WTO Philosophy: Environment

Table of contents

Introduction

There are plenty of accusations that the WTO either does not prevent or actually promotes environmental damage1 There are three main strands of criticism.

  1. Striking down of environmental laws under WTO regulations about Non Tariff Barriers (NTBs). This normally concerns domestic laws that restrict imports.
  2. Failure to promote (or even opposition to) pro-environmental measures.
  3. The WTO’s attention to growth in the traditional economic sense is to the detriment of environmental concerns, at bottom because traditional conceptions of growth are not attentive enough to environmental issues.

Both 1 and 2 appear to be practical issues but I feel primarily relate to the question of having NTBs and their relation to domestic environmental regulation and so will be dealt with here. Initially it will be helpful to focus on the bigger issue of the environment and international trade in general and then to focus on the specific issue of the WTO. Issue 3 is better dealt with in the section on the WTO’s free trade philosophy and the associated economic issues and will not be addressed here.

Some Examples

First let me provide a few illustrative examples of trade issues that involve the environment. These issues arose in disputes and some of them come from disputes relating to the GATT before the WTO came into existence. These summaries are derived from [3d], [1:398ff]

  1. Venzuela, Brazil versus US: gasoline: The dispute arose out of complaints by Venezuela that US regulations discriminated against imports of gasoline. Specifically that the US was applying stricter rules on the chemical composition of imported as opposed to domestically refined gasoline. The facts were as follows:
    “Following a 1990 amendment to the Clean Air Act, the US Environmental Protection Agency (EPA) promulgated the Gasoline Rule on the composition and emissions effects of gasoline, in order to reduce air pollution in the US. From 1 January 1995. . . , the Gasoline Rule permitted only gasoline of a specified cleanliness (“reformulated gasoline”) to be sold to consumers in the most polluted areas of the country. In the rest of the country, only gasoline no dirtier than that sold in the base year of 1990 (“conventional gasoline”) could be sold.
    The Gasoline Rule applied to all US refiners, blenders and importers of gasoline. It required any domestic refiner which was in operation for at least 6 months in 1990, to establish an individual refinery baseline, which represented the quality of gasoline produced by that refiner in 1990.The Environmental Protection Agency also established a statutory baseline, intended to reflect average US 1990 gasoline quality.The statutory baseline was assigned to those refiners who were not in operation for at least six months in 1990, and to importers and blenders of gasoline. Compliance with the baselines was measured on an average annual basis.” [3d1]
    Thus the key point was that imported gasoline would automatically be assigned the base line cleanliness (and would therefore not be eligible for sale in some areas) while domestic refiners would have the opportunity to have their quality properly measured on an individual basis.
    In their defence the US argued that:
  1. this approach did not violate Article III (national treatment).
  2. That if it did this violation of Art. III was justified under Article XX as a measure ‘necessary’ to protect life and health or as ‘relating to’ the conservation of natural resources (air quality in this case). And, that this trade-restrictive manner of pursuing this goal was adopted “as verification and compliance would be very difficult to execute with respect to individual baselines for foreign refineries, given the way that gasoline is shipped as a fungible commodity and the lack of US regulatory control ofver foreign refineries.” [1:414]
    The US lost the case and the appeal though there was disagreement between the panel and the Appelate body over legal reasoning. See [1] or [3d1] for the details.

Trade and the Environment - Theory

  1. Environmental Justifications For Trade Restrictions
  2. Environmentally Based Trade Restrictions And The International Trading System

Environmental Justifications For Trade Restrictions

We are considering the use of trade policy to achieve environmental ends. The discussion consists of two stages. First we establish the grounds for using trade policy for environmental ends. Then we discuss the tensions between such restrictions and the free trading ideal and the balance that should be struck. Following [1:Chpt 15] We first distinguish between the use of trade policy (normally restrictions on trade)

  1. To protect the domestic environment of the importing state
  2. As a response to the environmental policies of other states. We further distinguish within this category between environmentally based trade restrictions related to: 1. Environmental Aims. For example the use of trade sanctions as an enforcement mechanism for the Convention on International Traffic in Endangered Species (CITES) or the trade restrictions in the Basel Hazardous Wastes Convention. 2. Competitiveness. For example fair traders who believe laxer environmental standards in other countries are an unfair competitive advantage that is damaging to domestic industry.

2b: The competitiveness justification. In my view this is a very weak justification for the use of trade restrictions. The central problem that occurs with this kind of justification is the establishment of an appropriate set of objective environmental standards and of measuring compliance with them. Without such objective benchmarks the implicit assumption is that the domestic country’s standards are optimal both domestically and globally which is by no means clearly true. Second the actual competitive disadvantage as a consequence of environmental regulation may in fact be very small (or even an advantage rather than a disadvantage) and in any case is very difficult to calculate (see [2] for an in depth discussion of this very issue). Moreover even if we lived in a world of completely harmonized environmental standards different countries would not face the same costs of compliance due to the widely differing social, technological, demographic and geographic situations. These factors not only make the competitiveness argument extremely difficult and costly to implement but also make it particularly susceptible to protectionist abuse. Thus one is led to conclude that this is not an argument that should be considered in justifying the use of trade restrictions.2 for a further discussion particularly relating to wages for unskilled workers)
1: The use of trade measures to protect the domestic environment of the importing state. Here we are on much sounder ground. As long as the restriction is pursued in a evenhanded manner (i.e. the principle or regulation justifying the trade restriction is being applied equally to the domestic market) it is, in my view, perfectly legitimate to use trade restrictions to pursue environmental ends (however see following paragraphs for discussion of choice of policy instruments in the case of alternatives and of the trade off between trade restrictions and the principle of open trade).
2a: Use of trade restrictions to alter the environmental policies of other states for environmental reasons. What justification’s can their be for interference in another state’s affairs in this manner (other than straightforward paternalism of the kind ‘We know better’ which is unlikely to cut much ice with those upon whom these restrictions are imposed)? There are the following reasons: (following [1:422])

  1. Externalities. A situation where the costs of economic activity in country A are borne to some extent by country B, i.e. country A has externalized some of the costs. For example acid rain though caused by country A may fall in country B. Externality justifications are in fact the only ones that occur but I include the following two points separately for clarity. Both II and III are focus particularly on the difficulties of adequately defining property rights (of course this combined with other informational problems are the crux of all externality problems).
  2. Global Environmental Commons. The global commons include, for example, Antarctic, the high seas, the electromagnetic spectrum, the stratospheric ozone layer and the global climate system. Again the point is that the costs of damage (or improvements) done by country A are felt by country B (for example pollution of the world’s oceans).
  3. Shared Natural Resources. That is physical or biological systems not entirely within the jurisdiction of a single state. For example fish stocks, some oil reserves, complex ecosystems. The crucial point is that ‘Property rights to these shared resources cannot easily be assigned on a purely territorial basis, and therefore each sharing state has an interest in the practices and policies of each other sharing with respect to these resources.’ [1:422]

Thus there are several good justifications for using trade policy to intervene in the environmental policies of other states. However there are several qualifications of this conclusion. First is the question of whether economic sanctions are an effective way of pursuing this goal compared to alternatives such as negotiation or eco-labelling3. Second is the issue of trade off between this ability to sanction and the effect of this on the trading system’s integrity. This general issue is dealt with below and it is to this that we now turn.

Environmentally Based Trade Restrictions And The International Trading System

The (WTO based) international trading system is based on several key principles:

  1. Commitment to free/liberal trade
  2. Transparent and open set of rules and dispute settlement procedures
  3. Objectivity (by this I mean individual countries cannot simply make up the rules themselves - this is almost a tautology in any trading system)

Environmental trade restrictions conflict with all 3 of these principles:

  1. Restrictions be they tariffs or regulations are barriers to trade
  2. Environmental restrictions involve complex issues of cost and measurement and added legal complexity
  3. Often there will be difficult issues of who establishes the cost and consequences of a particular environmental problem and its regulation.

Point 1 is not a significant issue since we have shown there are good reasons for treating these environmentally based trade restrictions as exceptions to the general rule. Points 2 and 3 provide greater difficulties particularly as it is these principles which guard against protectionist manipulation of the rules 4. The best solution to this tension is, in my view, to provide in international agreements:

  1. Clear rules and guidelines relating to environmentally motivated trade sanctions
  2. Clear, independent, and objective methods for determining breaches of these provisions.

This prevents protectionist abuse while at the same time providing real and substantive methods of dealing with important and serious environmental concerns. This will mean that there are limitations on a country’s ability to pursue environmental ends by trade policy solely through its domestic legislative process. This is something that is often upsetting to environmental campaigners (particularly in North America) who view it as unwarranted restriction of democratic legislation. Unfortunately, in my view, this is a trade off that must be made for the greater long-term health of the international trading system. Moreover it is to be hoped that these environmental goals can be vigorously pursued both through other methods than sanctions and in a suitable international arena 5.

Trade and Environment in the WTO

Introduction

The WTO as can be seen does concern itself directly with the environment. However it must be acknowledged that the progress is slow. Why is this? Simply put, it is that many countries, especially poorer, developing ones, do not want any increasing environmental regulation. For example on eco-labelling, something strongly supported by developed countries such as Germany, there has been little progress because of the opposition of developing countries. For they see it as being indirectly discriminatory (the bureaucracy and tracing required is much a greater burden on a less developed country than on a developed one) and perhaps also directly opposed to their interests (in that eco-friendly farming methods such as organic farming are more widely adopted and promoted in the developed world at present). It is also that on the trade agenda environment figures a fair way below other concerns, particularly those seen as having direct economic affects - things such as agricultural protectionism and trade in services.

WTO Institutions

Many environmental issues had already arisen in connection with GATT and the associated disputes. Thus when the WTO came into existence a special Committee on Trade and Environment (CTE) was created in 1995. Its mandate is:

  • ‘to identify the relationship between trade measures and environmental measures in order to promote sustainable development’
  • ‘to make appropriate recommendations on whether any modifications of the provisions of the multilateral trading system are required, compatible with the open, equitable and nondiscriminatory nature of the system.’ [3a] They have the following 9 items on the agenda as of autumn 2002:
  1. Trade rules, environmental agreements, and disputes - the relationship between the rules of the multilateral trading system and the trade measures contained in multilateral environmental agreements (MEAs), and between their dispute settlement mechanisms.
  2. Environmental protection and the trading system - the relationship between environmental policies relevant to trade and environmental measures with significant trade effects and the provisions of the multilateral trading system.(e.g. trade-related environmental policies: subsidies, and the environmental review of trade agreements).
  3. How taxes and other environmental requirements fit in - the relationship between the provisions of the multilateral trading system and: (a) charges and taxes for environmental purposes; and (b) requirements for environmental purposes relating to products, such as standards and technical regulations, and packaging, labelling and recycling requirements. (eco-labelling, handling requirements and environmental charges and taxes).
  4. Transparency of environmental trade actions. The provisions of the multilateral trading system with respect to the transparency of trade measures used for environmental purposes.
  5. Environment and trade liberalization - the effect of environmental measures on market access, especially in relation to developing countries, in particular to the least developed among them, and the environmental benefits of removing trade restrictions and distortions.
  6. Domestically prohibited goods. The issue of exports of domestically prohibited goods (DPGs), in particular hazardous waste.
  7. Intellectual property - the relevant provisions of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).
  8. Services - the work programme envisaged in the Decision on Trade in Services and the Environment.
  9. The WTO and other organizations - input to the relevant bodies in respect of appropriate arrangements for relations with intergovernmental and non-governmental organizations (NGOs) [Source = 3b]

(For more information see [3])

See specific section on WTO website [3c]. In particular Article XX of GATT:

References

  1. Trebilcock And Howse 2001 (see docs page)
  2. Author = ‘Adam B. Jaffe, Steven R. Peterson, Paul R. Portney, Robert M. Stavins’; Title = ‘Environmental Regulation and the Competitiveness of U.S. Manufacturing: What Does the Evidence Tell Us?'; [JEL, Vol. 33 Issue 1 (March 1995) pps. 132-163]
  3. WTO Website pages: 1. Trade and Environment Section on WTO website 2. Agenda of the WTO Committee on Trade and Environment 3. Relevant WTO provisions: Texts 4. Environmental disputes in GATT/WTO
    1. Venzuela, Brazil versus US: gasoline
  4. Hakan Nordstrom and Scott Vaughan; WTO Special Studies 4: Trade and the Environment [WTO 1999]. See docs page. A more economics influenced perspective.
  5. Symposia: Income Inequality And Trade in The Journal of Economic Perspectives; Summer 1995; Vol 9. No.3: 1. ‘Are Your Wages Set in Beijing?'; Freeman, Richard; pp. 15-32 2. ‘Income Inequality And Trade: How To Think, What To Conclude’; Richardson, David; pp. 33-55 3. ‘How Trade Hurt Unskilled Workers’; Wood, Adrian; pp. 57-80
  6. ‘Sanctions: Neither War Nor Peace’; Davis, Lance + Engerman, Stanley; Journal of Economic Perspectives; Spring 2003; Vol 17 No. 2; pp. 187-197

Last Updated: 14-Nov-2002
Created: 11-Apr-2002
IP Policy

  1. Two examples among many being:

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  2. The effect on employment, particularly for unskilled labour, in developed countries of trade with developing countries such as China or Mexico has been an issue raised in both economic and populist circles in recent times . It is often alleged that trade with developing countries has had a significant impact on employment and wages (especially of unskilled labour) in the developed country due to this low cost competition. This may simply be due to having a large supply of unskilled labour or other factor endowment differences but it also often claimed that it is due to the lower environmental, safety and labour standards in the developing countries.
    I do not intend to provide anything like a full review of an already extensive literature but rather a very brief summary. Similar can be found in [5] which provide a much more in depth guide to further reading than I shall. (Also see [2] in relation to environmental issue).

    1. --
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  3. ‘Overall the evidence suggests that trade sanctions are of limited but real effectiveness, and in this respect they are no different from other, more extreme forms of coercive action such as military force where the record of effectiveness is also extremely mixed.’ [1:423]. See also [6] ↩︎

  4. ‘Even in the presence of indeterminate welfare effects, free traders might still reject envrionmental trade measures on the basis that such measures, if widely permitted or entertained, would significantly erode the coherence and sustainability of rule-based liberal trade. . . This is based on the notion that the legal order of international trade is best understood as a set of rules and norms aimed as sustaining a long-term cooperative equilibrium, in the face of on-going pressures to cheat on the equilibrium, given that the short-term political pay-offs from cheating may be quite high (depending, of course, on the character and influence of protectionist interests within a particular country, the availability of alternative policies to deal with adjustment costs etc.). In the presence of fundamental normative dissensus as to what constitues ‘cheating’ on the one hand, and the punishment of other’s cheating on the other, confidence in the rules themselves could be fundamentally undermined, and the system destabilized.’ [1:428] ↩︎

  5. In the construction of multilateral institutions to deal with environmental issues there are several important issues.

    1. Ensuring adequate democratic control and openness to scrutiny (especially important in ensuring objectivity and fairness in decisions). Once step distant from domestic politics as these institutions are it is particularly important to promote awareness and participation.
    2. Strong emphasis on cooperative solutions if possible.
    3. Adequate balance between the formation of small group agreements and full multilateral agreements (agreements requiring the assent of many countries can be vulnerable to free rider problems and paralysis due to creating consensus among many different interests).
    4. Provision for differential application, for example to allow developing countries greater time and leeway in conformance.
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