Expert Opinion: The Future of the Trade and Environment Debate

A Conversation with Hector Torres

Has the trade and environment debate lost steam? I would say that the debate has seen little progress since the December 1996 Singapore Ministerial and has been going around in circles. When the Uruguay Round was finished, there was a big push from the United States to include environment in the WTO. The Committee on Trade and Environment (CTE) was entrusted with a clear mandate and was tasked to present its findings at the Singapore Ministerial. However, by the time Singapore came around, the U.S. had lost interest in trade and environment and the CTE was pushed back to the periphery and stripped of its clear negotiating mandate.

Since then, the discussions have been stuck in a rut. Neither developing countries nor the current U.S. Republican administration are demandeurs, willing to push the trade and environment debate to the forefront. Although the Europeans have an interest in pursuing a stronger environmental agenda, they seem to have neither the willingness nor sufficient strength to push this debate forward.

However, even though trade and environment in the WTO is now stalled, there are a few areas where the debate needs to go if it is to become meaningful, especially from a developing country perspective. I can think of at least three specific issues that need to become part of future trade and environment negotiations.

1. The Primacy of National Legislation. First, an unending and fierce debate has raged between countries that prefer to pursue developing international standards and those that prefer a national approach to environmental legislation and regulations. I can understand the argument for national legislation and have no problem with it.

However, as a global citizen, I believe that the international arena should demand enforceability and accountability in the implementation of national environmental regulations. Once nations have set their environmental laws and regulations, they should have an international obligation to ensure that these laws and regulations are implemented. We resist the push for international regulations in the name of sovereignty, but bad governance at home means that national laws are not necessarily enforced. In developing countries, implementation of national environmental laws remains unsatisfactory. Politicians tend to enact environmental legislation in response to popular discontent or concern over the state of the environment or international pressures. However, the capacity and/or willingness to enforce existing legislation remain low. It is fair for developing nations to demand the right to develop their own environmental standards and regulations to match their economic development. But it is the obligation of every country to enforce its national environmental legislation. The future of the trade and environment link will be determined not just by the international regulations to which we agree, but also by how well we enforce our domestic regulations pertaining to both trade and environment.

2. Shift of Focus from PPMs to Consumption and Disposal. There is an urgent need for the debate to look at the entire product lifecycle rather than just one part of it. Much of the trade and environment debate to date has revolved around process and production methods (PPMs). This is, of course, very important. However, it is now time that the focus of the debate be broadened to include the entire product lifecycle, which includes not just externalities stemming from the production of goods, but also from their consumption and disposal. The obsessive focus on PPMs unfairly shifts the burden onto developing countries as the villains of environmental degradation and ends up targeting outdated production methods mostly used in developing countries, without being equally vigilant about externalities stemming from lavish consumption and irresponsible disposal. Some of the most severe environmental effects come not from PPMs, but from consumption and disposal of products.

Beyond this, it should be noted that the debate over whether PPMs are consistent with WTO rules could be solved by delving into the original intention of the 1995 Technical Barriers to Trade (TBT) Agreement and the subsequent practice of countries. There is a subtle difference in the definition between technical regulations and standards that leaves room for the argument that PPMs unrelated to the product could be used in standards to differentiate “like” products. To make the situation even more confusing, many of the countries that argue that the use of PPMs to differentiate “like” products is WTO-inconsistent, actually use PPMs in eco-labelling and other voluntary labelling schemes (for example, to differentiate organic food). This could be clarified through legal interpretation, but it would be far more desirable to settle the issue at the political level, where agreement can be sought on when and where PPMs are an acceptable means to differentiate products.

3. Tariff Escalation and Export Taxes. We need to carefully consider the perverse economic and environmental effects of the tariff escalation that developing countries face. Given the capital constraints that many developing nations face, they are compelled to raise capital either by borrowing, by attracting investment or by generating trade surpluses. Both borrowing and attracting investment pose difficulties and depend on factors that go beyond their domestic policies. Thus, developing nations often need to rely on their capacity to generate trade surpluses to service their capital requirements. Developing nations would like to trade in value-added exports as these create more employment and greater opportunities for sustainable development. However, the more value developing countries add to their exports and the higher they go up the production value chain, the more tariffs these products face because of tariff escalation in export markets.

In addition to being a drag to development, tariff escalation leads to perverse effects on the environment. Due to tariff escalation on value-added exports, many developing nations need to rely almost exclusively on trade in commodities, which face lower tariffs. This turns out to be an incentive for the over-exploitation of natural resources. The problem is compounded because some developing countries tax or restrict exports of commodities in order to offset the effects of tariff escalation on their processing industries. By taxing exported commodities, developing countries are providing cheap inputs to processing industries to offset the trade consequences of tariff escalation. These effects thus feed into a perverse cycle that ultimately leads to over-exploitation of natural resources with negative consequences for the environment.

In short, if the trade and environment debate is to make any meaningful progress, it has to broaden its focus to include three key dimensions. First, it has to broaden its focus to include the enforcement of national regulations as an international obligation. Second, it has to broaden its focus to encompass the externalities stemming from the entirety of the product lifecycle, including consumption and disposal. Third, and importantly, the debate has to examine the impact of policy failures and market instruments—rather than just the impact of environmental regulations—on natural resources and environmental quality.

Written by Adil Najam and Hyun Jung Jo Choi based on a conversation with Hector Torres. Hector Torres, from Argentina, served as a trade negotiator for his country and is now an Executive Director at the International Monetary Fund (IMF). The opinions above were expressed in his personal capacity.