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Email this citationCIAO DATE: 07/01
Environmental Sustainability and The Global Trading System
Richard Eglin *
March 25, 1997
Introduction
Linking the subjects of international trade and the environment has produced one of the most muddled debates about economic policy-making that the WTO has had to deal with.
The WTO is presented by some as "GATTzilla", wreaking environmental havoc by liberalizing trade and obstructing environmental policy-making with its strict disciplines on when and how trade restrictions can be used.
I will put forward a different view. It is that liberal trade is a sine qua non for generating environmentally and socially sustainable, economic development. Far from acting as an obstacle to environmental policy-making, the trade disciplines of the WTO are beneficial. They help govern-ments to formulate efficient and effective environmental policies and to avoid having their policies captured by "green" protectionists.
Liberalizing Trade
Open market economies are best equipped to take care of their environmental resources properly. There are a number of reasons for that.
The most important by far is that these economies allocate their resources more efficiently on an international scale, spurred on by vigorous competition in markets undistorted by trade restrictions. That encourages innovation, technological progress and productivity gains, and it allows the greatest increase in the quality of the environment to be supplied at the least cost. The more efficiently governments set about protecting the environment, the cheaper it will be to protect and the more demand there will be for it.
A second reason is that these economies get richer more quickly and generate wealth that can be spent on environmental protection. In developing countries, poverty is the principal cause of environmental degradation, as resources are exploited to meet today’s basic needs. Higher incomes are a clear bonus for just about every policy objective in developing countries, including protecting their environments. The notion of raising incomes even higher in industrialized countries is uncomfortable for those who believe environmental degradation stems from excess consumption, for example through high energy use and conspicuous consumption of scarce environmental resources. However, it is what is consumed rather than how much that is at the root of the problem, and that depends on relative prices. The solution lies in pricing environ-mental resources properly through appropriate environ-mental policies. There is no excuse in the OECD countries for fudging that challenge. Political will is needed, not economics.
The contribution of trade liberalization can be made not only in a general sense, but also at the level of specifics. Some trade restrictions and distortions impact adversely on the environment. Increasing market access then goes naturally hand-in-hand with better environmental protection. The results of the Uruguay Round negotiations provide a ready source of inspiration in this respect: reducing tariffs and tariff escalation and removing non-tariff barriers to trade in environmentally friendly goods and services; providing developing countries with improved market access for higher value-added products to relieve the pressure they face currently to exploit their natural resources or specialize in low value-added, environmentally sensitive activities; disciplining and reducing trade distorting and environmentally damaging subsidies, for example for energy production; reforming agricultural trade policies and reducing high levels of farm support; and encouraging the spread of environmentally sensitive technology through enforcement of intellectual property rights. The challenge for the WTO is to examine how these advances can be taken further, both within traditional areas of market access and more creatively through incorporating into the international marketplace environmental services which, although already traded, are not for the time being assigned any market value nor paid for: good examples are gas absorption and biodiversity protection services exported by countries with large forest resources.
Markets And The Environment
Free market forces alone will not do the job of protecting the environment as long as so many environmental resources are unpriced or underpriced in relation to the value that society attaches to them. That is not an argument in favour of foregoing the benefits of economic growth and development until proper environmental policies are in place. Instead, government intervention is needed through taxes and regulations to "get the prices right" so that markets can allocate environmental resources efficiently.
Those concerned about the WTO trade rules getting in the way of environmental policy-making should note that government intervention is not anathema to the WTO: it is not about free trade at any price. A wide range of trade-related measures, taxes and regulations can be applied by WTO Member governments to protect environment resources without running a risk that they will face a commercial challenge under WTO rules. The proof is there, in the extensive environmental legislation that OECD countries have in place already. If the WTO were even half the obstacle to environmental policy-making that it is sometimes made out to be, it would be swamped by environment-inspired trade disputes. Yet it is not. The main requirement in all cases under WTO rules is that trade-related policies must not discriminate between domestic and foreign producers: it is hard to believe that environmental policies must be discriminatory in order to be effective.
Whether more traditional trade restrictions such as tariffs or quotas have any useful role to play in getting the prices of environmental resources right can be analyzed most fruitfully from the point of view of the efficiency of different policy instruments. In the vast proportion of cases, it is production and consumption, not trade, which is at the source of environmental problems that are linked to economic activity; efficient policy solutions involve influencing production and consumption decisions in their entirety and at their source, not just the part of them related to traded goods and services as they cross national borders.
Restricting Trade
The conclusion that trade restrictions are inappropriate for addressing environmental problems needs the qualification "generally", since there can be situations where the source of an environmental problem lies at a country’s national frontiers, in which case some form of import or export restriction may be called for, or in the functioning of the world market, in which case a cooperative approach by importers and exporters involving a mix of trade restrictions may be an efficient policy response. In order the shed light on what those situations might be, the following three sections review arguments that have been made for using trade restrictions for environmental purposes.
Enforcing Domestic Environmental Policies To Protect National Environmental Resources
Governments have to be able to enforce their environmental policies with respect to imported products as well as domestically produced products if they are to protect national environmental resources. Eco-labelling, eco-packaging and waste handling policies are typical of the new generation of environmental policies that affect imports as well as domestically produced goods and services; they can be accommodated perfectly happily under WTO rules. On the export side, governments may wish to reinforce their domestic production and sales controls through export restrictions, which again can be done by a WTO Member government.
In such cases, trade restrictions are not the principal policy instrument. That role is filled by domestic resource management policies. The proper way to correct the environmental problem of consumption pollution at its source is a consumption restriction (e.g., ban sales of leaded petrol). A corresponding trade restriction is necessary because without it a new market distortion would be created at the border in the form of an excess supply of the polluting product.
This case for using trade restrictions efficiently for environmental purposes hinges on the fact that it is consumption pollution of domestic environmental resources that is at stake. The same results do not hold when the problem is production rather than consumption pollution nor when the resources in question belong to another country.
In the first instance, there is no logic in restricting imports of a product from abroad because the foreign producer is polluting his own environment through his production methods but not affecting yours. Not only would a trade restriction raise prices and reduce economic welfare in the importing country, without delivering any improvement in environmental quality there, it would have no predictable effect on reducing production pollution in the exporting country. The efficient policy solution is to address the production pollution at its source, for example with the financial and technological support of the importing country to raise the production standard of the exporting industry, without introducing along the way all of the market distortions that result from the use of trade restrictions. As for restricting trade to punish another country for not protecting its own environmental resources properly, not only is this contrary to the basic international legal principle of respect for national sovereignty (and to WTO rules), but also the policy approach is economically inefficient and the result is again ambiguous: it may work if the United States restricts imports from Mexico, for example, but the reverse is unlikely, and the history of the use of trade sanctions for coercive purposes is replete with examples of unfulfilled expectations even for the major trading powers.
Competitive Issues
Arguments for restricting trade because an importing country does not approve of the processes and production methods (PPMs) used by foreign suppliers sometimes crop up under the guise of "competitiveness". The adoption of new environmental legislation can result in an increase in production costs for domestic industries and fears of a loss of competitiveness vis-a-vis producers in other countries that are not subject to equivalent environmental standards. That may lead domestic producers to resist any increase in environmental standards, or to demands that trade taxes or subsidies be imposed to compensate them for the higher costs they incur. One example is the demands of some environmental groups for the introduction of "eco-dumping" duties on goods produced in a polluting way. This brings out real fears among governments and in the trade community of the misuse of trade policy for "green" protectionist purposes.
In fact, there is little empirical evidence to suggest that serious competitiveness problems do arise. World Bank and OECD studies have concluded that on average environmental costs do not make a significant difference to industry competitiveness, and the major business groups in the United States and Europe are on record as dismissing arguments for resorting to trade restrictions or subsidies in such circumstances.
Even if problems of competitiveness were found to be of real concern in business circles, for example among highly polluting industries facing stiff price competition from abroad, the question remains whether trade restrictions are an effective way of dealing with them. If, as has been suggested above, they will not act predictably to change an overseas producer’s production methods, their environmental benefit is dubious at best and the argument for using trade restrictions boils down essentially to one of providing protection against foreign competition. The reason for lack of international competitiveness, whether environmental or something else, is then secondary. WTO rules already provide possibilities for providing some form of non- discriminatory and temporary protection to industry, for instance through safeguard action, and it hardly seems necessary to invent and bless a new protectionist instrument with a specifically green label attached to it.
Transboundary Pollution And The Global Commons
A key element of designing an efficient policy solution to transboundary or global environmental problems is cooperative, multilateral action by all countries affected by the problem. That was the approach endorsed at the highest political level at the "Earth Summit" in Rio in 1992. Its appeal is quite evident from the point of view of the WTO which is dedicated to finding cooperative, multilateral solutions to trade problems. There are over 200 international environmental agreements in existence, suggesting that they are definitely a practical option. Unilateral action by each country acting independently is less likely to produce results, and to the extent it involves trade restriction it is likely to run afoul of WTO rules.
The problem of tropical deforestation is a good example of why those rules make sense, and indeed are a valuable point of reference for environmental policy-makers. There is a large degree of consensus that the cause of the problem is undervaluation of forests as international environmental resources, both in timber exporting countries and in final markets where timber is consumed. Policies need to correct for that by capturing and giving real economic meaning to the value attached to tropical forests as sinks for carbon absorption and as sanctuaries for the preservation of biodiversity. What role can trade restrictions play?
Unilateral trade restrictions on tropical timber (teak garden furniture, for example), for which loud demands have been made in recent years in a number of EC countries, will reduce supply to the markets of the importing countries and drive up prices there. From the point of view of tropical timber exporters, however, it is demand that has been cut while supply remains unchanged, and the price of timber and the value attached to the forests at their source will consequently fall. In other words, an already undervalued resource will be devalued still further, leading in all probability to an increase in its exploitation (for example by clearing forests to make way for the higher returns to land associated with grazing cattle).
That is surely a perverse result, given what the import restrictions set out to achieve. The reason is that no attention was paid to cooperative action by both the importing and exporting country, and therefore to resource management policies at the source of the problem. These hold the key to proper pricing of environmental resources. Local production and sales restrictions on tropical timber are needed. They may be backed up by export restrictions, and import restrictions in importing countries may then play a role in reinforcing the monitoring and effectiveness of the export restrictions to ensure there is no leakage in the system (by curtailing smuggling, for example). On their own, however, without the local production and sales restrictions in place, import restrictions will not work.
About twenty international environmental agreements in effect today contain trade measures (e.g. the Montreal Protocol, CITES and the Basle Convention). The WTO rules provide scope to apply these measures, and none of them has ever been challenged under the GATT or WTO dispute settlement procedures.
Endnotes
Note *: Richard Eglin, with a doctorate in economics from Jesus College, Cambridge, worked for the International Monetary Fund in Washington D.C. from 1977 to 1985. In 1985 he joined the Economic Research Division of the GATT Secretariat and in 1987 was given the responsibility of supporting various aspects of the Uruguay negotiations, in particular, investment measures and functions of the GATT system. Dr. Eglin, at the time of this presentation, was Director of the Trade and Environment Division of the WTO Secretariat, covering WTO work on Technical Barriers to Trade, as well as on Trade and Environment. He took up this assignment in 1991 at the start of the GATT work program on trade and environment. He has been closely involved in the work of various GATT/WTO bodies active on the subject of environment-related trade disputes; GATT's contribution to UNCED; the GATT symposium on trade, environment, and sustainable development; and the negotiation of the Ministerial Decision on Trade and Environment in Marrakesh in April 1994. The last forms the basis for the current WTO work program in this area. Back.
