V. International trade, the environment and sustainable agricultural development

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How trade is linked to the environment
The effects of trade on the environment and their measurement
Trade liberalization and the environment
Policy implications
Concluding remarks

In recent years, the collision of environmental and trade interests has emerged as one of the most complex and divisive issues in world trade policy. While the debate is multifaceted, involving legal, economic and environmental perspectives, all sides are generally interested in promoting national and social welfare. Many supporters of liberal world trade believe that reducing trade barriers is environment-friendly as a way of allowing the world to use its resources more efficiently and, as long as impacts on the environment and on natural resources are appropriately priced, more sustainably. Moreover, by raising incomes, the reduction of trade barriers enables countries to spend more on preserving the environment. Trade supporters also point to numerous studies that show how protectionism often exacerbates environmental problems. For example, a variety of studies document how export bans, import restrictions and consumer boycotts of tropical hardwood products actually discourage conservation and encourage unsustainable rates of cutting.

In contrast, some environmental interest groups argue that by contributing to economic growth and increasing the world's demand for natural resources, trade liberalization is a cause of the problem and not the solution. A few groups advocate trade restrictions to protect the environment. They argue that, unless accompanied by strict environmental regulations, trade-induced growth will further deplete and degrade the earth's oceans, air, fresh water, soils and climate. Not surprisingly, these groups tend to distrust regional and global trading agreements that are aimed at removing trade barriers. On the contrary, they support trade barriers and tighter restrictions in multilateral negotiations as a way of controlling excessive resource depletion and protecting consumers from potentially hazardous imported products, particularly food. Box 14 presents an overview of the trade and environment debate in forestry and highlights how environmental regulations may affect trade and how trade policies may affect the environment.

The growing debate over trade and the environment is raising new issues and concerns in global trade politics and is changing the way in which trade and environmental concerns are addressed in multilateral agreements. Three recent events illustrate the growing importance of trade and environment issues. First, in 1992, the United Nations Conference on Environment and Development (UNCED) outlined a work programme on trade and the environment in Chapter 2 of Agenda 21. As part of this programme, OECD established a set of procedural guidelines for trade and the environment with the aim of encouraging member governments to work towards national trade and environmental policies that are more compatible with each other. Second, in 1993, Canada, Mexico and the United States signed an environmental side agreement to NAFTA. This side agreement represents an international precedent for subjecting trade agreements to environmental review. Third, in 1994, it was decided to set up a committee on trade and the environment within the WTO. This committee is to help ensure that trade rules are responsive to environmental objectives.

As with the overall goal of sustainable development, trade and environment issues pose long-term challenges for which adequate policy responses would often require better scientific knowledge than is currently available; but they also pose practical problems that require immediate attention. For many developing countries, the need to increase incomes at the same time as reducing environmental damage represents a real policy dilemma. The developmental and food security needs, together with the macroeconomic imbalances of these countries impose pressure on their natural resources in order to reduce food import dependence and generate foreign exchange from exports. These pressing needs for increasing incomes, economic growth and exports raise important questions about how to balance environmental protection, economic development and trade.

BOX 14
FOREST TRADE AND THE ENVIRONMENT

Some environmental groups interested in protecting tropical forests argue that further trade liberalization is bad for the environment because it will increase the demand for tropical timber. These groups have encouraged some OECD countries to experiment with bans on the import of tropical timber products, or with a selective ban on those products that are not sustainably produced. Some 450 city councils in Germany and more than 90 percent of local councils in the Netherlands have banned the use of tropical timber. In the United States, the states of Arizona and New York prohibit the use of tropical timber in public construction projects.'

Despite their popular appeal, such bans are unlikely to encourage sustainable management in countries that export tropical timber for a number of reasons. First, recent 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 proportion of logging is for domestic consumption. Second, because the majority of tropical forests are cleared for agricultural use of the land; the majority of the wood then being consumed as fuelwood, only about 6 percent of the total amount of wood cut in the tropics enters the international timber trade. Third, country case studies indicate that, however well-intentioned they may be, regulations such as bans on logging and exports aimed at protecting forests' environmental resources may be counterproductive and result in even higher economic and environmental costs.

To date, most research demonstrates that a ban on tropical timber products is ineffective in reducing either tropical deforestation or the trade in unsustainable timber production. 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 restricting log exports may stimulate short-term growth and employment in domestic processing, over time, they tend to result in undervaluing of logs (trees), losses in value-added and resource rents, processing over-capacity and inefficient production practices. 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.

For those tropical forest countries where timber exports are neither significant nor a major factor in deforestation (e.g. in Latin America), an import 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 policy that determines whether environmental costs are internalized and thus has most effect on user decisions.

Import restrictions affect the use of forest resources 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.

The forestry experience suggests that trade measures are not the most appropriate means of addressing concerns about deforestation and environmental degradation. First, 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. Second, the most direct impact of trade measures is 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. 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.

This section presents an overview of the linkages between trade and the environment in agriculture. It identifies conditions under which the goals of liberalized trade and environmental protection can be mutually supportive and it discusses the implications for domestic and international policy.

How trade is linked to the environment

International trade may affect sustainable agricultural and rural development and the environment in a number of ways. First, trade may encourage production activities to shift from places where the environment is less sustainable to places where it is more sustainable or vice versa. Second, increased trade liberalization changes the pattern and level of world consumption, production and income and these changes can affect the environment in ways that go beyond the shifting of consumption and production among countries. Third, trade influences the process of economic development, creating fresh opportunities for the profitable use of productive resources. For instance, international trade in agricultural products is large and an important source of foreign exchange earnings for many countries.

As incomes rise, demands on resources increase, but at the same time, income growth can also lead to more effective demands for better environmental quality. In addition, increased incomes make investment in resource-conserving strategies both more affordable and more attractive. Moreover, higher incomes are associated with lower population growth rates, reducing the pressure on environmental resources. Higher incomes and better employment opportunities widen the range of choices thus leaving fewer rural people dependent on environmentally fragile areas, such as steep hillsides, for subsistence.

The effects of trade on the environment and their measurement

Trade shifts the incidence of environmental effects. Trade geographically separates production from consumption. When environmental effects are national and not transboundary in their incidence and instead are mainly associated with production, trade may shift the environmental effects from one country to another. In addition, where consumption produces waste that has become an important part of the ecological cycle (for example, when nutrients are returned to the farmers' fields), trade's separation of production and consumption may put stable ecosystems out of balance. In some cases, production in one country may have environmental effects on neighbouring countries. For instance, water used for irrigation that then drains back into the river system raises the salt content for users in other countries downstream. In other cases, the act of production has beneficial global environmental effects. For example, planting trees that absorb and store carbon.

Although shifting the location of environmental damage may not affect total world environmental damage, it often poses problems of international concern. Where the negative effects are purely national, the unilateral action of one country to alleviate its own environmental problems may well raise costs to producers and hence cause a competitive handicap for its exports of affected products. If the country is big enough, the effect may be an increase in world trade prices, with consequences for all countries. In other cases, such as when an importer raises food safety standards, environmental protection measures may adversely affect exports from other countries.

Trade affects world production and consumption. trade causes global production and consumption to change. If there were no trade in coffee, for example, world consumption and production would he far less than it is, if only because coffee cannot be produced everywhere. The argument also applies to commodities that are produced in a far wider spectrum of countries than are tropical beverages. By exploiting comparative advantages, a country can enjoy higher levels of consumption and production which influence the ways in which natural and environmental resources are used and protected.

This basic interrelationship between trade and the environment implies that trade policy has an impact on the environment. Conversely, because environmental policy affects the supply and demand situation of commodities, it affects trade too. It is in recognition of this two way relationship that UNCED called for mutually supportive environmental and trade policies.

Measuring the effects. The impact of trade on the environment depends on the volume of trade, the share of trade in production and consumption and the environmental impact of production and consumption. Large volumes of forestry and fishery products are traded along with several agricultural commodities including cereals, sugar, fats and oils, oilmeals, cassava, meat, bananas, fresh citrus, cotton, pulses, dairy products, wine, coffee and rubber. At the global level, the trade: production ratio is usually low, while for commodities such as tropical beverages and rubber world trade is the main stimulus to production. trade in cereals accounts for little more than 12 percent of world production Table 24 presents the shares of exports in world production for several commodities.

The trade: production ratio is often significant in some commodities for individual countries even when it is not significant globally. For example, while only 3 to 4 percent of world rice production is traded, exports account for more than 20 percent of production in Australia, the EC, Guyana, Pakistan, Thailand, Uruguay and the United States. At the same time, imports of rice account for more than 80 percent of consumption in as many as 4 3 countries (out of a total of 130 countries for which data were available).

The production and processing of commodities cause different amounts of environmental side-effects. These effects depend on numerous factors including technology, soils, topography, water quality and the ecosystem. There is no overall measure of pollution per tonne produced or consumed of a given product that can he applied to all countries and ecosystems.

Some work has already been clone by several of FAO's intergovernmental groups and FAO) has also developed a methodology to he used as a standard tool in environmental impact assessment at the commodity level.

TABLE 24
Shares of exports in world production for agricultural commodities, 1990

Commodity Share (..%..) Commodity Share (..%..)
CEREALS   BEVERAGES  
Wheat and products 19 Coffee and products 86
Rice and products 3 Tea 45
Coarse grains and products 12 Cocoa 82
LIVESTOCK PRODUCTS   FIBRES  
Meat and products 9 Cotton 27
Animal fats 19 Jute 17
Milk and products 10 Sisal 33
FRUIT   OTHER  
Oranges and products 35 Tobacco 31
Lemons and products 22 Rubber (dry equivalent) 85
Grapefruit and products 38 Sugar (raw equivalent) 20
Bananas 20 Vegetable oils and products 37
Apples and products 13    
Pineapples and products 26    
Dates 11    

Source: AGROSTAT.

However, at present there appears to he a basic shortage of hard data on the physic al assessment of the environmental impact of production of individual commodities and on the financial cost of reducing the environmental damage caused by the production of commodities. This shortage greatly limits the ability to quantify the effects that changes in trade have on the environment and natural resource bases of participating countries.

Trade liberalization and the environment

In the absence of trade, each country has to meet its own requirements through domestic production. When trade becomes possible and when it is not distorted through subsidies or barriers, both the importing and the exporting countries gain; in the importing country gains to consumers exceed losses to producers; in the exporting country, consumers face a loss because prices become higher, but gains to producers exceed this loss as both the quantity sold and the revenue raised increase. This is a classic example of the gains from trade and implies that the world would benefit from liberalized trade because the gainers could compensate the losers and still be better off.

However, production processes require resources and these often include environmental resources. When the costs of pollution are taken into account the trade situation becomes more complicated. For the importing country any decrease in resource depletion or degradation associated with the reduced pressure on domestic resources of the (now) imported product represents an additional gain. Not only are there benefits in terms of resource reallocation in the market place, but the negative environmental consequences of producing the imported product are reduced as some production takes place in the exporting country.

For the exporting country under the same assumptions the opposite is true. In effect, unless it is compensated, the exporting country is carrying part of the environmental cost of supplying the market of the importer and the welfare gain to its own citizens is thereby reduced.

The next stage is to consider the implications of reducing environmental damage through, for example, taxing the production process to reflect its environmental cost. The effect is straightforward for the importing country if it alone imposes such a tax. Its own production is reduced and more of its demand is met from imports. The gains from trade grow and, in effect, the environmental cost is transferred to the exporting country. If in that country too, similar environmental taxes are applied, the gains to the importing country may be reduced, but global welfare will increase. Production tends to occur where the sum of market and environmental costs is smallest.

This analysis suggests that in many cases trade liberalization and environmental concerns are compatible. Given an appropriate response to environmental protection, whether through market incentives or through regulation, and adequate services (information, training and extension), consumer needs can be met at lower environmental costs than in a protected market.

Policy implications

While there is a lack of hard data on interactions between trade and the environment, there are at least clear signs that in some situations these interactions are significant. The production of traded commodities affects the immediate environment, both positively and negatively. Similarly, environmental regulations often have effects on trade. The nature and magnitude of these interactions depend on the specific resource endowments, production technologies and socioeconomic systems.

There are important differences between high- and low-income countries that are worth highlighting. First, the nature of environmental problems varies to such an extent among production systems that what is considered as an environmental "bad" in one system may be considered an environmental "good" in another. For example, in high population density areas of low-income countries manure has high value and is collected and traded as a commodity and as part of the general return on livestock investments. In contrast, in many industrial countries livestock waste is an undesirable side-effect and environmental regulations control its treatment, thereby raising production costs. Second, as incomes rise there is a corresponding shift in the allocation of both public and private resources towards the improvement of the quality of the environment. When market failure leads to environmental problems, richer countries are more likely to introduce measures to correct the situation. These measures, in the form of regulations, taxes and subsidies, may even be at the expense of economic growth and food production. By contrast, low-income countries tend to emphasize economic growth and basic food production, even at the expense of environmental quality. Thus in many cases, the basic difference in reaction to environmental problems between high- and low-income societies is the ability, and not necessarily the willingness, to pay for the environmental goods. In other cases, global and local interests in natural resources may differ. For example local community interest in a tropical forest often focuses on its production values (as a source of land, food, wood and livestock feed), while global interests may focus on the biological diversity values of the same forest.

Domestic policy. Because of the considerable differences in resource endowments and levels of income among countries, universal prescriptions on domestic policy to control the environmental impacts associated with production and local processing of commodities are not feasible. However, some broad observations are possible and these can assist in the formulation of domestic environmental control policies.

The most obvious problem is related to cases where the excessive use of one factor of production, such as fertilizer, is caused by commodity-specific environmentally unsound subsidies. Clearly, reduction or elimination of such subsidies should be the first line of action. More broadly, environmental damage often results when producers lack incentives for taking proper account of the costs of resource use.

Environmental externalities can be internalized through a regulatory approach, whereby quantitative standards are set and mechanisms are put into place to ensure compliance with these standards. Such approaches may be the only ones acceptable in certain circumstances where, for instance, public health or unacceptable levels of irreversible damage to resources are at stake. The alternative is to use market-based economic instruments (incentives and disincentives) and, in general, these are more cost-efficient than the regulatory approach and provide a continuing incentive to reduce environmental costs. The prerequisite, however, is the existence of markets and administrative structures that are adequately developed, and this can be a problem, especially in developing countries. In general, developed countries have greater experience than developing countries in undertaking policies to internalize environmental costs.

Implications for international trade. The implications for trade policy depend on the various domestic policy responses of countries. As noted above, no universal prescriptions for domestic policy are possible. However, policy responses that are rational for an individual nation or area may become a source of friction within an international trading framework. Such policies may result in the denial of market access to certain imports (especially those from developing countries), based on the application of national health, safety and environmental standards. Evaluating whether domestic standards entail justified burdens on the international trading system involves weighing the benefits of environmental, health or food safety regulations against the trade distortions caused, including the loss of market access.

Further complications arise from the perceived effect of internalization as a potential cause of the loss of competitiveness. Indeed, the unilateral internalization of environmental costs at the producer level will tend to increase costs to the affected domestic producers relative to foreign competitors (as well as to domestic producers in other sectors). Thus, while unilateral internalization of environmental costs will improve resource allocation domestically, it can also affect trade flows because production of the affected goods will tend to shift to other countries that have not introduced similar measures. This, in turn, may create pressures from domestic producers in those countries that have introduced "green measures" for the imposition of trade barriers.

A country's internalization of non-transboundary environmental costs should not require reciprocity from other countries, to the extent that its principal objective is to improve welfare in the country itself. However, given the trade implications of such internalization, some harmonization of different regulatory approaches could "level the playing field" and make the internalization of environmental costs politically more feasible in the individual countries.

If environmental standards are harmonized at a high level, however, it is possible that developing countries will he unable to meet them. Conversely, harmonization at lower levels than currently prevail could pose a threat to the environment. It follows that a balance has to be struck between the advantages of harmonization and the advantages of allowing legitimate differences in national standards when these reflect differences in resource endowments, national preferences and the level of economic development.

The interrelationships between environmental measures and market access are numerous and complex. Some progress has been made on developing broad principles for measures and instruments that may be used to achieve environmental objectives while minimizing adverse trade effects. However, even if all policies respected such principles, there are still direct and indirect ways through which market at access opportunities, especially those of developing countries, could be affected. By and large, these effects are linked to the costs to developing countries of adapting to new regulations related to specific product quality specifications and to the packaging and ecolabelling standards adopted by developed countries. In general, the effetts on market access depend on whether the costs of compliance to environmental standards for the domestic producer are greater or less than those for the foreign supplier.

Developing countries access to world markets can also be affected by changes in demand in the developed countries, where consumers wish to have an assurance of the "environment-friendliness" of the production process, even when the final product is not distinguishable from those produced with more conventional technology. The effects on international trade of such shifts in demand depend on the extent to which the domestic market system can generate environment-friendly products compared to the foreign market.

Unilateral and multilateral trade policies. The adoption of environmental policies by an individual country on its own would raise that country's costs of production for the affected products. Unless other countries also adopt such policies, domestic producers of the products risk losing their market share. However, unilateral environmental measures, if taken by a sufficiently large number of individual countries or major producers, will affect world prices and, thus, other countries, benefiting exporters and increasing costs to importers of the product. Thus, even when an environmental problem is purely national in its incidence, there are likely to be effects on trade. The question arises as to which type of response to these problems is appropriate: unilateral or multilateral).

For countries that have adopted environmental policies leading to higher costs, a unilateral response would be to levy import duties or to control the volume of imports in other ways. This may be done under Articles 111 and XX of GATT. Basically, Article 111 stipulates that internal taxation and regulations should apply equally to both the domestic and the imported product. Countries therefore have the option of imposing the same requirement on both the domestic and the foreign product, even though compliance costs might be greater for the importer.

Other environmental measures, however, may require special border protection to make them effective. For instance, a domestic policy to slaughter diseased livestock may require an import ban on diseased livestock to make the policy effective. In these and similar cases Article XX of GATT may be invoked. This is perhaps the key article for dealing with the relation of trade to environment and sustainable development. It reads (in part): Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by a contracting party of measures: (b) necessary to protect human, animal or plant life or health; (g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.

Thus unilateral trade actions to protect the environment or promote sustainable development are allowed under Article XX(b) and (g) provided they do not discriminate between countries nor act as a disguised restriction on trade. The extent to which this article can be used to justify trade measures taken in support of domestic environmental measures has been the subject of considerable discussion at GATT in the past and at the newly created Committee on Trade and Environment of WTO. Of great importance is the question of how wide a coverage is given by this article to the variety of concerns that go into the environmental and sustainable development agenda. If the article is interpreted too widely there is the risk of spurious environmental issues being used to justify trade restrictions. A too rigid reading of the article could limit the scope for genuine attempts to protect a country's environmental policy from being undermined. There has been debate on the force of the word "necessary" in Article XX(b) and under which conditions something that is sanctioned by an international environmental agreement could be considered as necessary for the purpose of invoking Article XX.

Other provisions of GATT/WTO also have a bearing on the use of trade policy to secure environmental ends. These provisions include: Article I on most favoured nation treatment and nondiscrimination; Article Xl on elimination of quantitative restrictions on imports and exports; Article XXV on waivers from other GATT articles; the Agreement on Technical Barriers to Trade (TBT); and the Agreement on the Application of Sanitary and Phytosanitary Measures (SPS).

The multilateral response to national environmental concerns has yet to be developed. The existing multilateral approaches to environmental matters have evolved to deal with transboundary problems but not with national concerns that may require multilateral support. The point at stake is that, while existing GATT articles allow an importing country to impose a domestic tax on imported products when the same is done on the domestic product and to impose some trade restriction to protect a certain category of domestic measures [covered under Article XX(b) and (g)], not all measures to protect the environment are likely to be covered. For instance, a tax on nitrogen fertilizer would penalize domestic farmers without providing an obvious way of counteracting this extra cost to them by, for example, raising the tariff on imported wheat. Thus a class of potentially important measures to support the environment could not be undertaken unilaterally without bearing the full trade impact of higher costs. This raises the question of whether there could be scope for multilateral environmental agreements to support national policies in this area.

Such international commodity-related environmental agreements (ICREAs) have been discussed at OECD. Among existing commodity agreements, only the International Tropical Timber Agreement explicitly includes environmental aspects, and it relies on the voluntary agreement of countries to promote environmental protection and reforestation together with research and development projects to foster reforestation. It contains no provisions for directly linking the costs of forest reconstruction and timber prices. In general, ideas on multilateral responses to national environmental problems are currently only at an early stage of development and much more work would be needed on them before they could be said to provide a valid approach to internalizing the costs of making production sustainable and the environment better.

Concluding remarks

Markets alone cannot ensure environmental quality and sustainable agricultural development. Private values often do not take account of social costs and benefits and, while individuals have regard to the longer-term impact of production and consumption decisions for their families, these do not necessarily represent the interest of society as a whole. As a result, if the environment is to be protected, governments should have appropriate policies to modify the behaviour of producers, consumers and markets. Without such policies resource allocation is likely to be suboptimal. The range of policy options is very wide. Most will have to be applied to the respective resource directly and thus affect trade only indirectly via their effects on production or consumption.

In addition to national environmental issues, there are a number of transboundary environmental issues, which may or may not directly involve trade.

Particularly difficult matters are raised when it is not the commodity itself that causes negative environmental effects but the processing and production methods that are damaging and that are therefore, limited by trade measures in other countries. If appropriate national policies are not introduced and if damage, is causes in other countries , multilateral action to encourage "good practice" could be considered via, for instance international environmental agreements ( IEAs). Such action, however, must be based on objective, scientific criteria and must recognize the authenticity of differences in valuation of environmental goods among countries.

Some principles to guide multilateral action are under discussion at the WTO Committee on trade and Environment. These include, inter alia, nondiscrimination, transparency, proportionality of the trade effect to the damage caused and least-trade restrictiveness, i.e. the choice of measures that have the minimum trade impact, given that the environmental goal can be achieved.


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