IV. Forests, trade and the environment

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The environmental impacts of international trade are among the most divisive issues facing national policy-makers. Some environmental and advocacy groups interested in the trade environment debate argue that further trade liberalization will increase the demand for tropical timber. Not surprisingly, these groups tend to distrust regional and global trade agreements aimed at removing trade barriers. A number of interest groups advocate more restrictive trade measures in multilateral negotiations to control excessive forest depletion, encourage sustainable timber management and raise compensatory financing for timber-producing countries that lose revenues and incur costs by changing their forest policy.

Important concerns in the trade and environmental debate include: i) logging of old-growth forests in some regions of the world 19 service the and trade distortions on the incentives for timber trade; and iii) the inability of many countries to make a sustainable transition from dependence on old-growth to second-growth forests and to match domestic processing capacity with the availability of timber stocks.

After a brief overview of the structure of world trade in forest products, this section examines the debate about forest product trade barriers, timber export and import restrictions, trade bans and environmental restrictions related to trade, including environmental labelling and timber certification.

Table 14: World trade in forest products

Region

1961

1961

Total Roundwood Total Roundwood

($ million)

World 6 039 708 103 331 9 876
Developed countries 5 493 408 86 455 6 402
Developing countries 546 300 16 876 3 474

 

While the purpose of this section is to examine the nature of the forestry-related aspects of the environment-trade debate, a number of additional issues are important to keep in mind. For instance, trade liberalization raises important questions regarding social distribution of wealth, resources and income. More open markets tend to concentrate wealth and redistribute it to economically efficient groups at the expense of less advantaged and less efficient segments of society. These shifts require public interventions to adjust for imperfect competition and market failures. How to sustain productive distribution and regulate conflicts over forest resources is a fundamental question in the new world of liberalized trade, and nations are only beginning to confront the complexity of these problems.

World trade patterns in forest products

About one-quarter of global timber production enters into international trade; it reached more than $102 billion in 1992, representing about 3 percent of world merchandise trade (see Table 14). Trade in wood-based products is growing more rapidly than production. The developed countries dominate trade flows, accounting for more than 80 percent of total trade. Moreover, trade is concentrated in a handful of countries; the top five importers, shown in Figure 12, account for 50 percent of world imports while the top five exporters account for more than 50 percent of world exports. Brazil, Indonesia and Malaysia account for 10 percent of world exports and 50 percent of developing country exports.

For several major exporters, forest products are an important component of their external trade; in the case of Cambodia the Central African Republic, Equatorial Guinea, Finland, Laos, Liberia, Myanmar and the Solomon Islands, timber products exceed 20 percent of total exports; in the case of Canada, Cameroon, Congo, Côte d'Ivoire, Gabon, Fiji, Finland, Indonesia, Malaysia, New Zealand, Swaziland and Sweden, they exceed 10 percent. Canada exports almost 50 percent of its production. Other countries are heavily dependent on imports. This is particularly the case with paper; some 80 developing countries depend on paper imports for more than half their supply. Even the United States, which is the world's largest producer and second largest exporter of forest products, is also the largest importer of forest products.

Figure 12: The largest importers and exporters of forest products, 1992; Source: FAO

An important trade feature among the developing countries has been the increase in manufactured products as a share of their total exports. In 1961, 54 percent of export value was unprocessed roundwood while, by 1991, this proportion had dropped to 20 percent of a much larger total.

While tropical timber accounts for only a small portion of world trade and of total timber production, it is significant in a number of countries. in Malaysia, the export of sawnwood and wood-based panels accounted for more than 60 percent of production in 1991 and 1992. Indonesia exports more than 80 percent of its wood-based panels and plywood. Other countries with high export shares include the Congo, Côte d'Ivoire, Gabon, Ghana, Liberia and Papua New Guinea.

Around 80 percent of industrial roundwood from tropical countries is imported by four Asian countries China, Japan, Thailand and the Republic of Korea. Japan is the single largest importer, accounting for 45 percent of imports in 1992.

Trade policies and forest management

In addition to using restrictions for revenue purposes or to reduce import dependence, countries with forest industries may use restrictive trade policies to protect their own forest-based industries, to stimulate value-added processing or to reduce the log content of timber product exports. Trade barriers include tariffs, quotas and other controls that limit the type and volume of forest products traded relative to what would be traded in a free market. Tariffs and quotas on imported forest products provide protection for domestic forest industries. Subsidies and product standard rules are used to discriminate against imported forest products. Taxes and bans on log exports are intended to promote value added processing and restrict harvesting.

Over the past four decades, international trade negotiations have attempted to reduce trade restrictions on a wide range of goods and services including forest products. Fora such as GATT provide a means for reaching agreements on trade rules, settling disputes and reducing trade barriers.

Export restrictions

Log export bans and related export restrictions are often used in producer countries to allow domestic processors access to lower-cost logs and to increase value added activities as well as employment. Proponents argue that export bans are also good for the environment because: falling external demand reduces log harvests; once the processing industries expand and become dependent on a regular wood supply, incentives to invest in and manage forest resources increase; and log export bans are needed to counter high tariffs imposed by many industrial countries on finished wood products.

Although this is a complex issue, current evidence does not support these arguments; log export bans have led neither to better forest conservation nor to the development of efficient processing industries. The bans do not reduce the overall demand for logs; instead they shift the location of processing. While restrictions on log exports may stimulate short-term growth and employment in domestic processing, over time they tend to result in the undervaluing of logs, losses in value added and resource rents, processing over-capacity and inefficient production practices .63

Moreover, with elastic internal demand for logs as inputs, deforestation rates will probably increase." For example, when export bans cause log prices to fall, tropical forests are treated as an inferior land use and timber as an abundant good. If export restrictions lead to over-capacity, the pressure for logging increases over the medium and long term. In the case of Indonesia, government policies aimed at promoting processed timber product exports relative to logs led to economic losses, inefficient processing operations and accelerated deforestation .65 Nevertheless, Indonesia doubled the value of its exports in a decade and increased its share of world plywood trade from 0 to 30 percent. Industrial roundwood production increased by 50 percent, but roundwood exports dropped from 20 million ml to virtually nil.

Import restrictions

Although import tariffs on tropical forest products are generally low and declining in major developed consumer markets, non-tariff barriers (NTBs) may be significant and increasing. In some cases, major importers have increased NTBs (in spite of commitments to reduce tariffs) to maintain some protection for domestic industries particularly plywood industries. In many developed countries, increases in NTBs may reflect growing pressure from advocacy groups to reduce consumption of tropical timber which they perceive, rightly or wrongly, to be produced in environmentally harmful ways.

Import restrictions affect forest resource use by depressing global demand for tropical timber products, reducing stumpage values in producer countries, discouraging investments in more efficient processing and, in some cases, eliminating incentives for better forest management. Moreover, import restrictions on processed wood products prompt producer countries to argue for subsidies and log export restrictions to compensate their domestic processors.

Tropical timber import bans

In some industrial countries, bans on tropical timber product imports or selective bans on those products that are not sustainably produced have been introduced. Some 450 city councils in Germany and more than 90 percent of the Netherlands' local councils have banned the use of tropical timber in their own activities. In the United States, the States of Arizona and New York prohibit the use of tropical timber in public construction projects .67 However, despite their popular appeal, such bans are unlikely to encourage sustainable management in tropical timber-exporting countries for several reasons.

Producer countries argue that a trade ban on tropical timber products is discriminatory because similar rules for sustainable practices are not imposed on temperate and boreal timber producers. Furthermore, in order for existing multilateral trade agreements to sanction a ban, both tropical and temperate producers need to agree. To extend the ban to include temperate product trade is even less feasible. Given that the global market for temperate wood products is much larger than that for tropical wood products, governments would resist hurting their own forest industries by extending the ban to cover all timber product trade. Box 22 examines this issue in the context of how temperate forest policy-makers attempt to influence forest policies in tropical countries.

More important, the evidence demonstrates that a ban on tropical timber products would be ineffective in reducing either tropical deforestation or trade in unsustainable timber production. The share of tropical timber produced for export is small and declining, while the share of tropical timber exports absorbed in South-South trade is increasing. In response to a tropical timber ban imposed by current importers, the major tropical timber exporters could divert some timber supplies to domestic consumption or to newly emerging export markets. For tropical zone countries where timber exports are neither significant nor a major factor in deforestation (e.g. in Latin America), a ban may have little impact on timber management or overall deforestation. In addition, a tropical timber import ban would have little impact on the economic incentives for sustainable management at the concession level and may actually encourage poor management practices. It is domestic policies that determine whether environmental costs are internalized and most of these affect user decisions.

Proponents of free trade assert that, by eliminating the gains from trade, a ban on tropical timber imports would decrease the value derived from timber production and thus actually reduce the incentives for tropical countries to maintain permanent production forests. Faced by declining export prospects and earnings from tropical timber products, these countries may decide to convert more forests to alternative uses. Thus, while the purpose of the ban may be to reduce log production and exports, it may increase overall deforestation in the medium and long term.

Many of the problems associated with a complete import ban on tropical timber products also apply to a selective import ban on unsustainably produced timber (tropical or temperate). A selective import ban may be counterproductive for similar reasons, namely:

BOX 22: NORTHERN INFLUENCES ON TROPICAL FOREST POLICIES


Tropical forests are the focus of a great deal of international research, debate and controversy centred in the temperate countries. Much of the controversy concerns the regional and global benefits that are lost when tropical forests are cleared, logged or fragmented. Many environmental advocacy groups and scientists argue that the economic, environmental and social costs of converting 154 million ha of tropical forests during the 1980s are well above the benefits.

Proposals to halt tropical forest destruction and secure its sustainable management are a prominent feature of current development assistance programmes and policy advice. The GEF, the ITTO, the World Bank, WRI, WWF, regional development banks, the follow-up activities to UNCED, and the Tropical Forests Action Programme, together with numerous other NGOs and bilateral donors, are pressuring tropical forest countries to adopt sustainable forestry practices.

To many tropical countries, it appears as though the donors' goals of ecological protection are in conflict with their own goals of economic development. In recent international meetings, representatives of tropical timber countries have pointed out the greater scale of annual felling of primary forests in North America than in most tropical countries; they argue that the extent of protection forests and reserves is often greater in underdeveloped countries than in boreal and temperate areas and that countries with a very small forest area because of past extensive deforestation are acting unsustainably by relying on other countries' timber. In short, the South is accusing the North of hypocrisy.

Proposals to introduce production standards and trade barriers, including ecolabelling (see Environmental labelling, certification and sustainable management, p. 326), are perceived to discriminate against only tropical timber producers. Some consider that temperate exporters are using these measures to maintain their share of global timber markets while masquerading as environmentally correct advocates of trade in sustainable timber. Some countries use these counter-criticisms to deflect attention from their own environmentally damaging practices. When criticized for the deforestation of the Amazon, Brazil shifts attention to destruction in the Tongass National Forest of Alaska and in Canadian forests.

At the 1991 International Workshop on Global Forestry Management in Bangkok, Malaysia's representative expressed dismay at the overemphasis on tropical forests and called for a careful assessment of the problems besetting the world's forests. She supported the call for quantification of the respective values of forests from different zones, in terms of both environmental services and internationally traded products. This type of assessment is a prerequisite for establishing national targets to deliver global benefits such as carbon sink plantations. (it may also help to determine appropriate levels of funding for the GEF.) If Malaysia's demands for minimum levels of forest cover are to be set, particularly in developed countries, sustainable development criteria must be developed.

The potential difficulties inherent in this global approach quickly became apparent. In January 1994, developing and developed countries signed a revised International Tropical Timber Agreement (ITTA) to promote sustainable forestry practices throughout the world. During the negotiations, developing countries attempted to decrease the tropical emphasis of the agreement, insisting that industrial countries should be held to similar standards of sustainability, as proposed in the original 1983 ITTA for tropical producers. The industrial countries were willing to pledge only to adopt appropriate guidelines and criteria for sustainable management of their forests.


Forest trade and environmental policies

The timber industry is directly affected by concession terms that require the reforestation or rehabilitation of logged areas. The forestry sector may be constrained by: limits to the intensity and type of logging- the creation or expansion of public parks and reserves; the legal protection afforded certain endangered species of forest plants or animals; or the reservation of forested areas for the exclusive use of indigenous populations. All of these public initiatives can effectively reduce both the scale and the profitability of forestry activities.

From a general economic welfare perspective, the changes are justified if the net gain from these other demands and requirements exceed the costs of reduced timber earnings. (Distribution issues add another dimension to the debate.) Different uses of forest land, whether for timber production, conversion to an alternative use or reservation as a protected area, must be analysed to determine the relative benefits and costs of each option .69 In practice, such benefit-cost analyses (whether ex ante or ex post) to determine the appropriateness of a particular environmental regulation or land-use option are rarely conducted. One report in northeastern Australia confirmed that reduced-impact logging procedures introduced in the early 1980s increased marginal costs by less than 3 percent .70 A study in Malaysia indicated that natural forest management with reduced impact logging produced higher economic returns than both the current practices and range of alternative land uses, confirming an earlier study carried out by FAO in Sarawak.

Failing to carry out benefit-cost analysis may lead to underestimation of the full production and trade impacts of environmental policies and can even undermine the intended objectives. This has become particularly evident in developing countries, where environmental restrictions have been increasingly imposed on forest management and logging operations in recent years.

In the United States, recent studies suggest that the combination of environmental and trade restrictions on logging in the Pacific Northwest have significant impacts on timber output as well as on prices both domestically and abroad. Three harvesting restrictions (mainly affecting Douglas fir) are implemented in the region:

The spotted owl reserves represent an environmental restriction on timber operations, and replanning has elements of both a timber and an environmental restriction, whereas the log export ban is unambiguously a trade restriction. Flora and McGinnis have analysed the incremental and cumulative impacts of these restrictions on domestic and export timber flows and prices for both logs and milled lumber from the Pacific Northwest. Their results indicate substantial decreases in both domestic prices and export trade. Another study estimates that environmental legislation may reduce the total volume of timber sold on public and private land by 44 percent .73

Trade liberalization and the environment

Little evidence exists to show how the removal of either import and/or export restrictions affects the environment. One study in the Philippines investigated some of the possible connections between broad export trade liberalization (i.e. the removal of export restrictions) and tropical deforestation. The study concludes that trade liberalization would expand timber harvesting by 6.5 percent, wood-based exports by 28.5, wood industry investment by 2.8 and forest industry employment by 13. The study identifies the wood-based manufacturing sector, which is highly export-oriented and receives no nominal tariff protection, as the major potential beneficiary of trade liberalization.

A recent ITTO study examines the implications of a 10 percent across-the-board reduction in transfer costs (i.e. the difference between export prices and import prices) as a proxy for the removal of both tariff and non-tariff barriers to tropical timber products. The report also simulates the complete removal of log export bans in Malaysia, Indonesia, Papua New Guinea, the Philippines and West Africa.

The results indicate that trade liberalization is likely to produce significant gains for importing countries, particularly those with log processing capacity. The impacts on tropical timber-exporting countries are mixed. In the simulation's policy scenario, the rise in producer log prices could provide an important incentive for sustainable timber management - but the scenario assumes that policies promoting sustainable harvesting levels will be in place by the year 2005. Without such policies, higher prices could conceivably lead to increased felling of the remaining commercial, timber reserves in those countries.

The various studies to date imply that, to take advantage of trade-expanding strategies, countries need to address existing policy failures and the incentive structure underlying deforestation by, for example, internalizing externalities, improving access to farmland, expanding employment opportunities and providing increased tenure security for common and private property.

General trade liberalization for tropical timber products may not be politically realistic in the current global trade climate. Agreements between exporting and importing countries on widesweeping reductions in existing trade restrictions are often difficult to reach. For example, GATT negotiations over removing just one import restriction the EC plywood quota system - failed to obtain agreement. Exporting countries are reluctant to remove export restrictions on logs, particularly if it means giving up processing capacity to importing countries.

Eliminating even the most visible quantitative restrictions and tariffs across all countries is probably equally unrealistic. Both importing and exporting countries are likely to continue employing trade restrictions as part of their national strategies to promote forest-based industrialization and to protect domestic industries. Thus, the political will for a general liberalization of the tropical timber trade may simply not exist.

A more feasible approach involves selective trade liberalization steps, such as:

Environmental labelling, certification and sustainable management

Environmental labelling is both an environmental and a trade policy instrument. Timber certification is one form of environmental labelling designed to evaluate the performance of forestry operations. Four certification schemes are currently operational, covering an estimated 1.5 million ml of timber and timber products in 1993. This volume represents less than 1 percent of world timber trade.

Many additional certification schemes are being planned: the EC has a programme to establish uniform criteria for a number of products (not just timber products) and a single label that can be applied throughout Europe; WWF began a "1995 Club" in the United Kingdom under which 24 retailers have agreed to sell wood from sustainable sources; and the African Timber Organization (ATO) has proposed a regional ecolabelling programme for West and Central Africa.

The Forest Stewardship Council (FSC), an environmental NGO established in late 1993 to promote good forest management worldwide, accredits the various private certification systems and certifying organizations to establish the authenticity of their claims. In June 1994, the FSC established a set of principles and criteria to be applied to all tropical, temperate and boreal forests. The scale and intensity of forest management operations, the uniqueness of the affected resources and the relative ecological fragility of the forest are considered in all certification assessments .78

Environmental labelling programmes are intended to complement trade policy options encouraging sustainable forest management; the main objective is to facilitate rather than restrict the flow of timber products while providing an incentive for increased sustainable management.

The term certification is used in various ways to mean:

Product labelling is difficult to implement and verify because of the vast array of timber products traded and the stages of processing involved in producing final products. For instance, the end uses of timber are often not discrete products but components of products and composites or parts of basic structures, fixtures and fittings. Free trade advocates argue that product labelling would be used as a powerful NTB to discriminate against the imports of tropical timber in general.

Concession certification involves: i) assessing a forest concession for compliance with sustainable management guidelines; ii) monitoring forestry practices in the concession, including volumes sold and destination, up to the retail level; and iii) ensuring that each product produced with timber from that concession has appropriate certification to verify its origin.

The concession certification approach appears to be a good means of guaranteeing that timber comes from sustainably managed sources. Certification allows traders and timber companies to gain brand name recognition. This represents an important selling point in consumer markets where premium prices are paid for organically grown and environmentally friendly products.

These positive features of concession (or company) certification provide incentives for companies to promote their products through voluntary labelling schemes. Groups of consumer and producer countries could also develop common voluntary labelling schemes. Such efforts are elements of good marketing and export promotion strategies.

This type of scheme has to address a number of obstacles. First are the potentially high costs of monitoring, enforcement and verification. Moreover, the questions of who pays these additional costs, how the money ought to be raised and how such a mechanism is to be implemented are not easy to resolve, especially if not all concessionaires in producer countries are willing to accept a mandatory scheme.

Second, producer countries and companies may object to intensive monitoring of all aspects of their forest industry production. It is unlikely that a team of visiting international inspectors would be allowed to monitor all levels of the wood chain in all producer countries.

Third, concession or company certification in itself does not provide support for forest management administration and services of producer countries. If anything, a comprehensive mandatory scheme may impose additional costs on forest departments.

Fourth, concession- level monitoring requires the scrutiny of products at the retail end of the trade. Verification is fairly straightforward for consumer products composed solely of one type of wood derived from a single source. However, for composite products containing two or more different timber components, or for timber used as part of basic structures, fixtures and fittings, the process is more difficult.

The purpose of country certification is to ensure that participating countries are implementing policies, regulations and management plans that lead towards a sustainable management target. In return, the tropical timber products of that country would be certified as originating from a well-managed forest, giving them easier access to import markets in developed economies.

Proponents of country certification suggest it is more effective than other schemes because it is less costly, easier to administer, more acceptable to producer countries and simpler for consumer countries to implement (see Box 23, p. 330). Problems include the following: if a country has been certified and later criticized for a particular forest concession, the credibility of the whole system is in question; no international organization is in a position to issue certificates to temperate and tropical forest countries; and, under the existing international framework for certification established by the International Organization for Standardization, only individual companies or operations are certified, i.e. there is no precedent for country certification.

Balancing trade and the environment

A recent study of the many issues related to the ongoing trade-environment debate proposes four principles of balanced environmental and trade policies in an ideal world. In real world situations, however, the issues become more complex if trade policies lead to environmental damage or environmental regulations impose trade burdens. Thus, these principles serve as a focus for discussion and a basis for reform. The first principle states the logic of matching targets and instruments; the next two consider trade and environmental policies and how the domain of each might be reasonably determined; the fourth principle extends this logic to the international setting.

Principle 1. In general, trade targets should be matched with trade instruments and environmental targets with environmental instruments.

Principle 2. In general, trade policies should aim to reduce trade barriers while remaining environmentally neutral.

Principle 3. In general, environmental policies should aim to conserve natural resources and improve the quality of the ecosystem while remaining trade-neutral.

Principle 4. National governments should be encouraged to pursue similar trade and environmental objectives, i.e. both trade and environmental policies should be coordinated across national borders.

Another study on forestry suggests how trade policies can match these principles and provide incentives for sustainable management. Trade policies are most effective when:

The first condition requires producer countries to review forest sector policies to determine how existing domestic and trade policies influence forest use. Addressing any policy distortions that undermine sustainable development of the forest sector is a necessary step.

The second condition aims at removing barriers to forest imports into consumer markets, particularly among those producer countries that demonstrate a commitment to sustainable forest management and policy reform. The removal of specific tariff and non-tariff barriers on imports could take place on a case-by-case basis, according to verifiable progress within each exporting country. This could occur through normal bilateral trade negotiations or through multilateral agreements and organizations.

The final condition raises contentious issues concerning sovereignty, the need for international compensation, the scale of resource transfers required and the possible mechanisms for implementation.

Summary

Trade measures are often not the most appropriate means for addressing concerns about deforestation and degradation, for several reasons. First, substantial distortions may already exist in the timber trade, the environmental effects of which are not well known. Further interventions to achieve environmental objectives may add to these uncertainties and prove to have unintended and even counterproductive effects.

Second, market and policy failures have a significant impact on forest management. Domestic environmental policies can have substantial effects on timber production, trade and prices. Trade interventions, on the other hand, address these problems only indirectly at best. Trade measures imposed unilaterally by importing countries would have little influence on domestic policies within producer countries.

Third, empirical studies contradict the view that logging for the international timber trade is a major cause of deforestation and environmental degradation. The evidence suggests that, in many countries, a large portion of logging is for domestic consumption. Because the majority of tropical forests are cleared for agriculture and the majority of wood is consumed for energy, only about 6 percent of the total amount of wood cut in the tropics enters the international timber trade .83 Moreover, country case-studies indicate that, however well-intentioned they may be, regulations such as logging bans aimed at protecting forest resources may be counterproductive, resulting in even higher economic and environmental costs.

Finally, trade measures have their most direct impact on cross-border product flows and prices. As noted above, changes in these international flows may have very little influence on the main causes of deforestation and forest degradation in producer countries. Even for forestry operations, there may be little effective control on how these trickle-down effects influence economic incentives at the level of the timber stand.

However, trade policies can play a role in encouraging trade-related incentives for sustainable forest management. Such policies should be used in conjunction with and to complement forest sector policies and regulations that improve forest management. Certainly, other sectoral and macroeconomic policies that influence the pattern of deforestation and forest land use must also be addressed.

BOX 23: COUNTRY CERTIFICATION


Recent studies examining country-level certification suggest the following advantages:

i) Certification at the country level is less costly and easier to implement. Periodic inspection tours by internationally certified teams, monitoring at customs ports and reviews of forest policy and management plans would probably be sufficient to ensure the effectiveness of such a scheme.

ii) Producer countries would find country certification more politically acceptable, provided that: • producer countries could help determine the certification scheme as well as any verification process under international auspices;

iii) Consumer countries may also find country certification more feasible to implement because:



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