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The WTO and environment: …more words than deeds?

Katharina Gnath

- On the relationship between the WTO and the environment: overview, latest developments and assessment -

Introduction

Trade has grown dramatically in the last decades and has increased widely in scope: it more and more affects other areas of public policy, such as – for the purpose of this analysis - environmental standard setting, environmental protection, agricultural subsidies, or health measures. The general decline in tariff barriers at the national borders has ensured that any given cost-raising standard is becoming relatively more important for international competitiveness. Thus, the WTO increasingly has to deal with non-tariff barriers to trade, such as standards of environmental protection, which often go at the heart of national policy-making.

At the same time, environmental awareness has increased, and the scientific basis for environmental protection is becoming more solid. Various attempts have been made to co-operate internationally in order to stop environmental degradation. This trend of increased emphasis on environmental policies is relatively recent: with higher income in the industrialised world, demand for environmental goods has increased and channels to lobby have become institutionalised and organised more effectively.

Since trade and environment both affect the use of natural resources, they naturally interact - and the two camps have had a long legacy of mutual mistrust. For both free-traders and environmentalists, the interlinkage has been a topic of contention and serves as a point of reference to NGOs as well as to industrial lobby groups. As Fontagné (2001) puts it succinctly, “Trade and environment: the two notions are at the epicentre of the globalisation debate”.

Why is the environmental topic important for the WTO? First of all, the WTO itself calls it a “new high profile”[1]. The trade and environment debate is complex and varied, and it involves some of the most fundamental WTO principles and rules, such as the concept of non-discrimination and the definition of “like products”. It is a horizontal issue that cuts across many disciplines in WTO. For example, Multilateral Environmental Agreements have consequences for trade which may come into conflict with the general aim of the WTO to reduce trade barriers.

In addition, the recent WTO round is  marked by great cleavages and drifts and has more than once been at the brink of failure. Although they are not the main focal point of the internal cleavages, environmental issues bear the potential of worsening the North-South drift in the WTO, which could possibly escalate and eventually undermine the global trading system.

Nordström and Vaughan (1999) regret that, “One of the unfortunate features of the trade and environment debate is that at times it has generated more heat than light”: too many generalisations have been made both from the trade and the environmental communities. The complexity of the interrelation and the scarcity of empirical evidence undermine the ground for a solid and factual debate. Thus, in the following, this article seeks to shed light on the trade and environment debate in general arguing that the WTO cannot turn its back on environmental aspects of trade. This article follows the premise that -  independent from what the WTO concludes with regard to its relationship with environmental aspects -  environmental concerns are among the crucial issues that need to be addressed for the WTO to strengthen its credibility and public image.[2] After having depicted the “green” provisions by the WTO and recent developments, the focus will lie on the normative aspects of the role of the WTO and on the assessment of recent WTO-developments with regards to the environment.

 

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How green is the WTO?

The first part of this article will compile an inventory of the WTO’s environmental provisions and the recent developments in the negotiations as well as in WTO-case law. It will primarily focus on the Marrakech and the Doha Declarations and the workings of the Committee on Trade and Environment.

Marrakech Declaration 1994 and the creation of WTO

The WTO has no specific agreement dealing with the environment, as it is foremostly a trading organisation. It did not include a specific agreement in order to centralise all linkages; when the WTO was founded in 1994, negotiators took a more diffuse approach by establishing the Committee on Trade and Environment to deal with environmental issues. Yet a number of agreements include provisions for the environment. These „green provisions” actually countervail the general stance of the organisation’s principle of free trade.

GATT XX

GATT Article XX (“General Exception”) is a broad umbrella clause, which allows countries to take measures of unilateral trade restrictions for various reasons, including the pursuit of environmental protection. Subject to non-discrimination (Articles I “Most favoured nation” and II “National treatment”) or disguised protectionism, it allows for restrictions under Art. XX (b) “necessary to protect human, animal, or plant life or health”, and XX (g) “relating to the conservation of exhaustible natural resources if such measure are made effective in conjunction with restriction on domestic production or consumption”.

TBT and SPS measures

The rules of the WTO concerning environmental measures are fixed in the agreement on technical barriers to trade (TBT) and the agreement on sanitary and phyto-sanitary measures (SPS). Under these agreements, measures must directly focus on an environmental objective and must be justified scientifically. The initial obscurity on the agreements disappeared with several high-profile disputes over product standards, end use vs. production methods, for example the tuna-dolphin case (see below).

Intellectual property

According to TRIPS Article 27, governments can refuse to issue patents that threaten human, animal or plan life or health.

Subsidies

Specific clauses allow environmental programmes to be exempt from cuts in subsidies.

Committee on Trade and Environment

At the first WTO meeting, the general Council established the Committee on Trade and Environment (CTE), which has institutionalised the debate into the mainstream of the organisation’s work. The committee’s work is based on two principles: the WTO is only competent to deal with trade and it is not an environmental agency. Secondly, WTO members believe that they must uphold the principles of the WTO trading system to be a multilateral, non-discriminatory and equitable organisation. The CTE has both an analytical and prescriptive function: it is designed to “identify the relationship between trade measures and environmental measures, in order to promote sustainable development and to make appropriate recommendations on whether any modifications of the provision of the multilateral trading system are required.” [3]

Doha Declaration 2001 and the Doha Development Round

The Doha Ministerial Declaration of November 2001 reaffirmed the organisation’s commitment to sustainable development: “We are convinced that the aims of upholding and safeguarding an open and non-discriminatory multilateral trading system, and acting for the protection of the environment and the promotion of sustainable development can and must be mutually supportive.”[4] Due to the insistence of the EU, Japan, Norway, and Switzerland - and against the resistance of some developing countries- , the Doha round is the first trade round in which the environment is real part of the agenda. More importantly, the Doha Development Agenda (DDA) contains, for the first time, a series of serious commitments to discussion and possible negotiations on major trade and environment issues.

The Ministerial Declaration has structured the main dealings with environmental concerns in §§ 31 and  32: It involved the need negotiations in CTE special sessions on the relationship of trade measures in MEAs and WTO-rules, and information exchange between the WTO and environmental organisations. CTE regular session are mandated to deal with non-negotiated issues of the Marrakech declaration and to discuss, among other things, the effect of environmental measures on market access, especially for developing countries and environmental aspects of TRIPS.

Cancún and post-Cancún

Thanks to the EU, environmental concerns were a major issue in the run-up to the Cancún conference of September 2003. It was hoped that the conference would serve as a political signal for the acceleration of the so-far slow negotiations and to underline the importance of environment topic. However, as the trade round entered a rocky path, the negotiators concentrated on more high-profile issues such as agriculture and investment. The topic of environment was entirely sidelined. 

Since the failure of Cancún, concrete decisions have been sparse. Despite the multifaceted Doha environment mandate, environmental issues have taken a back seat to other negotiations that the member states find more pressing. The Geneva framework accord from July 2004 comprises not the whole Doha-mandate, but concentrates on the key areas of agriculture, industry, the Singapore issues and developing countries’ preferential treatment. Brack and Branczik (2004) even conceive the possibility that the trade and environment debate will be dropped entirely from the Doha Round as negotiators want to concentrate on certain issues, rather than widening the agenda.

Development of WTO Case Law

For an assessment of the recent status of the development on trade and environment, it is not only important to evaluate the provisions of Ministerial Declarations and the WTO statutes. One also needs to look at the evolution of WTO case law, which developed under the rulings of the Dispute Settlement Body’s (DSB) Panel, followed by the Appellate Body as a court of appeal. In the absence of any clear rules, the case law provides a good yardstick for the questions at stake and the implications for the future relationship between WTO and environmental aspects.

“Tuna-dolphin” (1991)

In the tuna-dolphin case, Mexico complained against US-American trade restrictions on tuna. This conflict was handled under the old GATT dispute settlement procedure, but it still attracts attention because of its implication for environmental disputes. The US imposed an embargo on tuna that was not fished with dolphin-friendly devices. The Panel decided, however, that no country should be allowed to apply its own environmental regulation unilaterally onto another country; the US could not embargo imports of products simply because the regulation of process abroad were not the same as US regulation. The Panel ruled that Art. XX (b) and (g), which the US used as legitimisation for its ban, do not allow the protection of animals outside the national territory; only qualitatively different products are relevant for product differentiation, which  under Art. II GATT (equal treatment) and XII (non-discrimination) is not allowed. In this case, non-discrimination was seen as more important than environmental protection, as the GATT feared the potential misuse of Art. XX for environmentally-legitimated protectionism. This case brought the trade- environment debate into the public debate.

“Shrimp-turtle” (1997/1998)

The US banned shrimp fished without a turtle-excluder device (TEC) because of its 1973 Endangered Species Act, which listed some turtles as endangered and thus prohibited their “catch” within the US. After India, Malaysia, Pakistan and Thailand filed a complaint at the DSB, the US was forced by the Panel to lift the ban. Yet, after a heated debate, the US appealed the decision in 1998. The Appellate Body turned the conclusion of the Panel around and supported the US’s claim. It made clear that under WTO rules, countries have the right to take trade action to protect the environment. The US still lost the case - but not because it sought to protect the environment, but because it discriminated between WTO members: while it provided countries in the Caribbean technical and financial assistance and longer transition periods for their fishermen to start using TEC, it did not give the same advantages to India or Thailand. Thus, the second ruling by the Appellate Body upheld the rule, but weighted trade and environment more carefully against each other.

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How green should the WTO be?

Having established the actual relationship between the WTO and environmental concerns both at the level of statutes and case law, it is now important to look at the normative aspects of the debate. What should the role of the WTO be?

The general Trade and Environment Debate and  the Impact of Trade on the Environment

In theory, the objectives of trade liberalisation and environmental protection are compatible: they both aim for the reduction of distortion and thus optimisation of efficiency in the use of resources. From a normative, welfare-theoretical point of view, free trades and environmentalists have a common goal: the increase of social welfare. There are possible win-win situations in which trade liberalisation and environmental protection interact positively, for example in the case of elimination of trade subsidies that increase environmental degradation such as agricultural over-use of resources, deforestation or the depletion of fisheries. Trade encourages the economy to develop - from primary resource extraction to manufacturing and eventually to (less polluting) services. If poverty is the core of the problem of environmental degradation, economic growth will be part of the solution of a shift from more immediate concerns to long-run investment into the future resources[5]. Furthermore, an improvement in production techniques through international dissemination of technological knowledge helps reduce pollution.

Yet there are as well areas of conflict between trade and environment. Most importantly, trade increases economic growth and with the rise in quantities produced (and given market failures), pollution increases. Furthermore, trade liberalisation opens up the possibility of firms moving their production to countries with lower environmental standards in order to save costs. This can lead to “eco-dumping” in less regulated countries or to a “race to the bottom” of standards, if more regulated countries want to attract or keep business. The net environmental outcome of trade is difficult to evaluate precisely, but Brack (2000) evaluates that the structural effects and win-win situations are most likely to be offset by the large negative scale effects from the expansion of economic activity, and smaller aggregate negative distribution effects.

From a political economy point of view, tensions are normal between different policy goals that are pursued at the same time. The chances of succeeding in both areas are not great because both advocates need political support, and  they strongly affected interest groups in a unilateral way. Thus, while in theory it might be possible to advance both goals of trade liberalisation and environmental protection jointly, cross-border externalities are not properly internalised, and further liberalisation without internalising global externalities can lead to an increase in environmental problems. Thus, if unhampered trade liberalisation is potentially a negative determining factor of environmental quality and the WTO epitomises this principle, it is important to ask whether and how the WTO and environmental concerns should be combined.

On the appropriate role of the WTO regarding the environment

There is no international consensus on which role the WTO is supposed to play in environmental issues. Many free-traders world argue that the WTO should have nothing to do with environmental concerns, as its sole purpose is to promote free trade and that environmental protection should be left to another body, possibly the MEAs’ secretariats or a new body. Many also want to avoid a paradigmatic change along the lines of: “if it ain’t broke, don’t fix it”. Additionally, it is claimed that the WTO is not the appropriate institution for environmental concerns, as it is arguably overloaded. This trade round is arguably overburdened, and by advancing another the contentious issue such as environment and trade, this might contribute to the failure of the already-fragile round.

Similarly, developing countries are very sceptical about an expanded role of the WTO in maintaining environment standards. They accuse the EU of pushing for the WTO’s further development in its own environmental terms. This in turn decreases the capacity for developing countries to capitalise on their own comparative advantages  and it could be seen as “green protectionism” or “protectionism in disguise”, which will be picked up in the assessment below. In this sense, many suspect that environmental standards would not serve as market correction, but as disguised non-tariff trade barrier. There is the danger that pressure groups find it advantageous to support environmental claims in order to provide an additional, socially respectable, reason for unilateral import restrictions. Hence, although environmental issues have gained some legitimacy as an element of global trade policy, many economists remain unconvinced of the benefits from systematic linkages.

Why environmental protection should nevertheless be a concern of the WTO

Yet, this analysis argues that despite the arguments against it, the WTO should take environmental concerns into account. The well-rehearsed arguments include issues of unfair competition through low standards, subsequent eco-dumping, and a possible “race to the bottom” with regards to standards. Most importantly, however, are the problems of global externalities and the realities in which the WTO already operates and which affects the organisation’s image that have to be called in when judging the appropriate role of the WTO.

In recent decades, the issue of global or transboundary environmental problems has become a major concern to the international community. It has been internationally acknoledgedthat environmental problems cannot sufficiently be tackled by national environmental policies in order to capture transboundary externalities[6]. Nordström and Vaughan (1999) argue that trade liberalisation reinforces the need for environment co-operation at the national as well at international level. The ongoing dismantling of economic borders and national sovereignty reinforces the need to co-operate on environmental matters, especially on global problems. Trade liberalisation could potentially exacerbate the consequences of poor environmental policies. Bhagwati and Srinivasan (1996) have argued that global environmental spillover could eventually undermine the whole international economic order and compromise the gains from trade.

“ The WTO cannot operate in isolation from the world in which it exists”[7]: In the absence of a parallel organisation, with inclusive membership and a built-in mechanism for dispute resolution with sanctions, the WTO has emerged as a platform for debate on environment and trade issues over the last decade. In the need for cooperation, trade measures through the WTO are a powerful stick-and-carrot method to conform to international environmental standards. The theory of the second best suggests that one distortion (i.e. the environmental spill-over) can often be best met by another distortion (i.e. a trade ban) to enhance welfare on the whole.

Though while trade policy is clearly a second-best means to achieve environmental objectives, in practice it has become difficult to justify the exclusion of environment from negotiation on trade[8]. Morici (2001) states that whether one is in favour or against it, the WTO participation in environmental issues is already a practical fact and not a theoretical proposition - an inevitable outcome of the recent trends. To Esty (1996), responding to environmental concerns is a political necessity for the trade community: “If the momentum for trade is to be maintained, the already-narrow coalition in favour of freer trade” is risked.  As an influential institution of global governance, the WTO should to promote environmentally sensitive trading regimes and show responsibility to the common global goods.[9]

Assessment of the WTO’s provisions and latest developments

This article argues that WTO and environment are naturally linked and the role of the WTO in environmental protection should be an active one. From the discussion above it is obvious that the trade and environment debate has steadily moved inward to the WTO agenda. While GATT was an agreement solely with the purpose of reducing trade barriers, the WTO, according to Cottier (1997), “increasingly assumes constitutional functions in a globalizing economy. It moves center stage to shape global economic policies (…) the system become multifunctional.” Thus, the WTO has developed into an important forum of international environmental policy.

Yet it is not entirely clear whether the provisions built into the WTO-framework to protect the environment are a mere lip service to the environment. The establishment of the CTE and the provisions in the Doha Ministerial Declaration do not imply that that much progress has actually been made in terms of reaching a resolution of the inherent tensions. Despite progress being made in bridging some gaps between free traders and environmentalists, the North-South gap has become critical enough to threaten further programme on the agenda at all, including environmental aspects.

Assessment of the Committee on Trade and Environment

The CTE, established 1995, has a broad-based mandate, which was reaffirmed with the Doha Ministerial Declaration. It works in the areas of market access and the links between environmental agreements and the WTO. Its establishment constituted a step forward as it formally establishes a multilateral forum for trade and environment discussion -  the Doha round  thus constituted a partial success. Yet despite years of discussion, its findings have had no real impact: it has proven unable to agree on any such recommendation, and it has settled for playing a primarily analytical role.

Furthermore, the regular sessions lack a clear idea: even the WTO-own Journal “Bridges” ascribed the session a “lack of energy”[10] Brack and Branczik (2004) conclude: “Discussion within the Committee have undoubtedly contributed towards a greater understanding of the issues, but there is not much else on can say for its deliberations.” Hence, while being formally committed, the CTE’s actions have been disappointing.

Assessment of the relationship between Multilateral Environmental Agreements (MEAs) and the WTO

Since the establishment of the EMIT-group (environmental measures and international trade) in the 1970s by the GATT, around 200 Multilateral Environmental Agreements (MEAs) have been established, of which about 20 to 30 contain trade measures – normally bans, embargoes or “market transformation measure” (e.g. taxes, subsidies). The most important MEAs incorporating trade measures are CITES, Montreal, Basle, Cartagena, and Kyoto (not yet in force). The MEAs restrict trade either because trade itself is causing environmental damage, or as an enforcement measure. Trade measures in MEAs are second best and should thus be a last resort, but they can sometimes provide the best available point of leverage given the lack of other forms of sanctions. Their measures are often quite contrary to the WTO, where quantitative embargoes are generally forbidden and welfare is improved through free trade. Thus, there are possible grounds for conflict as a MEA-based trade measure could potentially disobey WTO requirements of WTO-non-discrimination.

The WTO-MEA relationship got a great deal of attention at the CTE meetings, yet little has been succeeded. While the EU has submitted several proposals on the co-operation between MEAs and WTO, many developing countries felt that the question was beyond the mandate of the CTE. Furthermore, no concrete decisions on the mandate of information exchange between WTO and MEA secretariats and regarding criteria for observer status of environmental organisations have been  taken so far. Although no trade measures pursuant to a MEA have been challenged in the WTO, there is no guarantee that such conflicts will not arise in the future, as the interaction of the two regimes is likely to increase. While WTO provisions solely deal with the relationship between two MEA-members regarding trade, with the US not willing to sign some MEAs (e.g. Kyoto), the main problem lies in the relationship with states that belong to a MEA but that deal with non-MEA countries.  As a result, the negotiating mandate around the relationship is too narrow: while the WTO mandate will – at best - solve the conflicts between two MEA-member countries, the potential conflicts between a MEA-country with a non-MEA country will most likely be far more important - the WTO is badly-equipped for this.

Assessment of WTO Case Law

Case decisions have in practice determined how the system treats trade-related environmental measures. Hence, as Cottier (1997) states, the WTO’s development in constitutional terms is not an “area of grand design, but of gradual evolution of case law”, often not noticeable for the untrained layman. Yet, according to Liebig (1999), “disputes (...) can shake the world system”: Before the 1998 ruling in the shrimp-turtle case it was often interpreted that GATT/WTO rules could be used to undermine domestic efforts to protect international environmental resource and could weaken MEAs. The Panels of both the tuna-dolphin or the shrimp-turtle case revealed a trade bias, and the decision ways heavily criticised. The Appellate Body’s decision in 1998 represents a shift in WTO law; it completed a transition in dispute settlement reasoning that, if sustained, would permit member states to invoke XX (b) or (g) to impose conditions on imports incorporating Process and Production Methods (PPMs) to accomplish environmental objectives. This has potentially far-reaching consequences for the entire relationship of the WTO and environmental protection. It might be used to further widen the potential for process-based trade restrictions beyond what was generally thought the WTO would allow.

Process and production methods (PPMs) have become one of the most difficult issues in the trade and environment debate. The problem with PPMs stems form the meaning of the term “like product” because under WTO law only different products (and not production methods) can be treated separately. There is an agreement that PPMs that have an impact on the final product (i.e. product-related PPMs) are allowed by WTO’s TBT. Yet, there is fierce disagreement over whether or not discrimination on the grounds of PPMs that do not affect the final product (i.e. like-products) is allowed.

Although the tuna-dolphin and the shrimp-turtle cases de facto limited the US’s ability to require others to adopt their standards, the second shrimp-turtle case sets an encouraging precedence because the Appellate Body also used NGO evidence and took into account the convention on international trade in endangered species (CITES) - and not just US domestic environmental law. Thus, while many environmentalists still see the WTO system as an obstacle to progress on environmental issues, the review of recent cases finds that actual legal decisions have encouraged international co-operation[11].

Market Access- green protectionism

The issue of environmental protection based on PPM-discrimination has great consequences for the developing countries. These countries often find themselves on the receiving end of environmental regulation: due to structural weaknesses they are standard-takers, and not standards makers. Thus, many developing countries are very suspicious about high-income countries’ motives and condemn this form of disguised protectionism vigorously. Krueger (2000) criticises: “Those seeking protection have no hesitation in cloaking their aspiration with the legitimacy of other issues.” (p.13) It is thus vital that environmental concern don not become an alibi for reintroducing unilateral trade barriers, which have been reduced elsewhere. Recently, rather than tackling these difficult issues, discussions have concentrated on the win-win situations on agriculture and fishery, where trade liberalisation could play a positive role for the environment.

The width of existing decisions on the WTO has favoured free trade but there is no closure on these issues, as can be seen from the second shrimp ruling. Thus, Brack and Branczik (2004) claim that, “The story of the trade and environmental debate in the world trade organization is one continued failure to make any substantial progress in rewriting WTO rules- but significant changes in the way in which existing rules have been interpreted.”

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Conclusion

While the net effect of trade on the environment is not clear-cut, the implications from the recent literature are that trade expansion through liberalisation is likely to affect the environment negatively. Thus, it is necessary to offset the effects, especially by adjusting global environmental policies upwardly through international coordination. The stance of the WTO on this is not entirely clear: WTO is not an environmental organisation but it is getting greener. In particular, WTO case law has developed in favour of environmental protection. Yet, in spite of the political recognition of the importance of environmental aspects and the link with trade and the WTO and the recent rulings, environment issues are still sidelined or treated as a residual issue if one looks at the recent development of the Doha trade round or the July framework accord.

As this article has shown, the topic of environment and trade and the WTO’s role in the debate is very heated and it includes a lot of rhetoric arguments on “green disguise” on part of the free-trade community and the developing world and on fears of a “race to the bottom” from NGOs and industrialised countries. In Doha, the “demander” for WTO negotiation on environmental issues was the EU, supported by Japan, Norway, and Switzerland. Yet, the great majority of members opposed such negotiations. This cleavage within the WTO needs to be solved – not only for the sake of the environmental debate – in order to achieve fruitful results in the recent trade round. In this context, the WTO needs to address environmental concerns in a way that does not increase the inter-organisational drifts and that strengthens the WTO as part of the global governance architecture. Especially in the absence of a global counterpart for environmental issues, the trade organisation cannot turn its back on this issue - deeds have yet to follow words.

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