Trade-Environment Tensions

Options exist for reconciling trade and environment

by Paul Cough

Expansion of world trade and worsening regional and global environmental problems increasingly bring trade and environmental interests into conflict. North South tensions, in particular, have become acute, mainly because of differences in the scope, stringency, and cost of national environmental regulations.

These tensions and their root causes are addressed in the Rio Declaration (see box) and in Agenda 21. Trade and environment issues also figure prominently in the North American Free Trade Agreement (NAFTA), in the Uruguay Round of negotiations under the General Agreement on Tariffs and Trade (GATT), and in the work of such international bodies as the United Nations Conference on Trade and Development (OECD) and the Organization for Economic Cooperation and Development (OECD). This article examines the principal trade and environment tensions between developed and developing countries and describes some options for resolving them.

In 1991, a dispute settlement panel under the GATT found that a U.S. ban on imports of tuna from Mexico violated GATT rules. The ban v. as imposed because the Mexican tuna fleet's "incidental" kill rate for dolphins during tuna harvesting was higher than that permitted under the U.S. Marine Mammal Protection Act. The Act also regulates the U.S. tuna fleet's dolphin kill rate.

(Cough manages trade and environment issues and the OECD portfolio for EPA's Office of International Activities.)

The GATT panel ruled that the U.S. could not restrict tuna imports based on harvesting methods as long as the methods did not affect the product itself. It also ruled that the ban could not be justified under GATT provisions that allow import restrictions for the purpose of protecting "human, animal, or plant life or health" or to conserve exhaustible resources, because those provisions apply only to protecting life or health and conserving resources within the jurisdiction of the importing country.

The panel's report, which has not yet been adopted by the GATT Council, is very troubling to environmentalists, who are concerned that governments will be deprived of the use of trade restrictions to protect the regional and global environment. While in some cases alternatives may be available, such as assisting the exporting country in changing its production process, lifting the threat of trade restrictions may reduce the effectiveness of these alternatives. The questionnaires: Should countries be pressured by GATT rules to become part of the problem by providing a market for products made in an environmentally harmful way?

An important factor in the dispute is whether the environmental impacts of the production process are confined to the exporting country or whether they also affect other countries (especially the importing country) or the global commons. Also important is whether the country imposing the import restriction acts unilaterally, based on its domestic environmental laws, or whether it acts pursuant to an international agreement. In the tuna-dolphin case, the U.S. action was unilateral and was directed at harm to the global commons.

Developing countries, in particular, have characterized the unilateral use of trade restrictions to address the environmental impacts of production processes as "eco-imperialism" and a violation of their sovereignty. In general, countries are more receptive to the use of trade restrictions in connection with international environmental agreements, such as the Montreal Protocol on Substances that Deplete the Ozone Layer. However, it may not always be possible to negotiate an effective international environmental agreement.

The World Bank estimates that a 50 percent reduction in agricultural and industrial trade barriers erected by the developed countries u would increase developing countries' annual export earnings by $50 billion, which approximately equals the value of official development assistance provided by the developed countries. If concluded successfully, the Uruguay Round of GATT negotiations, discussed below, may significantly increase developing countries' export earnings by reducing such trade barriers, or protectionism.

Under GATT rules, countries are supposed to treat imported products "no less favorably" than comparable goods produced domestically. However, developing countries are concerned that some ostensibly environmental standards may actually be "green" protectionism--standards designed to favor domestic producers over foreign competitors.

The Draft Final Act of the Uruguay Round of the GATT contains new rules on the use of technical regulations and standards. These new rules would cover, for example, environment, health, and safety regulations pertaining to agricultural products, chemicals, and motor vehicles. The rules would require countries to use the least trade-restrictive means for achieving environmental objectives and, in most cases, to use relevant international standards instead of national ones. Environmentalists fear that international standards will become a ceiling rather than a floor, and will exert downward pressure on the environmental standards of developed countries. They are also concerned that a least trade-restrictive rule could be interpreted narrowly by GATT dispute panels, threatening domestic regulatory regimes.

Both developed and developing countries are concerned about the risks posed by international trade in hazardous wastes. This trade is addressed, in p art, by the Basel Convention on the Control of Transboundary Movement of Hazardous Wastes and Their Disposal. The convention came into force in 1992, but has yet to be ratified by the United States.

Trade liberalization makes it more likely that comparable goods produced under different environmental conditions will compete directly for market share. Environmentalists are concerned that trade liberalization may encourage countries to set low levels of environmental protection-- not only standards, but their enforcement--to reduce production costs and encourage foreign investment. This, in turn, may force other countries to lower their environmental standards to maintain the competitiveness of their exports.

For most environmental problems, the evidence indicates that environmental expenditures have a minor impact on international competitiveness. However, the impact of, say, a large carbon tax to reduce greenhouse gas emissions could be very significant if imposed by some countries and not by others.

Some suggest that countries with stringent environmental standards (primarily developed countries) should impose duties on imports from countries with not so stringent standards (primarily developing countries) to compensate for differences in expenditures on environmental protection. Should countries of the North and South have comparable standards to protect the environment, health, and safety? Sustainable development means, among other things, remaining "within the carrying capacity of supporting ecosystems"; carrying capacity varies from country to country, depending on climate, geography, and other factors, and ecosystems may span national boundaries. Countries also differ in the resources they have available for environmental protection and the priority they assign it compared to, say, improved nutrition. Should a distinction be made between standards that protect environmental carrying capacity, which varies from country to country, and standards that protect human health and safety?

The GATT came into force in 1948; it now has 107 "contracting parties," a majority of them developing countries. The GATT recognizes the urgency of raising the living standards of developing countries and of the "progressive development" of their economies. It promotes increased market access under favorable conditions for their processed and manufactured products. It asks contracting parties to expand trade with developing countries by harmonizing and adjusting "national policies and regulations ... [and] technical and commercial standards affecting production."

The Uruguay Round of GATT negotiations has been underway since 1986. A "Draft Final Act Embodying the Results of the Uruguay Round" has been prepared, but has not yet been agreed upon. If concluded successfully, the Uruguay Round may improve market access for developing countries in such areas as natural resource-based products, tropical products, agriculture, and textiles and clothing.

The North American Free Trade Agreement (NAFTA) between Mexico, the United States, and Canada was signed in December 1992 but has not yet been ratified by Congress. An environmental review of the draft agreement was performed by the United States (with EPA participation) and utilized in negotiations. NAFTA provides that obligations of international environmental agreements on stratospheric ozone depletion, hazardous wastes, and endangered species take precedence over NAFTA obligations, subject to certain conditions.

Promotion of sustainable development is one of the NAFTA's stated purposes. The NAFTA confirms that each country may set standards to achieve the level of environmental protection it deems appropriate. It discourages countries from relaxing environmental standards in order to attract investment. Important environmental issues not addressed in the NAFTA itself are being taken up in parallel and follow-up mechanisms, which include a pollution control program for the U.S.-Mexico border, a North American commission on the environment, and bilateral environmental agreements.

A number of options for reconciling trade and environmental interests are being studied and tested. The NAFTA and the parallel and follow-up mechanisms may offer a practical model for pursuing more open trade in concert with environmental protection. UNCTAD is developing case studies on trade-environment linkages in Brazil, Colombia, India, the Philippines, and Turkey and is examining the environmental impact of producing and processing commodities such as cocoa, coffee, and rice. The GATT's Working Group on Environmental Measures and International Trade is investigating the trade impacts of environmental regulations for product packaging and labeling, an issue of particular concern to developing countries. An OECD working group is developing guidelines for improving the compatibility of trade and environmental policies.

An especially promising option is for countries to conduct environmental reviews of trade agreements and trade reviews of environmental agreements as a standard procedure. Such reviews, conducted early in the negotiating process, should help reveal the environmental and economic implications of these agreements and foster public comment and debate on the issues that are revealed.

As to environmental risks from traded products, it has been suggested that countries adopt international environment, health, and safety standards. However, such standards, where they exist, may not provide an acceptable level of protection for countries that now have stringent domestic standards. One way to reduce trade barriers posed by product standards is to expand international cooperation on product risk assessment and testing, perhaps using as a model the OECD's cooperative program of investigation on chemicals and pesticides. This approach might or might not lead to a larger and more acceptable set of international environmental standards, but it would make it easier to distinguish between legitimate standards and "green" protectionism.

With respect to environmental risks from production processes, one alternative to trade restrictions is international cooperation on environmental labeling of traded products to reflect their life-cycle environmental impact, and thus influence consumer choice. Another option is to provide training and financial/ technical assistance to exporting countries to help them change processes that cause environmental harm. Promotion of trade in environmentally cleaner technologies deserves special attention, as does encouraging multinational corporations to apply their home country standards (if they are more stringent) to their operations in developing countries. As mentioned earlier, these options may work best if trade restrictions are available as a backup.

Finally, countries of the North and South could take concrete steps "to promote the internalization of environmental costs" in the prices of traded products, in keeping with Principle 16 of the Rio Declaration. Progress toward this goal would be a useful measure of the extent to which expanded trade contributes to sustainable development.

Additional information: On the policy intersect between trade and environment, EPA's National Advisory Council for Environmental Policy and Technology (NACEPT) has published The Greening of World Trade (March 1993), a 240-page report representing work carried out by the advisory group over a two-year period. It provides an overview of the policy issue through 12 in-depth technical supporting papers and recommendations of the Committee to EPA. Copies are available for sale for $14.00 from the Government Printing Office, Superintendent of Documents, Washington, DC 20402, GPO Order #055-000 00425-1; (202) 783-3238.

Trade and the Rio Declaration

"States have, in accordance with the Charter of the United Nations and the principles of international law, the sovereign right to exploit their own resources pursuant to their own environmental and developmental policies, and the responsibility to ensure that activities within their jurisdiction or control do not cause damage to the environment of other States or of areas beyond the limits of national jurisdiction." (Principle 2)

"States should cooperate to promote a supportive and open international economic system that would lead to economic growth and sustainable development in $11 countries, to better address the problems of environmental degradation. Trade policy measures for environmental purposes should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade." (excerpt from Principle 12)

"States should effectively cooperate to discourage or prevent the relocation and transfer to other State of any activities and substances that cause severe environmental degradation or are found to be harmful to human health." (Principle 14)