| CCP: ME/HS 01/3
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| CCP: ME/HS 01/3
|
COMMITTEE ON COMMODITY PROBLEMS |
INTERGOVERNMENTAL GROUP ON MEAT |
SUB-GROUP ON HIDES AND SKINS |
Seventh Session |
Rome, 4 - 6 June 2001 |
TRADE, SANITARY AND ENVIRONMENTAL POLICY LINKAGES IN THE HIDES, SKINS AND LEATHER PROCESSING SECTOR |
III. ASSIMILATIVE CAPACITY VARIES ACROSS COUNTRIES
IV. ALTERNATIVE POLICY MEASURES
V. AN APPLICATION TO HIDES AND SKINS
1. At its 6th Session in November 1998, the Sub-Group requested the Secretariat to undertake an analysis of the linkages among restrictions on the trade of hides, skins and leather; sanitary regulations, and voluntary measures, such as ecolabelling; and environmental issues. This document has been prepared in response to that request.
2. Linkages between trade, trade policies, sanitary regulations and environmental policies are examined in this paper. An economics perspective on trade and environmental issues is presented next. Economic policies must operate within a legal framework, and the regulations governing trade as determined by the World Trade Organisation and other international agreements are discussed subsequently. The regulatory approach to environmental issues is to set standards, and the harmonisation of standards is examined. Alternatives to trade restrictions and harmonised standards are then discussed.
3. In the next half of the paper these conceptual issues are applied to the leather processing sector. An assessment is made of environmental policies in the industry and their likely impact on the location of production and on trade flows. The potential impact of trade liberalisation on the global environment is examined and some policy implications are drawn to conclude the paper.
4. This article focuses on analysis of the economic issues. Various political, scientific and social perspectives that policy makers would also need to consider are not addressed here. Nonetheless, economic analysis is important in showing the costs incurred and benefits foregone in implementing non-optimal policies.
5. An inevitable output from production of almost all goods and services is pollution of some kind. Sound policy is thus not to eliminate all pollution, but to constrain output to such levels that the benefits of the additional production outweigh the cost of production, inclusive of environmental costs. Output can be constrained by taxes, quantitative restrictions on inputs or outputs, or various standards that impinge on the production process. Economists tend to favour economic instruments such as taxes and charges, because these encourage producers and consumers to search for ways to produce more output without raising pollution levels.
6. The key to effective trade and environmental policy is to achieve a situation in which prices reflect the true costs and benefits of production and consumption. This implies setting taxes or quantitative restrictions to reduce the direct cause of environmental degradation at levels that reflect the value of the damage incurred. Using taxes as an instrument, the optimal policy for a good that is polluting in its production process is a tax on emissions. The tax should equate at the margin with the cost imposed on members of society other than the producer. A tax on its use should be different for different uses, reflecting the degree of pollution associated with each. For example, chromium is used in a variety of industrial uses in addition to leather processing. A tax on its use should be different for different uses, reflecting the degree of pollution associated with each. These policies will not lead to the elimination of pollution, but the gain to society from the marginal unit of production will just compensate for the pollution.
7. One important effect of an environmental tax is that a benfit accrues to producers in other countries where the tax is not imposed. This provides an incentive for producers in a particular country to encourage other countries to impose environmental taxes. Concern for the global environment blurs with a desire for industry protection.
8. Trade regulations as determined by members of the World Trade Organisation are primarily aimed at enhancing trade. A key WTO principle is national sovereignty, which implies that on environmental matters member countries cannot impose their standards on others. A second principle of relevance is that the WTO regulations articles relate to products only, not to production or process methods (PPMs). While this is a sensible distinction to facilitate trade, it is differences in the methods of production that determine the environmental impact, and these cannot necessarily be seen in the final product. A revision of the WTO provisions to allow trade restrictions on the basis of differences in processes and production methods is thus being increasingly advocated to ensure that sound environmental practices are used in the production, distribution and disposal of goods.
9. Where the production in one country causes significant environmental impacts in another, regional or multilateral environmental agreements are often negotiated. Examples of such agreements relate to ozone depletion and climate change. Agreements between countries regulate emissions into shared resources such as the Baltic Sea or rivers crossing national boundaries. In the case of leather processing, pollution in this industry is relatively localised, with little or no international spillover, apart from downstream effects. The WTO position in such cases is that each country is permitted to determine its own environmental standards and that other countries cannot restrict imports on these grounds.
10. WTO regulations are also relevant in the case of sanitary restrictions, which aim to keep out unwanted pests and diseases and to protect the health of people, animals, plants and the environment more generally. Member countries set their own regulations, but these must be consistent with WTO Agreements. There are numerous disputes relating to these provisions, because the risk of disease is difficult to estimate, particularly if there has never been an outbreak in the importing country. Like any restriction on imports, these restrictions have the effect of protecting domestic producers by restricting trade from exporting countries. The tanning industry within the country faces more limited supplies of raw materials at higher prices. Thus domestic producers have an incentive to support sanitary restrictions on imports even when the risk of outbreaks is minimal, while exporters and domestic processors may oppose them.
11. Sanitary provisions are relevant in the case of hides and skins and leather because importation of these animal products may introduce diseases that put at risk the health of humans or animals. Clearly, risk associated with hides and skins are greater than those related to leather or leather products. However, there is little evidence that sanitary restrictions significantly impede trade in these goods. There is however concern that some regulations may be un-necessarily burdensome in, for example, requiring certification which is difficult to provide under the conditions in some developing countries and which does not materially enhance the sanitary security of those imports.
a) Harmonisation of environmental regulations
12. One approach to environmental externalities is to call for harmonisation - the setting of identical regulatory standards. Harmonisation to date has focused primarily on product standards, relating to the product itself, in an effort to minimise impediments to trade arising from confusion over product differences. More recently, greater emphasis has been placed on achieving internationally consistent environmental policy instruments, such as ambient standards on permissible levels of pollutants in air, water or soil), process standards, economic instruments and eco-labelling schemes. These measures are aimed at enhancing the environment rather than trade. Attempts have also been made to harmonise environmental regulations (for example, the International Organisation for Standardisation, the Standards Code from the Tokyo Round, and various OECD committees).
13. Harmonisation of international regulatory standards is one means of reducing differences in international competitiveness attributable to differing national environmental standards between countries. It avoids countries competing with each other and inadvertently driving down their standards to those of the lowest competitor, the 'race to the bottom'. However, setting standards that are too high may eliminate legitimate competition.
14. Many countries would not wish to accept harmonised standards. There are often legitimate differences between countries including preferences and assimilative capacity.
b) Preferences vary between people
15. Environmental quality can be thought of as a range of goods and services that can be provided like the many others available to consumers. By their nature, many environmental "goods and services" are more in demand by consumers who have satisfied their basic needs, such as food, clothing and shelter. Hence, individuals are likely to demand higher environmental standards, i.e., a greater quantity and wider range of "environmental goods", as their incomes rise. Countries may seek to provide, through the use of more extensive pollution abatement policies for example, increasing amounts and types of environmental goods, as their growth and development progresses.
16. The environment functions as a sink for waste. Its assimilative capacity is its ability to absorb waste in a sustainable fashion. Assimilative capacity depends on the physical ability of the local environment to absorb incremental levels of different pollutants. Factors such as vegetation, soil and topography and water flows determine the quantity and types of waste that the environment can absorb or dilute to acceptable levels. Large vegetation and water areas effectively function as sinks for particular types of pollution, provided the demands on those systems remain within their assimilative capacity.
17. Environmental damage would almost certainly be related to input use in a non-linear fashion. Damage is likely to be minimal until the limit of assimilative capacity is reached, and to increase exponentially beyond that limit.
18. In the case of leather processing, much of the effluent treatment involves filtering and aeration, often involving large pools and involving high odour levels. Clearly, it is desirable to locate these treatment plants in areas where fewest people are affected by the externalities. Countries with sparse populations are better placed to provide such facilities.
The existence of different assimilative capacities and preference means that the environment, in some senses, can be regarded as a natural endowment or factor of production that constitutes part of the comparative advantage of country, just as does an abundance of rich soil, high rainfall, rich mineral resources or a skilled labour force. Any advantage gained by a country because of the amount or particular character of its environmental assets or its set of social preferences contributes to its ability to specialise. Countries with the relatively high assimilative capacities and relatively low preferences for environmental "goods" are likely to retain higher production of more pollution intensive products. However, as preferences change with a rise in incomes, and increasing industrial concentration leads to further pollution, this comparative advantage will be progressively reduced.
19. There are ways to influence environmental policy in other countries without distorting trade policies and increasing protection. These include:
20. Technological advances, such as the use of chemical recovery equipment, may simultaneously reduce production costs and the amount and toxicity of polluting wastes. Technology may hold the key to reducing some of the adverse environmental impacts without sacrificing economic development. Further technological advance would reduce the need for countries to make short term trade-offs between economic growth and environmental needs. To transfer advanced technology, it may be necessary for developing countries to encourage foreign ownership and joint venture arrangements in order to develop production and processing facilities.
21. Technology transfer can be part of the wider dissemination of information to countries with lower environmental standards. The international diffusion of environmental ideas and enhanced concern for the environment can generate public support for changes in environmental policies and hence can influence the way in which products are produced in those countries. These activities could be undertaken by government and non-government organisations and potentially provide or strengthen the foundation of intergovernmental cooperation.
22. Consumer-based action can also be a powerful tool to encourage environmental policy changes, through the use, for example, of eco-labelling. However, there are difficulties with successful eco-labelling in the leather sector. The wide variety of technologies that can be used to produce leather imply that standards are likely to be somewhat arbitrary and monitoring difficult and expensive. By setting standards that discriminate against countries that use different processes, it is tempting for some countries to use the labelling process as a barrier to trade. In addition, leather is sold not to final consumers but to manufacturers, thus adding an additional stage between producer and consumer. Furthermore, it is likely that many consumers are neither aware of nor care about environmental issues relating to leather production. Encouraging consumers to think about environmental impact of leather processing may lead them to consider the benefits in substituting away from leather altogether towards other materials includingnatural fibres and synthetics. Finally, to the extent that consumers are more concerned about the local rather than global environmental impacts, eco-labelling would not work so well with products made from leather produced in other countries.
23. The discussion to this point provides a framework for exploring the linkages between trade and environmental policies. The major conclusion is that environmental policy instruments should be used to target environmental problems and they should be targeted as directly as possible to the emissions causing the degradation. The existing institutional framework favours the attainment of trade rather than environmental objectives, and favours countries setting their own environmental standards rather than accepting international standards. Furthermore, without analysing the data, it is not possible to conclude whether trade liberalisation enhances environmental objectives, nor how environmental policies affect the location of production and trade. These assessments need to be made on a case by case basis. Next, the linkages between trade and environment in the hides and skins and derived products sector are examined.
24. There are several characteristics of the global hides, skins and leather market that are relevant to a discussion of trade and environmental policies:
25. Given these characteristics, the likely effects of environmental policy on trade and trade policy on the environment can be gauged.
26. The location of the industry has shifted towards countries with less stringent standards in recent years1, but it is not clear how much influence these regulations have had on this shift. Differing standards are more of an incentive for firms to move if environment related compliance costs are a significant part of their overall production costs. In the case of leather processing the differences in standards are difficult to ascertain. Leather production is certainly polluting - a study by Hettinge et al. found tanneries and leather finishing to be among the most toxic of industries categorised at the four digit level2. However, it is not clear that the costs differ markedly between countries. Estimates suggest that clean-up costs in European plants might be 3-5 per cent of running costs (COTANCE personal communication). An earlier UNIDO estimate suggested that effluent treatment costs were about 4-6 per cent of final costs3. Presumably, costs in developing countries, where the same stringent standards are not met, would be lower, but would rise above 5 per cent if an attempt was made to meet European standards without the technology available in Europe.
27. Based on these estimates, differences in clean-up costs between developed and developing countries would be 5 per cent at most. This is not insignificant but whether it is enough to determine location is debatable. In addition, firms are often obliged to maintain their domestic standards when operating in foreign countries, thus negating a lot of the potential advantages.
28. Differences in labour costs may contribute more significantly to relocation of the leather processing sector, just as they have contributed to shifts in other labour intensive sectors. As a country's workforce becomes more skilled and highly paid, industries using relatively high shares of unskilled labour become uncompetitive and are taken up elsewhere. According to a European Commission study, labour costs are 12-15 per cent of the cost of finished leather, in Europe at least. Other costs are hides and skins (55-65 per cent), chemicals (10 per cent), overheads (20 per cent) and energy (3 per cent) European Commission4. Raw material costs are a significant component of final costs.
29. The tentative conclusion here then is that although leather processing is considered a relatively polluting industry, variations between countries in environmental standards may have only an insignificant impact on the location of the industry.
30. Export taxes and other constraints restrict exports of hides and skins from several developing countries5. These policies increase supply to the domestic market, lowering prices to producers and users of hides and skins. The lower prices make a local leather processing sector more competitive and hence encourage the development of value added industries. Relative to the free trade case, exports of hides and skins are reduced, and exports of leather or leather products are increased. Given the higher prices for leather, exports from both sectors combined are likely to be increased. Output from other sectors are decreased as inputs are bid away from them for use in the leather sector.
31. Leather products are highly protected by import tariffs in many developed country markets. Trade liberalisation would reduce prices in importing countries and lead to an increase in consumption of leather and leather products. The amount of leather processing is therefore likely to increase and its location is likely to shift following liberalisation.
32. Trade policies clearly affect the location of industry. In particular, taxes and restrictions on exports of hides and skins have reduced exports of these products and increased production of leather and leather goods in the exporting countries. Without restrictions, the location of any industry will depend on the relative cost of production in each country and the relative transport costs of the unprocessed and processed goods. Leather goods are high value items so transport costs are not such an issue in this case, although untreated hides and skins may deteriorate while being transported in hot climates. The importance of trade policies in determining the location of industry can be gauged by modelling the impact of trade liberalisation. The only available modelling to date suggests that complete liberalisation of export and import constraints in developed and developing countries would lead to light leather production increasing by 3 per cent in developed countries and by 12 per cent in developing countries6. While these estimates are dated and for this and other reasons should be used with care, they do imply that liberalisation would lead to a certain amount of relocation of the processing sector.
33. Trade liberalisation of hides and skins or leather could have a noticeable impact on the environment. Within a country, the leather processing industry is quite polluting, and any increase in output of processed leather increases pollution to an extent determined by the implementation of the existing legislation, available technology and expenditure on abatement and treatment costs. The primary effects of removing trade barriers are an increase in production and a relocation of production towards developing countries. Environmental pollution from leather processing is thus likely to increase in developing countries.
34. Trade liberalisation may also have global environmental impacts. First, there is a scale effect of increased global output. This effect tends to increase pollution, although a more efficient use of resources may lower the pollution per unit of output. The second effect is compositional, and would depend upon whether the implemented environmental standards are more stringent in the countries that are increasing or in those that are losing their share of global production. As a generalisation, there is evidence to suggest that developing countries that support their domestic processing sector have standards inferior to the developed countries and thus it is reasonable to conclude that the total environmental impacts from this effect are greater as a result of the trade reform policies. A third impact relates to technology transfer. Trade reform which implies a more open economy is likely to encourage the implementation of better technologies, reducing the amount of pollution. This is especially the case if trade liberalisation is accompanied by investment liberalisation, as foreign firms tend to operate with higher standards than domestic firms. If the scale effect dominates, as it is likely to in the short run at least, then in the absence of environmental policy reform, trade liberalisation which relocates production towards developing countries would tend to increase global pollution from tanneries.
35. While less global pollution is better than more, it does not follow that location is unimportant. Because there are only minimal transboundary effects, then shifting a given environmentally degrading process from one location to another will influence the valuation of the impact. Just as shifting a leather processing plant from an inner city area to a less populated location is seen as beneficial, then shifting from one country to another can be equally beneficial.
36. As a generalisation it is probably reasonable to conclude that developing countries have preferences and assimilative capacities that favour the location of leather processing industries in these countries. The stringency of their standards and their application reflect this. However, it cannot be concluded that a relocation of leather processing towards developing countries would result in a worse outcome from a welfare perspective, because countries have differing valuations of environmental degradation.
37. One beneficial impact of trade reform on the environment works through the increased demand for environmental goods as incomes increase. Leather processing is a significant industry in many developing countries, and improved returns would enhance their economies. Over time higher incomes are likely to lead to a demand for higher standards, improving environmental outcomes.
38. A feature of the leather processing industry is that it is quite polluting in production, and developing countries often operate with lower environmental standards than developed countries. Increased awareness of environmental issues in recent years has focussed attention on the need to improve environmental outcomes. Enforcing harmonised standards may be one way to do this. However, suggestions that developing countries should be required to meet developed country standards in the production process leads to suspicions that domestic producers in developed countries are attempting to restrict imports using environmental protection as a convenient but spurious rationale. On the other hand, domestic producers facing more stringent environmental standards may claim some foreign competitors have an unfair competitive advantage. According to this view, raising standards would not only level the playing field, but would help enhance the image of the industry in the minds of consumers and assist developing countries in overcoming their own environmental problems.
39. Similar concerns apply to sanitary issues. While sanitary regulations are necessary to limit the spread of animal disease, uncertainties over the potential risk leave the regulatory systems open to abuse, as domestic producers strive to protect their industry from foreign competition. Recent problems with livestock disease in Europe have accentuated sanitary concerns. Requirements that hides and skins be processed in a particular fashion has the potential to consititute an administrative trade barrier.
40. In considering policies it is important to note that pollution from tanneries is relatively localised, and transboundary effects are minimal. This implies that local or national governments rather than international fora should address the environmental problems. The WTO emphasis on national sovereignty supports this approach. Developing countries should impose environmental policies as they deem appropriate to their particular situation, rather than accepting standards imposed by others.
41. There is little evidence that lack of uniform standards leads to environmental degradation through a "race to the bottom". Developing countries have an incentive to raise standards as demand for environmental quality strengthens, and this occurs in many areas. Local environmental problems, such as air and water quality, are likely to be addressed first.
42. Trade may have a positive or negative impact on the environment, even when the costs of environmental damage are internalised so as to be paid by the polluting industry. Complete liberalisation of the significant import and export restrictions is likely to result in an increase in output plus a relative shift in leather processing away from developed to developing countries to take advantage of the lower labour costs in developing countries. Since some developing countries implement lower environmental standards, it is claimed that trade liberalisation would lead to greater global environmental damage and is on this account undesirable. However, if pollution is relocated to where it is best tolerated, an overall improvement in welfare will result.
43. With increasing awareness of environmental issues, the leather processing industry must address the concerns of environmentalists and consumers. The transfer of technology and training to developing country producers is beneficial. An eco-labelling scheme may have a role in raising standards by providing consumers with information about particular product attributes. A range of standards may be appropriate, in order to account for differences in tastes, preferences and endowments in different countries.
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1 FAO 1998, 'Trade in hides and skins and the environment' CCP: ME/HS 98/5, Rome
2 Beghin, J. and Potier, M. 1995 'Effects of trade liberalisation on the environment in the manufacturing sector', paper based on report commissioned for OECD Environment Directorate, Paris
3 FAO 1994, 'Environmental aspects of processing and trade in hides, skins and leather', CCP: ME/HS 94/9, Rome.
4 European Commission 1997 'Examination procedure regarding Argentinean practices regarding exports of hides and imports of leather', http://europa.eu.int/comm/trade/pdf/arglea_rep.pdf, Brussels
5 FAO 1998, 'Trade in hides and skins and the environment', CCP: ME/HS 98/5, Rome.
6 FAO 1998, 'Trade in hides and skins and the environment', CPC: ME/HS 98/5, Rome.
