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Trade and Environment - Issues for the WTO Negotiations

Why trade is an environmental issue

Existing WTO provisions on environment

WTO negotiations on trade & environment

Proposed research on trade & environment

Questions that need to be resolved

We welcome your comments on this draft policy: please send us an email.

Why trade is an environmental issue

International trade is the mechanism through which much of a country’s environmental footprint is imposed beyond its own borders. The globalisation of economic activity puts pressure on natural resources wherever environmental laws are weak. The world’s tropical rainforests, many wildlife species - whose body parts are in demand for Asian medicines - and the once-clear streams and rivers flowing through New Zealand’s export dairying regions, are all examples of natural resources that are suffering greatly as a result.

The essential problem is the weakness of environmental laws, not trade itself. Nonetheless, trade can magnify the problem in two ways. First, trade opportunities create incentives for increased domestic production of goods that a country specialises in. If production in a specialised economy is environmentally more harmful than a less specialised economy would be, and if environmental protection is missing or inadequate, the gains from trade can be more than offset by extra harm to the environment.

Second, trade opportunities lead business interests to lobby against effective environmental laws and policies, because they often see the additional costs cutting into their competitive advantage. This lobbying undermines the capacity of a community, or indeed a whole country, to move its economy on to an environmentally sustainable basis.

Production subsidies add an additional element to the mix. In many countries, production is subsidized (overtly or covertly) by governments, which are responding to pressure from business and farming interests or seeking a trade advantage. Such subsidies distort trade, and they usually have adverse environmental effects as well. That is particularly the case with the most widely-used, major subsidies – those for fossil fuels, roading, agriculture, fisheries and timber production.

At a conceptual level, two actions are needed to make trade environmentally sustainable. The first is to phase out environmentally damaging subsidies that cause excessive production and distort trade. The second is to control the environmental impacts of production to a sustainable level, while ensuring that the cost of doing so is borne by the producer. This will mean that the environmental costs of production are reflected in the price of the product (the polluter-pays principle).

The polluter-pays principle also needs to be applied to global environmental problems such as climate change. This will require trade rules that allow for the application of economically sound environmental taxes and other measures on imports as well as domestic goods, where authorised by multilateral environmental agreements.

The future of trade liberalization, and the economic and environmental benefits it can bring, will depend on the ability of governments to establish trade rules and environmental policies that serve the common interest and not just the interests of business. At the same time, trade liberalisation will have to help developing countries achieve sustainable growth, and not just serve the interests of developed countries.

Existing WTO provisions on environment                              Top

Existing trade agreements, negotiated and enforced through the World Trade Organisation (WTO), already allow countries to set their own regulations and standards for protection of human health or safety, animal and plant life or health, and the environment, in relation both to in-country production, and imported goods. Conflict between trade and environmental policies has arisen where governments (mainly the United States) have attempted to restrict imports on the basis of the environmental effects of production.

In the early 1990s, in two disputes that brought the trade and environment debate to prominence, the EU, the Netherlands, and Mexico successfully challenged a US prohibition on importation of tuna caught using techniques that cause incidental mortality of dolphins. Although the rulings in these cases (often referred to as Tuna-Dolphin I and II) were not formally adopted by the GATT (the predecessor to the WTO), they caused a furore in the environmental community.

The implied basis for these decisions was that while import restrictions may be applied to characteristics embodied in a product (eg pesticide residues), they may not be applied to the processes and production methods (PPMs) used to produce the product. This doubt has extended to whether PPM-based measures covered by a multilateral or bilateral environmental agreement are consistent with WTO rules.

In October 2001, however, the WTO Appellate Body issue a key ruling in the so-called “shrimp-turtle” case, regarding United States import prohibitions against shrimp harvested without use of “turtle-excluder devices” (TEDs). The WTO allowed the United States to maintain its import restrictions as long as it continued serious good faith efforts to reach a multilateral agreement on protection of sea turtles and use of TEDs. This landmark case could have far-reaching implications.

WTO Negotiations on Trade and Environment                       Top

The Doha Mandate

In November 2001, at the WTO’s Fourth Ministerial Conference in Doha, Qatar, Ministers from WTO member governments agreed to a new round of multilateral trade negotiations. These negotiations, now underway, include discussion of the relationship between trade rules and environmental policy measures.

New Zealand needs to develop a coherent approach to these negotiations, informed by public discussion and debate. Because of its international reputation for both environmental integrity and trade liberalisation, New Zealand is well placed to make a positive contribution to resolving some of the difficult issues in the trade and environment debate. Two key issues at stake are described below.

The WTO and multilateral environmental agreements (MEAs)

One particular focus of the negotiations is the relationship between existing trade rules and specific trade obligations set out in multilateral environmental agreements (MEAs). But this is limited to the use of trade measures between parties to the MEA in question. This means, for instance, that the negotiations are not meant to clarify what climate change measures New Zealand could take to protect its industries from competition from countries that have not ratified the Kyoto Protocol.

This is a serious shortcoming, as the relationship between parties and non-parties is where the most serious questions lie. If these issues are not clarified, governments might shy away from sound policy measures out of concern that those measures could be challenged in the WTO. Even worse, non-parties could gain a competitive advantage over Kyoto parties, thus encouraging more free-riding.

Ecologic has proposed a new strategy to re-build cooperation on climate change policy with the United States and Australia, as well as developing countries. This requires better integration of trade policy with climate change initiatives, including appropriate use of border tax adjustment. See Beyond Kyoto.

Eco-labelling

Ministers from WTO member governments are to decide in September 2003 whether, among other things, negotiations are needed to clarify WTO rules related to environmental labelling programmes and requirements. There has been a long-running debate amongst WTO members about whether eco-labelling programmes and requirements constitute an unfair trade barrier. Developing countries tend to be concerned that eligibility criteria for eco-labels will be tilted in favour of developed country issues and conditions. They argue that their products should not be discriminated against just because, at their level of development, health and education are given a higher priority than environmental protection.

Environmental advocates respond that consumers have a right to know how something is produced so that they can make environmentally responsible purchases. They also note that labelling programmes are almost always voluntary, and that developing countries are usually able to make submissions on eligibility criteria if they are interested.

Ecologic’s Executive Director, Guy Salmon, presented a paper advocating the use of eco-labelling at a special meeting of the OECD Round Table on Sustainable Development in Paris in December 2002.

Proposed research on trade and environment                       Top

WTO rules and multilateral environmental agreements (MEAs)

The tension between WTO rules and MEAs is best demonstrated by questions about what measures countries that ratify the Kyoto Protocol will implement to meet their emissions obligations. To avoid unwelcome effects on the competitiveness of energy intensive industries, these countries face some difficult decisions on how to treat imports and exports of goods whose production generates emissions.

If domestic production faces the cost of its emissions, but imports or competing exports from other countries do not, domestic producers could be at a cost disadvantage depending on the significance of emissions costs as a proportion of total costs of production. In some industries with high emissions, this could cause production to shift to countries whose industries have no emission obligations. This, in turn, would cause economic dislocation in Annex I countries without any reduction in global emissions, thus undermining the effectiveness of the multilateral environmental agreement on climate change.

Although there are various options for addressing this situation, all of them have both economic and environmental implications. Furthermore, many of the options could be interpreted as contrary to trade rules in WTO agreements. For example, rulings in WTO disputes suggest that a country may be able to impose taxes on imported goods based on greenhouse gases emitted during the production of those goods. However, any such import duties must be implemented with careful regard to WTO principles to ensure they are an appropriate use of trade policy and to minimise the risk of a successful challenge.

There is also a risk that the threat of WTO challenge could lead countries to adopt second-best measures that protect industries in ways clearly allowed under WTO rules, in preference to more efficient measures that might be more difficult to sustain under WTO challenge.

Attempts by Annex I countries to address competitiveness concerns of climate change policies will have significant implications for sustainable development. Measures are likely to include the imposition of customs duties (known as border tax adjustment), and possibly other conditions, on exports from developing countries for greenhouse gases emitted during production. This will re-kindle a simmering debate on the situations under which importing countries can impose trade restrictions based on processes and production methods (ppm’s) in other countries.

While there are strong arguments in favour of such border tax adjustment for climate change policies, many developing countries tend to see this as the thin edge of the wedge. The WTO rules that could be used to authorise trade measures in conjunction with climate change measures might be used to justify other environmentally-based trade restrictions without the global implications of climate change and without the backing of an MEA.

These issues could boil over in highly contentious trade disputes in the WTO. Regardless of their outcome, such disputes would further undermine public support for the WTO as an institution.

The Doha Declaration commits WTO members to enter negotiations on the relationship between existing WTO rules and specific trade obligations contained in MEAs. The negotiations are limited to the applicability of WTO rules between parties to the MEA in question, and are not to prejudice the WTO rights of any WTO member that is not a party to the MEA in question. While these negotiations might reduce somewhat the potential for WTO dispute over Kyoto measures between parties to the Protocol, it is also important that they do not in the process weaken the ability of Kyoto parties to use comparable approaches to their trade with non-parties.

Questions that need to be resolved include:                                              Top

1. How can governments with emissions obligations under the Kyoto Protocol address competitiveness issues in a way that has environmental integrity and promotes economic efficiency, including sustainable development in countries without such obligations?

a. Are any changes to or clarifications of WTO rules needed to provide governments with better assurance that environmentally and economically sound measures will not be found inconsistent with WTO rules?

2. When are trade measures in support of multilateral environmental agreements (MEAs) justified?

a. Must the MEA specifically authorise or mandate such measures, or is it sufficient for a party to an MEA to demonstrate that the measure is part of its policy package to comply with the MEA?

b. Should measures authorised or mandated by an MEA have an explicit exemption from WTO rules? If so, how should this be worded?

c. What constitutes a ‘valid’ MEA for the purposes of justifying trade measures? Must the country against which the trade measure is taken also be a party to the MEA for the measure to be justified?

3. What constraints should apply to the use of border tax adjustment or other environmentally-motivated trade measures that are not specifically authorised by MEAs?

a. Should WTO members be able to impose taxes or other standards or conditions on imported goods based on pollution or other environmental issues that are primarily local in their effects?

b. Are changes to WTO rules needed to give effect to principles for appropriate use of environmentally effective and economically efficient policies?

4.What should WTO rules say about the use of eco-labelling, both voluntary and mandatory?

a. How can exports from both developing and developed countries be protected from discrimination based on unfair or unreasonable expectations of consumers in countries with different environmental circumstances or priorities?

b. What constitutes “arbitrary or unjustifiable discrimination” or a “disguised restriction on trade” and how does this relate to consumers right to know how a product has been produced?

We welcome your comments on this draft policy: please send us an email.

Partial list of references                                                                                     Top

Cosbey, Aaron. 1999. “The Kyoto Protocol and the WTO.” Seminar Note. Royal Institute of International Affairs.

General Agreement on Tariffs and Trade. 1987. “United States – Taxes on Petroleum and Certain Imported Substances: Report of the Panel adopted on 17 June 1987”. BISD L/6175 – 34S/136. Geneva.

Hoerner, J. Andrew. 1998. “The Role of Border Tax Adjustment in Environmental Taxation: Theory and U.S. Experience”. Working Paper. Center for a Sustainable Economy, Washington, DC. Presented at the International Workshop on Market Based Instruments and International Trade, Institute of Environmental Studies, Amsterdam, 19 March 1998.

Hoerner, J. Andrew, and Frank Muller. 1996. Carbon Taxes for Climate Protection in a Competitive World. College Park, MD: Center for Global Change.

Hoerner, J. Andrew, and Jan Mutl. 2000. “Good Business: A Market Analysis of Energy Efficiency Policy”. Working Paper. Center for a Sustainable Economy, Washington, DC.

Loose, Helen. 2000. “Kyoto Protocol: Trade versus the environment.” Environmental Finance. July-August 2000. 27-29.

Petsonk, Annie. 2000. “The Kyoto Protocol and the WTO: Integrating Greenhouse Gas Emissions Allowance Trading into the Global Marketplace.” Duke Envtl. Law & Policy Forum. vol 10 (185).

Sinner, Jim. 1994. “Trade ad the Environment: Efficiency, equity and sovereignty considerations” in Australian Journal of Agricultural Economics, 38(2). 171-187.

Wofford, Carrie. 2000. “A Greener Future at the WTO: The Refinement of WTO Jurisprudence on Environmental Exceptions to GATT”. 24 Harvard Env. Law Rev. 563-592.

WTO. 2001. “European Communities – measures affecting asbestos and asbestos-containing products: Report of the Appellate Body.” WT/DS135/AB/R. 12 March 2001.

WTO. 2001. “United States – Import Prohibition Of Certain Shrimp And Shrimp Products: Recourse To Article 21.5 By Malaysia: Report Of The Panel” WT/DS58/RW. 15 June 2001.

WTO. 1999. “Chile –Taxes on Alcoholic Beverages: Report of the Appellate Body.” WT/DS87/AB/R. 13 December 1999.

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