6:28 AM Sep 27, 1993

TRADE LINKAGES NEED INTERNATIONAL COOPERATION

Geneva 24 Sep (Chakravarthi Raghavan) -- The need for strengthened international cooperation to ensure that trade, environment and sustainable development are mutually supportive has been underscored at the UNCTAD Trade and Development Board during its discussion this week on the inter-linkages between Trade and Environment.

The discussion at a sessional committee of the Board was based on a report by the secretariat which has analyzed the interlinkages among these issues and has called for greater integration of environment and trade-policy making, and increased transparency and consultation to assist in developing and implementing national policies for sustainable development and minimise the risks that policies in one area may have unintended effects on the other.

The debate, where speakers commended the secretariat report and approach, however also brought out that some of the major trading entities are looking towards ways of enforcing strict process standards on other countries, though this was being presented (as the US did) in terms of positive benefits for sustainable development in developing countries.

In initiating the discussions in the sessional committee, UNCTAD's Director of International Trade Programmes, Vijay Kelkar, suggested that the challenge for the international community was "to achieve a high level of environmental protection while maintaining an open trading system and supporting the development process of developing countries.

Meeting this challenge, Kelkar argued, required international cooperation aimed at improving market access for exports of developing countries, preventing trade conflicts and maintaining an open trading system, ensuring greater coherence among various policies and measures implemented by individual countries (such as in the area of policies for recycling), promoting national efforts to integrate trade and environmental policies, and preventing detrimental effects of environmental measures on growth of developing countries.

In the debate, Egypt's Amb. Mouni Zahran (speaking in his capacity as Chairman of the GATT's Committee on Trade and Development) said that environment problems without spillover effects should best be left to national authorities, while those with spill-over effects should be tackled through international and regional cooperation, rather than unilateral actions. Specific issues needing to be further examined in the CTD included ways for improving market access for environmentally-friendly products such as packaging materials where developing countries had a comparative advantage, the importance of environmental services for developing countries and impact of internal taxes and tariff escalation on commodity trade barriers. Zahran also said that it was not yet clear (in the CTD discussions) whether the current GATT rules in favour of developing countries, in particular Part IV of GATT, were sufficient and need simply to be interpreted or whether new provisions are needed.

In other comments, Indonesia for the Asian group, stressed that trade measures based on environmental considerations should neither be misused as an excuse for interference in internal affairs of other countries nor used to impose conditions on aid nor to introduce trade barriers against exports from developing countries. Environmental policies and standards would and should differ among countries. But efforts should aim at preventing conflicts arising from pressures to offset competitive effects of such differences.

The United States felt that the UNCTAD report played down the long-term benefits of cost internalization for developing countries and had overemphasized the differences between developing and developed countries on effects of measures on competitiveness.

The Nordic countries thought elaboration of comparable standards seemed more promising that international harmonization of environmental product and process standards.

Brazil said while a comfortable route, trade restriction was no substitute for international cooperation dealing with root causes which meant additional resources and technology transfer.

The EC agreed that trade liberalization could generate new financial resources which could in part be used to finance environmental policies. But such liberalization could contribute to sustainable development only if appropriate environmental policies were implemented simultaneously. On several issues, more empirical evidence was needed and speculative conclusions should be avoided.

China said the priority tasks for developing countries were development of the economy and elimination of poverty. Hence a correct strategy should ensure coordinated development of trade and environmental protection and formulation of appropriate policies in light of each country's conditions.

India was concerned that introduction of product standards and regulations in the developed countries could lead to less acceptability of developing country products. Hence, whenever such standards were introduced, they should be transparent and based on empirical and scientific studies, including careful study of upstream and downstream environmental impacts. India also stressed that developing countries had made an important contribution to the global environment through a large number of 'environmental services' but received no remuneration or benefits from them.

The secretariat report underlines that sustainable development requires a dynamic international economy and sound domestic policies and that sustainable development policies in the developing countries and transition economies have to be supported by open markets, financial aid and technical cooperation.

Trade and trade liberalization, including reduction of tariffs and reduction or elimination of tariff escalation as well as non-tariff measures, especially in agriculture, could make a substantial contribution to sustainable development.

Trade restrictions, it notes, are neither 'first best' nor even 'second best' policy options for achieving environmental purposes. Such restrictions may in fact be counter-productive and put strains on the international trading system.

Rather, the efforts of individual countries to promote internationalization of externalities should be encouraged and given wide international support through positive measures.

International cooperation (to achieve sustainable development without trade restrictions, as called for in the Rio declaration and Agenda-21) has to be based on the principle that all countries have a common but differentiated responsibility for the main environmental problems. Given the varying resource endowments, assimilative capacities and social preferences across countries, harmonization of standards was not always appropriate.

Many environmental policies, the report notes, have been successfully implemented without any conflict with trade policies. However there were a number of reasons why environmental policies might lead to trade friction.

It was widely agreed that governments should, to the greatest possible extent, address environmental concerns at their root cause -- and deal with environmental problems through appropriate environmental and macroeconomic policies. The solutions for many environmental problems lay not only in environmental action per se but also in development.

On the linkages between trade and environment, the report notes that while internalization of environmental costs is desirable as a key to reconciling environmental and trade policies, the ability of developing countries to do so would be strongly influenced by the conditions under which they are able to export their products.

So far, they have been less successful than developed ones in ensuring that export prices reflect environmental costs and resource values. To the extent environmental costs are reflected in the prices developing countries have to pay for their imports, their consumers bear atleast part of the environment protection costs (of the exporting countries), while to the extent that these costs are not reflected in their own export prices, the costs are borne entirely domestically -- largely in the form of damage to human health, property and ecosystems.

If the demand for Third World natural-resource-based exports are price inelastic, if most developing countries included costs of environmental protection in their exports, then consumers in the industrialized world would be paying a larger share of environmental costs associated with their own consumption patterns.

An estimate by the Washington-based World Resources Institute suggests that if the environmental costs in the developing world averaged roughly two percent of production costs (as in the US), then the $500 billion annual exports from the developing to the industrialized world would include payments of $10 billion by the importers to help defray costs of environmental protection.

Trade liberalization could have environmental benefits by removing the distortions causing environmental degradation. In the area of manufactured goods like textiles and clothing, it could also lead to sustainable development policies in the developing world.

But in the absence of complementary policy measures, trade liberalization in natural resources which are under-priced could have a negative environmental impact. There was need for careful evaluation of environmental effects of trade liberalization in order to make necessary policy adjustments.

On use of trade measures for environmental purposes, the report says that in practice many environmental policies have been successfully implemented without any conflict with trade policies.

Normally, the report argues, environmental problems could be most effectively dealt with by appropriate environmental and macro-economic policies and trade-measures are at best second-best solutions. But there were areas though where trade measures could constitute most effective and feasible solution -- e.g. in case of trade in hazardous substances.

However, the report notes, pressures have been building for use of trade measures on environmental grounds and to adjust existing rules of the international trade system to allow wider use of trade measures. But there were a number of potential areas of conflict that may lead to trade friction and put strains on the international trading system.

For a country to protect its own environment against damage from consumption and disposal of domestically-produced or imported products, it might be necessary to apply complementary trade measures -- for e.g. in requiring catalytic converters in imported cars where similar requirements are there in domestically produced cars. Denying entry to non-complying imports in such cases is legal under the GATT, if principles of non-discrimination and national treatment are observed.

On the view that international trade rules should be changed to permit use of subsidies, levy of counter-vailing duties or other measures to "level the competitive playing field" in setting process standards for environmental purposes, the report suggests that differences in standards across countries by themselves do not indicate failure of countries with lower standards to internalize environment costs or the existence of "unfair" competition.

In dealing with intrinsically domestic environmental problems, efficiency requires that each country adopt environmental policies and standards reflecting its own environmental and development conditions. While generally it is more efficient to prevent environment damage than engage in remedial cleanup, so long as environmental damage is reversible, faster economic growth and gradual rising of environmental standards may in some cases be more efficient for a particular country.

Environmental countervailing duties, the report says, are very difficult to justify from either a trade or environmental point of view and if remedial actions are required to address short-term difficulties arising from differences in standards, the GATT provisions on 'safeguards' (restricting imports) could be invoked and used, the UNCTAD report suggests.

It notes in this connection the several difficulties posed by environmental cv duties also pose several problems. There is the question of which country should select the standard -- an environmental cv could be used by a large country to impose its policies on a smaller partner. Again, a country may have stringent standards for certain pollutants and less stringent for others. Who is to decide in such a case which combination would be most appropriate? And since only goods exported to the country concerned would be affected, the measure could be ineffective in encouraging changes in environmental policies and markets. Goods destined for domestic markets or other countries could be unaffected.

On the push of some environmental organizations like the Worldwide Fund for trade measures relating to process and production methods (PPMs) used in other countries, the report says that such measures would amount to extra-territorial application of the importing country's laws.

Trade measures, the report says, could be permissible under international law in cases where the processes lead to transborder spillovers (such as acid rain or global warming), provided they are taken in the framework of international environmental agreements. But their relationship with GATT rules needed to be clarified. But trade measures in other cases like failure to internalize environmental costs and thus leading to unsustainable development and processes objected to because of 'values' of a particular society, tend to be unilateral and extraterritorial and difficult to justify.

Such trade measures intended to impose certain PPMs on other countries tend also to be inefficient, denying as they do benefits of trade on basis of comparative advantage. They are also inefficient from an environment point of view since efficiency requires each country to adopt policies and measures reflecting its own economic and environmental conditions and social preferences.

The report suggests that international cooperation should look for alternative ways to address PPM-related issues -- such as through technology transfer and financial and technical assistance. Even Eco-labelling, pursued at a multilateral level, could be a viable alternative and can be an instrument to help developing countries to capture rents associated with environmental concerns in the North.

As for transborder, regional and global environmental problems, these are best addressed on the basis of an international consensus and international cooperation. In such International Environmental Agreements (IEAs), trade measures should be included only when necessary and when directly related to the environmental problems addressed by the agreement, avoiding as far as possible conflict with GATT rules, the report adds.

The use of trade measures in IEAs to address the problem of 'free riders'. the report stresses that to be truly international, all interested countries must be allowed to participate fully in any negotiations for any such agreement and enabled to become a party. Such a process would avoid the risk of a few countries deciding on setting international environmental objectives and making access to their markets dependent on compliance with those agreements.

Where IEAs are negotiated by a sufficiently large number of countries, for example under UN auspices, then multilaterally agreed-upon trade measures against non-participants may, in principle, be permissible if they are necessary to achieve internationally agreed upon environmental objectives. But even here positive measures are to be preferred over sanctions, as cooperation is more likely to generate economic and environmental gains and overall improvement in welfare.