Critical relationship between trade and environment

The interlinkage between trade and the environment has become an increasingly important issue in international trade relations. Growing awareness of the need to protect the environment and promote the sustainable development of available resources has led to a rise in environmental policy measures.

Such measures are normally implemented by governments through regulatory or economic instruments. In some cases, both types of measures are used. The main regulatory measures are also known as ‘Command and Control Measures’. Economic measures include taxes on products that are hazardous or harmful to health; emission charges and other price-based measures and environmental subsidies.

In comparison to regulatory measures, economic measures offer, in theory at least, several inherent advantages: greater cost-effectiveness, permanent incentives to reduce pollution and revenue sources for the government.

However, in practice, for both economic and administrative reasons, governments may consider direct regulation and control more appropriate and effective in certain situations. For example, regulatory measures may be adopted where the emission of certain pollutants or the use of hazardous products or substances must be completely prohibited.

In some situations, regulatory measures may be supplemented by economic measures to strengthen enforcement.

A country’s choice of measure-whether regulatory or economic –depends on the strengths and weaknesses of its political and administrative structures, and should be determined on a case-to-case basis. Such choices should take into account factors such as the measure’s environmental effectiveness, economic efficiency, administrative feasibility and costs, equity and acceptability to the public.

The environmental policy measures taken by governments can affect trade in several different ways. Firstly, there are apprehensions that environmental standards may change the conditions of competition. Producers in countries with stricter environmental standards worry about the impact of such standards on their costs and their ability to compete in the world markets.

Second, producers in countries with less stringent standards, especially the developing countries and economies in transition fear that their products may be subjected to trade measures on the ground that they have been produced by industries which do not meet the higher pollution or emission standards of importing countries. Any such measure, whether in the form of a compensatory tax or outright prohibition of or a restriction on imports, would amount to a unilateral assertion of jurisdiction over environmental practices and priorities of other countries.

Thirdly, there has been a growing public concern with the global commons, species diversity and the treatment of animals. From the viewpoint of trade policy, this has raised a question as to whether international environmental agreements dealing with global environmental issues should contain provisions that require countries to restrict trade with non–parties, to force them to join such agreements.

The Agreement Establishing the World Trade Organization brought “trade-related aspects of environmental policies” clearly within the WTO mandate. The preamble to the Agreement states that its objective of “raising standards of living and ensuring full employment” by “expanding the production of and trade in goods and services” is to be achieved by making “optimal use of the world’s resources by the objective of sustainable development, seeking both to protect and preserve the environment in a manner consistent with the needs and concerns at different levels of economic development.

The main operational provisions governing trade measures taken by governments for environmental reasons are contained in GATT 1994. However, GATT does not carry direct references to environmental matters, mainly because the full implication of environmental and ecological degradation resulting from pollution or over-exploitation of natural resources was not known to GATT.

In addition to the provisions of GATT 1994, certain provisions of some of the associated WTO Agreements are relevant to the interrelationship between trade and the environment. These include provisions on standards in the Agreement on Sanitary and Phytosanitary (SPS), Technical Barrier to Trade (TBT), and provisions on subsidies in the Agreement on Subsidies and Countervailing Measures (SCM) and Agriculture.

The main responsibility for WTO’s work on trade and environment is assigned to a permanent Committee on Trade and Environment. Discussions on the implication for Trade of measures taken place by countries for environmental purposes in the Committee. The Trade issues that impact the environment are addressed in the light of the provisions of WTO law at the Committee.

Every sovereign country has the right to set standards for imported goods to protect domestic industries along with the protection of the environment and the health and safety of its people or life of its animals. However, the SPS and TBT Agreements require countries to use international standards in formulating such standards. But the rules of the SPS and TBT Agreements do not allow prohibiting or restricting imports on the ground that the imported good has not been produced following the PPM standard set for domestic industries. The Agreement on TBT stipulates that a country may prohibit imports of a product when the PPM is used to affect the characteristics or quality. Despite WTO Law, pressure from environmental lobbies is forcing governments to introduce laws which have an impact on trade because imports are then restricted on the ground that they have not been produced according to PPM standards imposed by laws. There are many examples where restrictions are imposed to regulate trade to protect the environment. For example, Netherland allows imports of wood only when the imports are accompanied by a certificate that the wood has been obtained from the forest that is managed sustainably. Similarly, the EU bans Furs obtained from animals, US restricts Tuna imports unless measures are taken to protect dolphins. However, at the Dispute Settlement Body, US actions on Tuna imports failed to sustain under the general exceptions allowed by Article XX, as they are applied on a discriminatory basis and constituted an unjustifiable barrier to trade.

Packaging can be defined as a material or item that is used to protect or contain a commodity or a product. The main environmental objective for which packaging requirements are being adopted is to reduce the amount of packaging that enters the waste stream, particularly packaging that has to be disposed of through incineration or landfills. It is estimated that about 30 per cent of the waste generated by households in European countries is packaging waste. Most of these countries are running out of landfill space. As such the new regulation aim at encouraging domestic manufacturers, importers and foreign companies to reduce the packaging waste that has to be disposed of, inter alia, by requiring them to reuse the packaging material several times and to recycle the material which cannot be used more than once. In addition, packaging requirements may be adopted to reduce the resource intensity of packaging discouraging the use of materials requiring energy, water or air intensive processes or to control the risks associated with certain types of packages.

Even when packaging requirements are applied to produced and imported products, they may pose problems or difficulties to foreign suppliers, in the following situation:-

Where packaging requirements vary from country to country, foreign suppliers may have to incur higher costs in their exports.

Packaging requirements are often formulated based on the packaging materials in common use in an importing country and its waste facilities or priorities; such requirements may discourage overseas suppliers from continuing to use indigenous packaging materials.

Foreign suppliers, particularly in developing countries may find it difficult to comply with legislation in importing countries which imposes obligations related to the collection and reuse, recycling or final disposal of the packaging waste.

The TBT Agreement carries specific provisions on the packaging. The Agreement applies primarily to technical regulation specifying product characteristics. Such characteristics may include packaging or labelling requirements as they apply to a product, process or production method.

Recent years have seen a marked increase in the use of environmental labels on products or packages to highlight their environmental attributes or features. Although such labels are voluntary, manufacturers and retailers do that to capture markets for their products. They do so as a marketing technique to promote sales.

Foreign suppliers in developing countries may be exacerbated if the criteria are influenced by the domestic industry. Consumption and other taxes are imposed for the protection of the environment. Internal taxes and other charges such as consumption taxes, product charges, emission charges and administrative charges are being increasingly used for the attainment of environmental objectives. GATT rules permit countries to levy on imported products and internal taxes that are payable on like domestic products. In this regard procedures and regulations are outlined in Article III.2 of GATT.

There are more than 140 international environmental agreements, of which around 20 contain Trade provisions. They are grouped into three categories.

There is an agreement to control trans-border pollution or to protect the global commons. Examples, the Vienna Convention to protect the Ozone layer, the Montreal Protocol to control substances that deplete the Ozone layer and the agreement on Climate Change.

The important issue receiving attention is the relationship between trade liberalization Environmental protection and sustainable development. To a great extent trade liberalization is not the primary cause of environmental degradation nor is trade instruments the best policy to address environmental problems. Trade liberalization and environmental protection are mainly based on the pattern of production and consumption of the products.

Such a relationship results in more efficient factor-use and consumption patterns through enhanced competition. This also helps poverty reduction through trade expansion and the encouragement of a sustainable rate of natural resource exploitation.

As such developing countries have no option but to depend on trade for their economic development and protection of the environment.

The writer is former Director General of EPB. He can be contacted at hassan.youngconsultants@gmail.com