After reading this essay you will learn about:- 1. Complex Issues on Trade and Environment 2. Disputes at WTO 3. Politics of Dispute 4. Conclusions on Trade and the Environment.
Essay # Complex Issues on Trade and Environment:
There are many complex facets to the trade and environment controversy, but even at the risk of simplification they can be reduced to a few sentences.
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When any product is made it has some impact on the environment.
In agriculture, the top soil, for instance, may run off or ground water may be overexploited. In industry, untreated effluents may pollute the waterways and factory chimneys may spew smoke into the air. The degree to which agricultural and industrial production has an impact on the environment varies from country to country, depending in part on national regulations and in the other on national practices.
The basic question in the trade and environment dispute is: Should such environmental effects of production decide whether or not these products can be exported from one country to another? For instance, if leather units in India pollute the groundwater with chemicals, can Germany decree that it will not allow imports of Indian leather products unless they are produced without such environmental side- effects?
Or, to take a real example, in 1996, citing its own laws, the US banned imports of shrimps from countries (including India) where turtles were killed during trawling for prawns.
Another aspect of the trade-environment dispute takes place amongst the rich countries itself. For example, the US argues that the European Union has been protecting its agriculture with a high level of subsidies, one effect of which is to encourage environmentally degrading forms of cultivation.
The removal of subsidies, it is said, will not only facilitate free trade; it will also stop environmental degradation. Such issues are not discussed here, the focus being restricted to the North-South controversies.
The tussle is not only about some countries using their laws to influence environmental practices in others (as in the turtle-shrimp case). The concern of the developing countries is also that, under the guise of environmental considerations, “green protectionism” is being advanced and environment—which is a “non-trade” issue—is being brought into a trade body, the WTO.
The argument is that the developed countries are talking about the environmental practices in the South merely to keep out imports from these countries.
On its part, the North claims that unless environmental practices in individual countries are more integrated into world trade rules, there will be “a race to the bottom“. That is, as countries try to out-do each other in the global market, each country will increasingly ignore the impact of production on the environment, ending up, ultimately, in a complete disregard for the environment.
Essay on the Disputes at WTO:
The link between trade and the environment is not a new one. A number of global environmental agreements do cover this aspect. The Convention on International Trade in Endangered Species had, until recently, for example, banned trade in ivory on the ground that this was necessary to protect a dwindling population of elephants.
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But what is special now is that attempts are being made to bring it into the ambit of the WTO. NGOs in the North have taken it up in earnest because they feet that, unless the brakes are applied now, globalisation will end up destroying the environment the world over.
They have focused on the WTO because, in recent years, this body has been seen as an agent of globalisation. Partly in response to NGO pressure and partly because they lose no opportunity to bring in new trade issues, the governments of the North have readily articulated these concerns at the WTO.
To see how the trade-environment issue at the WTO has developed, a bit of recent history would help. Towards the close of the far-reaching Uruguay Round of Multilateral Trade Negotiations (conducted under the WTO’s predecessor—the GATT—General Agreement on Tariffs and Trade) some countries in the North did raise what are called the “environment-aspects of trade”.
Though the developing countries opposed any formal negotiations on the issue, a decision was taken in 1994 to establish the Committee on Trade and Environment (CTE) which would oversee a work (study) programme on the trade-environment links at the WTO.
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In the seventeen years that the CTE has been in existence, the developing countries have been successful in pointing out that, while all countries are committed to sustainable development the best way, to achieve this in the South is to facilitate rapid economic growth, one requirement of which is opening markets to the developing countries.
Second, the South has also managed to convincingly argue that it is the sovereign governments which have the right to establish national environment standards. And, third, member-countries have agreed at the CTE not to use environment protection as a guise to impose protectionist measures.
However, while the CTE continues its discussions (which have no implications for WTO rules on trade), the North has been getting impatient about the issue. So much so that a fair number of disputes since the WTO was set up in 1995 have involved environment aspects of trade, the most well-known of which is the shrimp-turtle case involving the US on one side and India, Malaysia, Pakistan, and Thailand on the other.
In 1996 the US banned imports of shrimps from these countries, citing a 1989 US legislation which prohibited shrimps harvested in countries with technology that adversely affected sea turtles, five species of which were categorized in US law as endangered.
(During trawling for shrimps, turtles can get caught in the nets. Fishing operators usually kill these turtles. A solution is believed to be the attachment of “turtles excluder devices” to the nets, which will allow the turtles to escape from the nets under water).
In 1998, a WTO Disputes Panel struck down the US ban as illegal. A WTO Appellate Body also held the US action as wrong. But what has opened a can of worms is that the Appellate Body ruled that the shrimp ban was illegal because the US did not follow the right procedures before taking action and that, under the WTO rules, countries “can and should” take action to protect the environment.
In other words, if the US had followed the right procedures it would have been perfectly justified under WTO rules to ban shrimps imported from the four Asian countries—because they did not protect sea turtles in their waters.
At this point it would be useful to highlight the main issues involved in the trade-environment dispute and where it may be heading at the WTO. The first issue is, of course, whether environment should figure at all at the WTO. The WTO, after all, is an organisation that is supposed to frame rules for global trade in goods and services and not on the environment.
However, the North would like formal WTO rules to govern the “environment-aspects of trade“. It would like, for instance, an amendment/new negotiations on this issue.
The existing Articles of Agreement of the WTO do permit countries in exceptional circumstances to take action to protect the environment, but the rules are so tightly framed as to disallow such action by countries except in the most extreme of circumstances.
Article 20 of the WTO, which was cited by the Appellate Body in the shrimp-turtle case, is what the US, for instance, would like modified to permit WTO member-countries to take greater action on trade that has environmental implications. Quite naturally, the developing countries are strongly opposed to such a move.
The second and related issue is about what kinds of environment-related trade disputes should be covered by the WTO. All countries, including the developing ones, agree that there are certain environment issues over which the WTO has “jurisdiction“.
For example, if vegetables grown in New Zealand carry with them the residue of excessive pesticide application, an importing country—say the UK—is well within its rights to prohibit their entry. But such environmental/health issues are covered by a separate WTO agreement, called the Agreement on the Application of Sanitary and Phytosanitary Measures.
The third issue is: Where does the WTO stand vis-a-vis the provisions of the existing multilateral environment agreements (MEAs)? There are many kinds of global environment agreements that have already been negotiated under the aegis of other agencies and some of them do cover trade issues as well.
To give a few examples, the Montreal Protocol on chlorofluorocarbons (CFCs) prohibits trade in banned CFCs; the Basel Convention on Toxic Wastes prohibits cross-country movement of wastes and, until recently, CITES (Convention on International Trade of Endangered Species) banned trade in ivory. (In theory, each of these bans contravene the provisions of WTO agreements.)
The view of the developing countries—India being a vocal country in this respect—is that since there are so many MEAs (Ministry of External Affairs) which also cover trade matters and, since none of them have been challenged at the WTO, it is best to leave the job of dealing with environment aspects of trade to these pacts and not bring the disputes to an organisation that is not equipped to deal with the issue.
However, the support for this view does not run across all members of the WTO. The developed countries would like general rules to be administered by the WTO. For instance, there is no MEA—and there never will be one—on turtles caught by trawlers fishing for shrimps.
The other issue is what if some WTO member-countries are not signatories to an MEA? The larger question here is that a few countries can negotiate an MEA on a subject amongst themselves and then threaten to take action against those non-signatories who are also members of the WTO.
These are just three of the very complex issues involved in the environment-trade debate. There are others like the use of ‘eco-labelling’ in some countries by voluntary agencies in order to certify imported products as having been produced in an environmentally benign fashion.
Politics of Dispute:
The issues are very much evolving since they are very new. But there is a lot of politics in them as well and the battle lines have already been drawn. The developing countries are very clear at the WTO that any move to make environment a formal part of the negotiating agenda will be opposed. (India is one of the leading proponents of the position of the developing countries.)
The South sees this very much as ‘a non- trade issue’ that the North wants to bring to the negotiating table. The poor nations view the WTO moves on both environment and labour (‘the social clause’) in very similar terms.
They see the initiative of the North on these issues as very much protectionist in nature. That, fearing the loss of markets, the governments of the North are raising these issues so as to keep certain products of the developing countries out of their markets.
There is little doubt that there are reasons other than a concern for the environment underlying the attempts of the developed countries to bring the issue to the WTO. And the developing countries are on a firmer ground when they argue that this non-trade issue has no place in the WTO.
However, the scant regard that the governments of the developing countries have for the environment exposes them to the charge of hypocrisy when they say that they too are committed to environmental protection (Box 41.1, Box 41.2).
Essay # Conclusions on Trade and the Environment:
(a) Does Free Trade Harm the Environment?
Because free trade has as its prime purpose the expansion of output and consumption, it will contribute to environmental degradation by expanding the demands that are made on natural resources and on land. However, restricting trade for this reason would be wholly wrong since environmental impacts can be controlled by vigorous and well-targeted environmental policy.
There is a strong role for market-based incentives in this context. These aim to ‘decouple’ economic activity and environmental impact. In other words, the prime focus of policy must be on correcting the sources of environmental degradation in the country of export. Using trade restrictions is a last resort when all other means to correct the damage have failed. There is an exception for international agreements.
It is important to recognise, however, that free trade is not to be pursued at all costs. The environmental damage associated with expanded trade is a real cost that needs to be deducted from the (generally) large benefits of free trade. There is no justification in free trade arguments for ignoring environmental costs. Environmental costs change the conditions under which free trade maximizes world human well-being.
(b) Does Protection Harm the Environment?
Many forms of protection can harm the environment, as exemplified by the Common Agricultural Policy.
Less obviously, harm can be done to the sustainable development of countries supplying imports under special agreements, as with beef from Botswana to the EC. There is evidence to implicate the special agreement between the EC and Botswana in range degradation in Botswana due to the incentive to overstock cattle.
(c) How does Trade-Related Environmental Degradation Arise?
Trade is linked to two forms of environmental damage. Damage can arise from the consumption of an imported product which gives rise to an environmental loss. Most usually such ‘consumption externalities’ are health-related, e.g. pesticides on imported fruit, treated products, etc.
The second form of damage arises because of the production of the goods in the exporting country. Tropical hardwood from unsustainable forestry, for example, imposes a cost on importing countries if the population of the importing country cares about deforestation (regardless of whether that population makes direct use of the forest).
The same production process may also impose costs on the exporting country (e.g. loss of watershed functions due to soil erosion from deforestation). While these latter costs are the legitimate concern of the exporting country, importers may also feel concerned if, for example, minority groups suffer (e.g., forest-dwelling tribes).
The important point to note is that while consumption externalities have as their point of damage the importing country, many ‘production externalities’ will impose damage that is physically outside the importing countries. This raises the issue of the ‘right’ of importing countries to use trade restrictions to convey or impose their concern on countries who possess the resources in question.
A further category of damage arises from trans boundary pollution, e.g. acid rain. Here the damage is physically located in the ‘importing’ country but caused by activity in the ‘exporting’ country. Trade restrictions as a weapon against the exporter are problematic since it may not be possible to target the product in question (e.g. electricity).
GATT is generally consistent with environmentally motivated trade restrictions (under certain conditions—see below) on products, but is wholly inconsistent with generalized retaliation for an environmental harm done through some industrial process.
Indeed, in terms of the distinction made above, GATT rules do not permit restrictions to be employed against processes or methods of production, only against products. In general, then, GATT does not acknowledge production externalities, only consumption externalities.
This is confirmed by the recent ruling in the Mexican tuna fish case which found against the USA for prohibiting imports of Mexican tuna fish because of the loss of dolphins in the nets used. That is, GATT ruled against a production externality being relevant to trade restrictions.
It also ruled against concern with extraterritorial physical impacts (the dolphin), although it appears that it is legitimate to employ an import tax against polluting goods if the same tax is applied domestically, regardless of the fact that the pollution from the imports may be physically outside the importing country.
If GATT was to be ‘greened’ to allow for production externalities it is clear that a massive potential would exist for countries to restrict trade on the grounds that they disapproved of the way other countries produce their products. From an economic perspective, however, such concerns, if legitimate, are no less real a cost than the damage done from consuming a polluted import
(d) Are Trade Restrictions Justified on Environmental Grounds?
GATT accepts that the trade weapon can be used where a product generates an environmental cost in the importing country. From an economic standpoint such a cost arises if the import contains ‘more pollution’ than the domestic product, i.e. fails to meet the domestic environmental standard. GATT, however, is wary of allowing domestic standards to be used as a weapon to raise the cost of imports.
To date, there is considerable ambiguity over the use of standards as trade weapons. GATT recommends the international harmonisation of standards to ensure a ‘level playing-field’. Economic analysis suggests that harmonized standards are not economically efficient since countries vary in their environmental preferences and in their resource endowments.
But even if harmonisation is accepted as a general goal, it is not clear at what level harmonisation should occur. Left to a political process, any country failing to meet an agreed standard could be accused of providing an implicit subsidy to their exports.
This might be challenged under the Subsidies Code, although no case of this has yet occurred. There is a need to clarify just what constitutes a subsidy. Moreover, subsidies are typically not consistent with the Polluter Pays Principle (PPP) of OECD.
Environmental taxes are, in principle, consistent with GATT. However, environmental taxes can be justified for processes as well as for products’, whereas GATT is clear in opposing the extension to processes, although there are some debates about this. Moreover, environmental taxes ought, if they are to be efficient, to vary according to the pollution content of the import.
But such a variable tax would be illicit under GATT since it must be non-discriminatory between ‘like goods’. It can be argued that GATT needs clarification about the meaning of ‘like goods’ in the environmental context, i.e. that environmental characteristics should be used 10 distinguish goods. Once again, however, the prospect is one of virtually endless debate and dispute if this was to happen.
(e) GATT and International Environmental Agreements:
There is an understandable concern that GATT’s disallowance of trade restrictions—except in strict circumstances—could make compliance with international agreements more difficult. Such agreements might use trade restrictions as a weapon for compliance.
Up to 1994, only 19 out of 170 international environment agreements make use of trade weapons to ensure compliance, but these include the Vienna Convention for the Protection of the Ozone Layer (1985); the Montreal Protocol on Substances that Deplete the Ozone Layer (1987); the Basel Convention on the Control of Trans boundary Movements of Hazardous Wastes and Their Disposal (1989) and the Convention on International Trade in Endangered Species (CITES) (UNCTAD, 1991).
It would seem worthwhile establishing clear guidelines in GATT which separate out this context of trade restriction from all others.
The distinguishing features would seem to be:
1. That the restrictions are explicitly to secure compliance with, or the working of, an international agreement;
2. That they are necessary to the agreement in that other compliance incentives are not likely to be available;
3. That the trade restrictions would be collectively enforced by the signatory countries; and
4. That the ‘same conditions prevail’ clause of GATT differentiates non-signatory countries from parties to the agreement (i.e. non-signatories face different conditions).
In respect of (iv), however, a contracting party to GATT who is not a contracting party to an environmental agreement might challenge trade restrictions imposed through the environmental agreement on the grounds that GATT members may not vary the rights of third parties.
A possible mechanism for bringing international agreements into GATT is via Article XX(h) which provides an exception for measures undertaken:
In pursuance of obligations under any intergovernmental commodity agreement which conforms to criteria submitted to the Contracting Parties and not disapproved by them or which is itself so submitted and not disapproved.
It may, therefore, be the case that the extension of ‘international commodity agreement’ to ‘international agreement’ generally would provide the safeguard for the use of trade sanctions as weapons of compliance with such agreements.
The option of using (XXh) in this way has been advocated by the German government and by the World Wide Fund for Nature. The Mexican tuna fish panel resolution also indicated that multilateral agreements were once of the options open for the USA to protect tuna outside its territory, suggesting that, if the Panel’s rulings are adopted, that GATT is likely to approve of such agreement.
(f) Clarifying Clause XX:
Clause XX of GATT is the clause most in need of clarification under a new WTO from an environmental standpoint. The term ‘environment’ is not used, although it does appear in the Standards Code. Even a phrase like ‘exhaustible resource’ is unclear.
Its original intent may have been to refer to non-renewable resources, but all resources are exhaustible in one sense or another. Clause XX (b) could be modified to include the phrase ‘the environment’, although the prior requirement (the ‘chapeau’) of the Article requires that all restrictions should be applied in a non-discriminatory way and must not be disguised protectionism.
(g) Overall Features of GATT:
The presumption in GATT is that the benefits of free trade exceed the environmental costs of free trade. But this is an empirical issue, and not an article of faith. GATT is on much stranger ground by insisting that trade restrictions are only justified when they are ‘necessary’ or related to other objectives.
Trade restrictions are generally unlikely to be the most efficient way of tackling environmental problems. But for compliance with international agreements they may well be the only way—given the absence of world government. As such, international agreements warrant special and explicit attention.
The remaining observations are that:
(i) The lack of clarity in the wording of GATT and the associated Codes may work to the detriment of both free trade and the environment, and
(ii) The strict focus on product damage omits most of the important environmental costs being generated by the production of goods for world trade.
In general, however, reforming GATT to take account of production externalities would almost certainly do more harm than good.