Trade Problems

Trade Problems

Depending on who you listen to, trade is either the great destroyer of communities, the environment and developing countries, or the unblemished savior of all the above.

In reality, there is no simple relationship between trade, environment and development. Depending on the sector, the country, the markets and the prevailing policies, trade and trade liberalization may be good or bad for the environment and development. They will usually be both at once – good in some ways, bad in others.

Nevertheless, it is possible to group the majority of those linkages into three themes:

1. Magnifier effects: Trade, in the absence of proper pricing, can lead to environmental degradation.

2. Competitiveness effects: Trade can bring pressure to bear on environmental standards in one of two ways. First, it can spur demands for better environmental performance by foreign purchasers, or by multinationals with direct investments. Second, it can bring pressure to lower standards, or not to enforce existing ones, through the ‘pollution haven’ effect.

3. Market distortion effects: Markets that are closed or protected may impair sustainable development in two ways: by protecting inefficient, polluting domestic industries; and by denying exporters, particularly in developing countries, the opportunity to sell into the protected market.

The magnifier effect is so called because it involves damage to the environment that is caused not by trade itself, but through trade acting as a magnifier of existing inadequacies of environmental policy. Perfect environmental policy would price environmental resources and services at their proper value; producers would be forced to pay the social costs of emitting effluents that pollute air, water and soils, or degrading renewable environmental resources such as forests and fisheries.

These prices can be attached by a number of means, including charges, taxes, emission fees, and deposit/refund schemes. If they are not, environmental resources will in effect be valued at zero.

And therein lies the problem. Any input is used in relation to its cost. If palm oil is cheaper than soybean oil, food processors will use palm oil. Similarly, if it is cheaper for a manufacturer to use the nearby river as a dumping ground for effluent than it is to use a process that produces no effluent, the choice is obvious. When environmental resources are underpriced as a result of inadequate legislation, producers of goods and services will overuse environmental resources. Environmental economists would call this an inefficient outcome.

International trade allows the scale of this inefficiency to be magnified beyond what it would be in a closed, domestic setting. The fewer environmental costs borne by a producer, the cheaper the final product, and the more of them demanded by a global market – particularly if foreign competitors are made to pay the full environmental costs of production.

This brings us to the second linkage: the competitiveness effect. One element of this effect is a result of the magnifier effect. If regulators and producers understand that competitive advantage can be gained by avoiding environmental costs, there will be pressure to keep such costs as low as possible. This can be done through non-enforcement, or even slackening, of existing regulations, or through ‘regulatory freeze’ – the reluctance of environmental regulators to propound new environmental regulations, even where all the evidence shows that they are needed.

This generates ‘pollution havens’, where pollution-intensive manufacturing processes congregate in countries or regions that charge the lowest environmental costs. Evidence for the existence of such havens has been difficult to find. This may be because most attempts to find them looked for industries that have relocated in the search for lower environmental costs, rather than those which get their demands answered merely by threatening to relocate. Moreover, a firm deciding to relocate will consider a wide variety of factors including labour costs, security of investment and the availability of skilled managers, and not just environmental costs.

The other type of competitiveness effect works in the other direction, encouraging improved environmental performance. International trade means domestic producers may find a demand for products that are ‘greener’ than those they would otherwise produce. In markets such as the EU and North America, both retailers and manufacturers are increasingly demanding that their suppliers abroad produce goods to the high standards that are the norm in those markets. They may, for example, demand that certain toxic textile dyes not be used in the manufacturing process, or may even demand that the cotton used be organically grown.

There is also the regulatory type of pressure – where laws in a foreign market dictate that certain environmental conditions be met as a condition of market access. The most common regulations of this type are packaging and labeling requirements. Exporters to Germany, for example, must package their products in 100% recyclable materials.

Finally, there is the competitiveness effect that comes from foreign investors who establish production facilities in a particular country. Often they will bring with them production techniques, technologies or standards of operation which are the norm in their home country, but which exceed the environmental regulations in the country of operation.

The third type of linkage between trade and environment occurs in the context of closed or protected markets. It can be one of two types.

First, a protected market can impair sustainable development domestically, by sheltering domestic industries that are inefficient and polluting. The US steel industry, for example, is far less energy-efficient than many of its Japanese counterparts, but it survives nonetheless because of protectionist barriers. The results are less than optimal for the US citizens, who must foot the bill by paying higher steel prices and higher taxes, and for the environment.

Second, a protected or closed market can impair sustainable development in foreign countries by denying them the opportunity to export. For example, the Multi-Fiber Arrangement (MFA), a long-standing exception to the multilateral rules of trade, effectively limited imports of textiles and clothing by developed countries. The costs of this single piece of legislation, in terms of lost economic development in developing countries, are enormous. A recent study by the Canadian International Development Agency found that the cost to Bangladesh alone of Canada’s participation in the MFA exceeded the amount of Canadian official development assistance bound for that country.

Thus the relationship between trade and sustainable development is not a simple one. Moreover, it can be both positive and negative. It contains potential threats for business, in terms of national regulations that block trade and investment on environmental grounds. However, it also offers opportunities, in terms of new ‘green’ markets and investment opportunities.

Does the trade-sustainable development relationship matter to business? That question can be answered using a concrete example from international trade policy.

In November 2001, more than 140 trade ministers from around the world gathered in Qatar. On the agenda was a push to launch a new global round of trade negotiations – an initiative that was ultimately successful. This will be the first global round of negotiations since the completion of the Uruguay Round in 1995.

What is being negotiated? The agenda is extremely broad – as it needs to be in order to allow for the necessary trade-offs. On the table will be:

  • Agriculture, where the EU has agreed to phase out its notorious export subsidies;
  • Trade rules, where the US has agreed to a similar objective aimed at its infamous anti-dumping measures;
  • Liberalization of trade in services;
  • A review of the agreement on trade-related intellectual property rights (for example, who has the right to call their wine Bordeaux and their cheese Gruyere);
  • Further reduction of industrial tariffs;
  • Negotiations on special treatment for developing countries;
  • An attempt to negotiate multilateral rules on protection of investments;
  • An attempt to negotiate multilateral rules on competition policy;
  • Negotiations on transparency and fair process in government procurement contracts;
  • An attempt to negotiate new rules on facilitating the free movement of traded goods across borders;
  • A review of the World Trade Organization (WTO) dispute settlement mechanism;
  • Negotiations on trade and environment, including a critical review on fisheries subsidies, a negotiation on the relationship between WTO law and multilateral environmental agreements, and negotiations aimed at eliminating tariffs on environmental goods and services.

This is an expansive agenda, with important ramifications for sustainable development. There was already a trade and environment agenda at the WTO, and a trade and development agenda. Both were pursued in WTO Committees, but with little by way of results. But Qatar established a more concrete agenda on environmental and development issues.

The easiest way to make the case for business to take an interest in this new agenda is by way of concrete examples.

1. Multilateral environmental agreements (MEAs) and the WTO

It has never been clear how the international system would handle conflicts between international environmental law and international trade law. What if, for example, a signatory of the Kyoto Protocol imposed a tax on imported goods related to the carbon produced in their manufacture, claiming that it was doing so in order to meet its Kyoto commitments?

In this example, it is likely that an exporting country would seek legal redress, but where would the dispute take place? In the WTO, where the question would be whether trade law obligations were being breached? Or under the dispute mechanism set up under the Convention on Climate Change, where the argument would be over whether the protocol actually permits such measures?

There is no clear hierarchy that helps answer the question. The worst-case scenario would see the WTO ruling against an internationally negotiated environmental agreement. That would give a powerful boost the anti-globalization movement.

On the other hand, nobody wants to give governments carte blanche in imposing trade measures related to multilateral environm,ental agreements (MEAs), particularly when the agreements in question do not specifically mandate the measure used or when the measures are used against non-parties to the agreement.

The WTO is now committed to negotiating an answer to this question of how it relates to MEAs. The results will affect the ability of nations to impose all manner of trade-related measures, from bans on trade in endangered species and hazardous waste to restrictions on genetically modified products and chemicals implicated in climate change.

2. Environmental goods and services

There have always been one or two issues in the WTO agenda that seemed incontrovertible from both an environmental and a trade perspective. Lowering tariffs on environmental goods and services was one of those. It is good news, therefore, that the new agenda commits countries to negotiate a reduction or an elimination of those tariffs.

The opportunities for sustainability-conscious business in this agenda are straightforward: reduced tariffs mean bigger export markets, particularly to developing countries where tariffs on some industrial goods can be significant.

It is not clear yet how environmental goods and services will be defined, and this may be the most difficult strand of the negotiations. For example, is an efficient coal-fired power station an environmental good? How about a water treatment plant? Clearly, the business community will have a view on what should be on the list and what should not.

Overall, however, there is no doubt that international markets for environment-related goods and services, including environmental engineering and consulting, will become friendlier to exporters.

3. Agriculture

Agriculture has traditionally been the toughest nut to crack for trade negotiators. In fact it received a special carve-out status in trade rules, from the establishment of the GATT in 1947 right up until the creation of the WTO in 1995. But the new negotiations look to make some radical reforms, the most interesting of which relate to subsidies.

From a development perspective, most developing countries would dearly love to see limits put on the ability of developed countries to support their agricultural sectors – support which currently tops $300 billion a year. Many have a comparative advantage in agricultural products, and could use agricultural exports as an engine of development were it not for market barriers in North America and the EU.

From an environmental perspective, it is important to reduce subsidies that are linked to production levels. These tend to encourage overproduction, often on marginal lands. It is equally important to ensure that governments are able to subsidize farmers for ‘stewardship’ – namely sound environmental practices such as wetland preservation, low tillage and erosion prevention.

But the fights over reform will be messy. Subsidies are sacrosanct in many countries, and it is unlikely that US or French politicians will be willing to brave the consequences of killing this sacred cow. It is more likely that they will negotiate the right to use subsidies for ‘non-trade’ objectives, such as food security, environmental preservation and regional development.

It is a mechanism about which developing countries, understandably, are nervous. They see their hard-fought market access disappearing under the smoke-and-mirrors guise of what the EU is calling the ‘multifunctionality’ of agriculture. Canadian agricultural exporters, too, are concerned about the final outcome of the negotiations, nervous of losing markets in the EU, Japan and elsewhere as those countries embark on programs of self-sufficiency and environmental protection. If ever there was a clear example of threats and opportunities, this is it.

4. Labeling

The Doha Declaration, signed in Qatar, directed the WTO’s Committee on Trade and Environment to examine several key issues, and to recommend in 2005 whether changes to trade rules might be necessary. One of the themes for review was labeling.

There is a long-standing dispute in the WTO about exactly who is subject to WTO labeling law. There is a code of practice in WTO law that sets out how standards and labeling should be implemented. For example, there should be some way that foreign exporters can comment on the proposed design.

The overall aim is to prevent standards and labels from becoming barriers to trade, rather than information for consumers. The EU ecolabel for paper, for example, gives preference to recycled paper over paper from sustainably managed forests – a distinction that Brazilian plantation managers claim is designed to protect EU suppliers.

It is easy to see how a simple label can have enormous trade impacts. Consider the fate of a consumer food product from Canada that, in conformity with new EU regulations on labeling, advertises itself as possibly containing genetically modified organisms. This is likely to depress the demand for such products.

The big question, however, is who regulates voluntary ecolabels. Most are non-mandatory, and imposed by non-governmental organizations. For example, the Forest Stewardship Council label for sustainably produced forest products is becoming a globally accepted standard, but is completely voluntary. Does WTO law apply to such standards?

Some countries argue that it does, maintaining that the code of good practice demands that governments bring their national standard-setting bodies in line. Others argue that it does not, maintaining that WTO law applies only to governments. The discussions in the WTO will be interesting, and will carry heavy consequences for industries like forestry.

Labeling carries opportunities as well as threats. The more legitimacy a label has, the more powerful a market tool it becomes. This is important for firms seeking to exploit green niche markets abroad.

Implications for business

What happens at the WTO in Geneva is worth monitoring. Businesses need to know what is happening in world trade talks, and how it could affect their interests. This is also true of regional negotiations, such as the ongoing negotiations on a Free Trade Area of the Americas.

The second follows from the first. Armed with the knowledge of what is being negotiated and how it affects them, firms need to strongly insinuate themselves into the policy process at the national level. They need to let the national negotiators know what they should be pushing for, and what they should be defending against.

Some companies and business associations are already well up to speed on what is going on in trade talks, and are steadily practicing the art of engagement. Sometimes their interests coincide with sustainable development objectives, and sometimes they do not. There are dangers involved in working against sustainable development objectives in the WTO and other international trade forums.

Developed countries such as Canada depend heavily on the integrity of the multilateral system of trade rules, in order to protect their trade interests against economic heavyweights like the US and the EU. But the integrity of that system is increasingly coming under threat from the anti-globalization backlash. This movement filled the streets of Seattle at the WTO’s third Ministerial Conference in 1999, and has grown steadily stronger since then,

The influence of this movement should not be underestimated. Neither should the movement be dismissed as misguided. It is motivated by fundamental inequities in the global system that have not been adequately addressed by trade and investment regimes, and by apparent insensitivity of the trade and investment rules to environmental concerns.

This means that any attempt to push for a system of rules that works against environment and development objectives would be to push the WTO and other regimes closer to the fire of protest.

As well as a secure system of trade rules, business needs a secure and stable political environment if it is to thrive. Investment and trade are thrown into disarray when countries, regions or the global community feel shocks of instability like that experienced on September 11, 2001. It is important to press for a multilateral system of trade rules that will foster meaningful development in the poorer countries.

We are coming increasingly to recognize that gross global inequities are not sustainable. They may be related to migration, disease, political instability, environmental degradation, or even a lack of export markets for our goods and services. In a world where the forces of globalization are making us ever closer neighbours, our neighbours’ well being is ever more our concern.