable development, through the agreements signed at the UN Conference on Environment and Development, the ‘Earth Summit’ of 1992.

In principle, the pursuit of both objectives should be entirely compatible. According to the theory of comparative advantage, trade allows countries to specialize in the production of goods and services in which they are relatively most efficient. In other words, trade enables countries to maximize output from a given input of resources – which is a movement in the direction of environmental sustainability. Furthermore, trade liberalization can help to remove distortionary subsidies and pricing policies, improving the efficiency of resource allocation, and can encourage the spread of environmentally friendly technology. The higher rate of growth of income resulting from trade also helps to generate the resources needed for investment in environmental protection – although this is not an automatic link, and appropriate policies need to be pursued simultaneously.

Given modem systems of economic activity, however, trade can also harm the environment. To the extent that environmental externalities are not incorporated in economic prices and decision-making, trade can act to magnify unsustainable patterns of economic activity, exacerbating problems of pollution and resource depletion. Where externalities are being incorporated (through environmental taxation, for example, or regulation), the process is invariably proceeding at different speeds in different countries. Yet trade rules are set internationally, and the multilateral trading system (the complex of agreements centred around the GATT and administered by the WTO) may fail to allow for such differences in national efforts at achieving environmental sustainability, even when policies are aimed at controlling transboundary or global environmental problems. In addition, a country with strict environmental regulations may fear that its economy will be undermined by competition from other countries with more lax environmental standards (and hence potentially lower production costs).

Trade and environmental policies are therefore inextricably interlinked. Conflict between trade liberalization and environmental protection has already erupted in a number of instances as regulations drawn up in pursuit of the objective of environmental sustainability have been challenged as erecting barriers to trade, notably in several cases brought before disputes panels of the GATT and WTO. The very first dispute under the WTO (which went through both a panel and the Appellate Body) was on a trade—environment case. The WTO itself, on its creation on 1 January 1995, established a Committee on Trade and Environment (CTE), taking forward the work carried out in the former GATT Working Group on Environmental Measures and International Trade (formally created in 1971 but inactive until 1991). Its aim is ‘to identify the relationship between trade measures and environmental measures, in order to promote sustainable development’, and ‘to make appropriate recommendations on whether any modifications of the provisions of the multilateral trading system are required …’.² The Committee reported to the first WTO Ministerial Meeting in Singapore in December 1996, and had its mandate renewed; aspects of its discussions and conclusions are highlighted below.

Many other international organizations, including the OECD, the UN Environment Programme (UNEP), the UN Conference on Trade and Development (UNCTAD) and a large number of academic institutes and NGOs, have also published work in the area. Two new organizations were established during 1996: the International Panel on Trade, Environment and Sustainable Development, established by the World Wide Fund for Nature and sponsored by a number of European governments; and the Geneva-based International Centre for Trade and Sustainable Development, supported by the International Union for the Conservation of Nature.

This paper aims to provide an outline of the major issues involved in the trade and environment debate.

Use of trade measures for environmental purposes

The central aim of the GATT is to liberalize trade between contracting parties. Article I (‘most favoured nation’ treatment) requires that any trade advantage granted by any contracting party to any product either for import or export must also be applied to any ‘like product’ originating in or bound for any other contracting party. Article III (‘national treatment’) similarly requires imported and domestic ‘like products’ to be treated identically with respect to internal taxes and regulations. WTO members, in other words, are not permitted to discriminate between other WTO members’ traded products, or between domestic and international production.

The GATT does, however, permit certain unilateral trade restrictions in the pursuit of environmental protection under particular circumstances. Article XX (‘General Exceptions’) states that:

Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures:

…

(b) necessary to protect human, animal or plant life or health;

…

Box 1.1 World Trade Organization – Trade and Environment Decision of 14 April 1994 (extracts)

Ministers,

Meeting on the occasion of signing the Final Act embodying the results of the Uruguay Round of Multilateral Trade Negotiations at Marrakesh on 15 April 1994,

Decide:

• to direct the first meeting of the General Council of the WTO to establish a Committee on Trade and Environment open to all members of the WTO to report to the first biennial meeting of the Ministerial Conference after the entry into force of the WTO when the work and terms of reference of the Committee will be reviewed, in the light of recommendations of the Committee,
• that the TNC Decision of 15 December 1993 which reads, in part, as follows:
  • (a) ‘to identify the relationship between trade measures and environmental measures, in order to promote sustainable development;
  • (b) to make appropriate recommendations on whether any modifications of the provisions of the multilateral trading system are required, compatible with the open equitable and non-discriminatory nature of the system, as regards, in particular:
    • the need for rules to enhance positive interaction between trade and environmental measures, for the promotion of sustainable development, with special consideration to the needs of developing countries, in particular those of the least developed among them; and
    • the avoidance of protectionist trade measures, and the adherence to effective multilateral disciplines to ensure responsiveness of the multilateral trading system to environmental objectives set forth in Agenda 21 and the Rio Declaration, in particular Principle 12; and
    • surveillance of trade measures used for environmental purposes, of trade-related aspects of environmental measures which have significant trade effects, and of effective implementation of the multilateral disciplines governing those measures;’
  constitutes, along with the preambular language above, the terms of reference of the Committee on Trade and Environment,
• that, within these terms of reference, and with the aim of making international trade and environmental policies mutually supportive, the Committee will initially address the following matters, in relation to which any relevant issue may be raised:
  • the relationship between the provisions of the multilateral trading system and trade measures for environmental purposes, including those pursuant to multilateral environmental agreements;
  • the relationship between environmental policies relevant to trade and environmental measures with significant trade effects and the provisions of the multilateral trading system;
  • the relationship between the provisions of the multilateral trading system and:
    • (a) charges and taxes for environmental purposes;
    • (b) requirements for environmental purposes relating to products, including standards and technical regulations, packaging, labelling and recycling;
  • the provisions of the multilateral trading system with respect to the transparency of trade measures used for environmental purposes and environmental measures and requirements which have significant trade effects;
  • the relationship between the dispute settlement mechanisms in the multilateral trading system and those found in multilateral environmental agreements;
  • the effect of environmental measures on market access, especially in relation to developing countries, in particular to the least developed among them, and environmental benefits of removing trade restrictions and distortions;
  • the issue of exports of domestically prohibited goods,
• that the Committee on Trade and Environment will consider the work programme envisaged in the Decision on Trade in Services and the Environment and the relevant provisions of the Agreement on Trade-Related Aspects of Intellectual Property Rights as an integral part of its work, within the above terms of reference …

(g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.

Countries can, therefore, ban or restrict the import of products that will harm their own environments, as long as the standards applied are non-discriminatory between countries and between domestic and foreign production. Environmental grounds have indeed become more widely cited as an objective and rationale for applying trade-restrictive regulations including, most notably, measures aimed at controlling air pollution and hazardous chemicals.³ Any agreement permitting a restriction in trade, however, runs the risk of capture by protectionist interests using environmental justification as a disguise. To that end, the CTE spent some time discussing transparency requirements for such measures. The Uruguay Round agreement incorporated many improvements in the requirements for notification of measures under the Agreements on Technical Barriers to Trade (TBT), Sanitary and Phytosanitary Measures, and Subsidies and Countervailing Measures. While considering that no further modifications to WTO rules were necessary, the CTE concluded that the establishment of a central database of trade-related environmental measures would be helpful. Relatively little analysis has in fact been carried out on the impact of such measures, but at least one study has concluded that they are relatively inexpensive, tend to be short-term and are often well worth the cost in terms of environmental benefits⁴ (see further in Section 2.2).

Product requirements

Generally speaking, environmental regulations apply either to products or to processes. Product requirements, as well as outright bans, include regulations and/or voluntary agreements governing labelling, packaging, recycling and recycled content. Increasingly, such requirements are based on life-cycle assessments of the product’s environmental impact during production, consumption and disposal. Although these can be valuable instruments of environmental policy, the application of such requirements to imported products can pose significant difficulties. Information, particularly in life-cycle assessment cases, may be wholly or partially lacking. Characteristics chosen for labelling may reflect domestic environmental priorities, and criteria used in different national schemes may vary widely. Schemes that focus only on particular products (e.g. tropical timber) may create artificial advantages for products that are not subject to similar requirements (e.g. temperate timber or substitutes such as plastics or metals) but whose consumption and production nevertheless have environmental impact. Packaging regulations that require recovery and reuse (e.g. returnable bottles) clearly create problems for non-domestic producers. Foreign governments and industries are highly unlikely to be involved in designing and implementing such schemes. Not only do these problems combine to create barriers to trade (particularly for developing countries), but they may also lead to resource misallocation and potentially inappropriate environmental policies.

The TBT Agreement aims to ensure that regulations such as these do not create unnecessary obstacles to international trade; environmental protection is singled out as a legitimate objective of technical requirements and standards. The Agreement requires, inter alia, that all such measures should be as transparent as possible and based on international standards where feasible. The CTE, which spent most of its time under this item discussing voluntary ecolabelling schemes, stressed the importance of sticking to the Agreement’s provisions and ensuring fair access to foreign producers. It is unclear, however, whether recycling and waste management requirements, and labelling schemes incorporating information about production processes, are covered by the Agreement, and the CTE resolved to consider these issues further. The OECD has proposed a series of steps to minimize disruption to trade, including transparency; transitional adaptation periods; sensitivity to non-domestic conditions and particularly to the special needs of developing countries and economies in transition; greater harmonization of life-cycle methodologies; and a requirement for genuine environmental justification for all such measures.⁵

A specific issue related to the trade in products is the export of domestically prohibited goods. Goods that are restricted in domestic markets, on the grounds that they present a danger to human, animal or plant life or health, or to the environment, may often be legally exported. This may cause a problem for the importing country, where information is lacking on whether and why the product is banned: exporters may make false declarations, customs authorities (particularly in developing countries) may lack adequate product testing facilities, and undeveloped or ineffective consumer protection legislation may, for example, enable products to be marketed beyond their expiry dates. Trade in hazardous waste is covered by the Basel Convention, and the negotiation of further multilateral environmental agreements (MEAs) may prove the best way to make progress on this issue. A legal requirement for ‘prior informed consent’ for export is increasingly common within the European Union (for example for the export of restricted chemicals) and this may also provide a way forward. As with many other trade-environment topics, transparency of measures, and the provision of technical assistance to developing countries, are key issues.

Process and production methods

Environmental regulations based on process and production methods (PPMs), as opposed to product standards, cause more complex interactions with trade. Although the GATT’s ‘like product’ provisions were not drawn up with environmental issues in mind, a GATT dispute panel applied them in the case of the well-known US-Mexico tuna-dolphin dispute in 1991. It ruled that the trade restriction in question (the US import ban on Mexican tuna caught with dolphin-unfriendly nets) was in breach of the GATT because it discriminated against a product on the basis of the way in which it was produced, not on the basis of its own characteristics; i.e., it discriminated against a ‘like product’.

The meaning of ‘like product’ has become one of the most difficult issues in the trade-environment arena. In 1994 another GATT panel, ruling on an EU—US dispute over car imports, slightly relaxed the definition, considering that vehicles of different fuel efficiency standards could be considered not to be like products. However, it placed strict boundaries on this conclusion, argui...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Preface and acknowledgments
• Contributors to the conference
• Abbreviations
• 1 Introduction: the trade and environment debate
• 2 Trade versus environment: the evidence
• 3 Industry concerns
• 4 Resolving trade and environment disputes
• 5 Conclusion: the future