Index

Environmental Goods and Non-agricultural Market Access

Nathalie Bernasconi-Osterwalder, Linsey Sherman and Mahesh Sugathan

“Many studies also point, in particular, to the benefits of eliminating barriers to imports of so-called ‘environmental goods.’ There is an ongoing debate, especially within the context of WTO negotiations, on the scope of what constitutes environmental goods.”

The relationship between the environment and trade liberalization in industrial goods is complex and of great interest to the trade, environment and development communities. Literature and impact studies point to the negative environmental impact of liberalization in forestry, fisheries and minerals in the absence of sound environmental policies. At the same time, liberalization may have environmental benefits. Tariff barriers on processed or value-added products are in general much higher than the raw natural resource exports from which they are derived. As a result, many developing countries have exported large quantities of natural resources for the sake of relatively little export revenue. Reducing high tariffs on processed, valueadded products could ensure that developing countries earn more through their exports at a lower cost to their natural resource stocks.

Non-tariff measures (NTMs, referred to in the negotiations as non-tariff barriers or NTBs) used by developed countries that often fulfill important environmental or health policy objectives continue to be perceived by developing countries as significant trade barriers to their exports (particularly for fishery and forestry products). Developing countries, on the other hand, generally apply high tariffs on manufactured products. Hence, the focus of attention for developed countries in market access negotiations is often tariffs, while for developing countries it is NTMs. The exception is developing country demands for the elimination of extremely high tariffs on particular tariff lines (tariff peaks) and higher tariffs for higher valueadded products (tariff escalation) in developed country markets.

Many studies also point, in particular, to the benefits of eliminating barriers to imports of so-called “environmental goods.” There is an ongoing debate, especially within the context of World Trade Organization (WTO) negotiations, on the scope of what constitutes environmental goods. While developed countries enjoy a comparative advantage in the production of industrial environmental goods used for environmental remediation, and argue for the definition to include these products, many developing countries are interested in including environmentally preferable products (EPPs). However, the standards these products might have to meet to qualify as “environmental,” such as certification, standardization and labelling, might impose equivalent costs and could be construed as barriers to trade.

Relevant WTO Negotiations

The Doha Ministerial Conference in 2001 mandated the WTO Committee on Trade and Environment (CTE) to launch specific negotiations on trade and environment including on the reduction or elimination of tariff and non-tariff barriers to environmental goods and services (EGS) under Paragraph 31(iii) of the Doha mandate. This is an entirely new issue for the WTO and it establishes a direct link between negotiations in the CTE and in the Negotiating Group on Market Access (NGMA) on industrial goods (or non-agricultural market access, NAMA). (See related discussion on Environmental Services.)

Negotiations relating to NAMA are primarily taking place in the NGMA, where much of the discussion in the negotiations has centered on cutting tariffs. In that context, discussion has focused on variations of different formulae that, if agreed, would then be applied by Members to systematically reduce their current tariff levels. The type and construction of the formula has been a point of controversy and WTO Members have been divided on the issue largely, but not exclusively, along developed-developing country lines. In addition, small groups of countries have begun additional “informal” negotiations on the complete elimination of tariffs in specific sectors, including environmentallysensitive sectors, such as forestry and fisheries.

The second significant aspect of current NAMA negotiations is the discussion related to NTMs. At the insistence of developing countries in Doha, NTMs were included in the negotiations on NAMA, both to address the use of non-transparent NTMs in developed countries and to counterbalance the effects of reducing their own tariffs. In the negotiations on NTMs, Members have been requested to notify those measures problematic for their exporters to the NGMA. Several Members, from both developed and developing countries, have notified various environmental, safety and/or health standards as barriers to their exports. It is important to note that these notifications are not intended to indicate whether or not measures are perceived as illegal or whether or not they pursue legitimate public policy objectives. Notification simply reflects the perceived restrictive effects on trade of these measures.

Interests and Fault Lines

Tariff Negotiations: Sectoral Agreements

Although sectoral agreements for tariff elimination have generally been opposed by developing countries, this process has moved forward informally amongst interested Members, such as the United States, New Zealand and Thailand. Most developing countries have not considered it to be in their interest to scatter tariff negotiations into individual discussion groups on a sectoral basis. However, it is expected that a small group of countries will agree to eliminate tariffs in a variety of sectors, which they will present to the NGMA as finished deals. In this case, the benefits would be extended to all Members, although the commitments would only be binding on the small group of countries involved. Sectors that have been proposed for accelaterated liberalization also include a number of environmentally-sensitive sectors, such as fisheries, forestry products, chemicals and raw materials.

There are no indications that WTO Members are taking environmental considerations into account as they engage in tariff elimination negotiations in sensitive sectors in the NGMA. This, despite the fact that some evidence exists to show the likely negative environmental impacts some countries will experience as a consequence of complete tariff elimination. For example, the European Union commissioned a sustainability impact assessment (SIA) of the WTO negotiations, released in June 2005, which focused, inter alia, on liberalization of the forestry products sector. Using a model scenario of full liberalization (zero tariffs), the SIA study predicts that developing and some transitional economies that have problems with forest governance could face significant social and environmental costs, which could outweigh any economic gains from additional trade liberalization in the absence of adequate safeguards.

While some proponents of sectoral agreements argue that increased economic activity will allow developing countries to reinvest in environmentally sound infrastructure, the EU SIA finds that complete liberalization is more likely to magnify existing policy and institutional strengths and weaknesses rather than drive forest governance change. During the course of discussions at the WTO, some Members have been in favour of full liberalization of all raw materials, citing “win-win” opportunities for exporting countries through increased market access, and for industrialized countries through cheaper raw materials for processing industries. Others, for instance Japan, have recognized the potential dangers posed to conservation by liberalization of raw materials, such as fisheries and forestry products.

Currently, only a few countries, such as Canada, the United States and the European Union, regularly conduct environmental impact assessments of trade negotiations and agreements. In most cases, assessments undertaken with respect to developed countries find that these countries have sufficient domestic regulatory frameworks in place to counterbalance any negative environmental effects in sensitive sectors. However, many developing countries do not yet have the resources to develop strong regulatory schemes and their domestic environment may be unduly affected by the sectoral tariff liberalization being promoted by developed country trading partners.

Non-tariff Measures Negotiations

Since agreement on the “July Framework” in 2004, the Chair of the NGMA conducted a notification exercise in which Members were invited to notify NTMs that hindered their exports in various markets to the NGMA. The notification exercise has been perceived to be extremely difficult and complex for many, especially smaller, developing countries. As a result, many developing countries have not notified the NTMs that are problematic for their industry and, therefore, the overall picture of notifications is not representative of developing country concerns.

Several proposals support a horizontal approach to negotiations, which would have Members discuss several selected NTMs across all sectors. Some Members, however, have strongly advocated a vertical approach, according to which Members would focus on NTMs of interest to particular industries. This suggestion could be problematic for some developing countries that do not want to establish any formal link between a vertical approach in NTMs negotiations and the possibility of sectoral initiatives in tariff formula negotiations. Those Members supporting a vertical approach to modalities favour the use of plurilateral group discussions, with the results to be applied on a most favoured nation (MFN) basis. In other words, a small group of interested countries would decide to address NTMs in a particular sector and then apply the benefits of these new rules to all Members (although those not party to the discussions would not be bound by the rules). Additionally, others have proposed that NTMs covered in existing WTO agreements, such as the Agreement on Technical Barriers to Trade (TBT), should be addressed through dispute settlement as a “compliance” issue and not through negotiations. Their argument is that the NTMs faced by exporters in practice sometimes occur because Members are not appropriately implementing their commitments.

Some of the NTMs that have been identified as problematic to certain industries and notified to the NGMA are important tools for domestic environmental policies. For instance, the United States has notified policies that promote fuel efficiency, distinguishing between vehicles based on engine size, while China has notified regulations that promote energy efficient policies for household appliances, air conditioning units and heating, as implemented for instance in the EU. Bringing such a broad range of measures into the NAMA negotiations could weaken existing environmental standards and limit Members’ ability to adopt new legislation for legitimate policy objectives. While this should be avoided, it is also important to recall the objectives of the “Doha Development Agenda;” it is essential that Members address the relationship between legitimate standards and regulations of developed countries, and the lack of capacity of developing country exporters to meet these standards and regulations. In this regard, effective and operational technical and financial assistance will play an important role.

Defining Environmental Goods

The Doha mandate does not provide guidance on the definition of environmental goods, or on the modalities for negotiating tariff reductions. In early 2002, Members agreed to shift the Paragraph 31(iii) mandate on liberalizing environmental goods to the NGMA. However, since there is no clear definition of environmental goods, the CTE in Special Session (CTE-SS) has continued to examine the scope and definitional aspects of this mandate. The most commonly discussed approach to the negotiations is the “list” approach, whereby Members submit lists of environmental goods they wish to negotiate, based on which the CTE-SS would agree on a final list of products to be liberalized. India has suggested an alternative approach, which would classify goods as environmental based on their use in “environmental projects.”

Those advocating the list approach (primarily the developed countries) propose that, following submissions of goods from Members, the CTE-SS would negotiate a final list of goods considered to be environmental. Many advocates of the approach consider this to be the only practical option for coming to agreement on a set of products for which tariffs would be reduced. The Organization for Economic Cooperation and Development (OECD) and the Asia Pacific Economic Cooperation (APEC) Forum have produced lists of environmental goods, from which many WTO Members have drawn in drafting their proposals. However, many developing countries have raised concerns about focusing exclusively on these lists, particularly since they were created largely by developed countries and do not contain products of export interest to many developing countries. Another criticism of the list approach is that it focuses on goods with an environmental enduse only, and does not include goods produced in an environmentally sound manner.

UNCTAD has done extensive work, outside the context of the WTO negotiations, on a category of goods described as environmentally preferable products (EPPs), which has generated substantial discussion. Although an agreed definition has yet to emerge, UNCTAD defines EPPs as “products that cause significantly less ‘environmental harm’ at some stage of their life cycle than alternative products that serve the same purpose.” Brazil, Switzerland, New Zealand and the European Union support including EPPs within the list framework. Members that are supportive of a narrow list argue that broadening the definition would result in the inclusion of “multiple-use” products, which could be used for both environmentally sound and destructive purposes.

Given rapid technological advances, there is also concern that a static list of environmental goods could become obsolete in a few years. Therefore, New Zealand and the EU have proposed the concept of a “living list,” to which products could be added and deleted as technology evolves. The fact that “environmental friendliness” is a relative concept poses potential problems, especially where superior substitutes exist or may be used in the future. For instance, some experts believe that if hydrogen evolved into a fuel for popular use, natural gas would have less claim to be considered an environmental good. Yet, once tariffs for natural gas have been eliminated, it would be difficult to raise them again.

Some developing countries have also noted the lack of special and differential treatment provisions in current list approach proposals. Cuba has outlined areas where development concerns are not being taken into account in the CTE-SS discussions and formally supports a proposal from China, which suggests a “common list” of goods and a “development list,” “which comprises those products selected by developing and least-developed Members from the common list for exemption or a lower level of reduction commitment.” New Zealand has also proposed a “dual list” approach, supported by the United States, with a core list applicable to all Members and a complementary list, from which Members would self-select an agreed percentage of products for tariff reduction.

The reality is that most developing countries lack a comparative advantage in traditionally defined environmental goods that are capital or technology-intensive. In many cases, process and production methods (PPMs) would be the only criteria for including such products of export interest to developing countries. However, most WTO Members, particularly developing countries, want to avoid using PPM criteria to define EPPs, partly based on the fear of setting a precedent for introducing this concept in the WTO.

India’s environmental project approach was presented as an alternative to the list approach; it would define environmental goods based on their use in a given environmental project. National authorities would grant projects “environmental” status for a set period of time, during which tariffs and NTBs would be reduced on designated goods for use in the project. This would be a continuous process, as new projects become designated “environmental” and existing projects are terminated. The CTE-SS would formulate the criteria that a designated National Authority could use to screen projects for approval.

Many developing countries support a project- based approach, largely because it solves the problems associated with multiple-use products and directly addresses special and differential treatment for developing countries. They argue that the mandate from Doha is essentially environmental-benefit oriented, and market access is a means to that objective; not the objective itself. However, some WTO Members are concerned that this approach could prevent small and mediumsized enterprises from benefiting from tariff reductions on environmental goods, because they do not have the capacity to mount largescale projects, or the resources to engage in possibly complex certification procedures with national authorities. There are also some concerns on the appropriate definition of an “environmental project,” as well as how this would be administered multilaterally on an MFN basis.

Trends and Future Directions

The outlook for multilateral trade liberalization in environmental goods remains cautious and uncertain. Lists submitted so far have focused on “end-of-pipe” equipment and remedial technologies. The environmental and developmental benefits of these environmental goods should be clearly demonstrated. Moreover, negotiators may also need to consider the environmentally sound and developmentally supportive characteristics of EPPs. At the same time, negotiators should specifically focus on increasing market access for environmental goods produced by developing countries in order for developing countries to be fully engaged in, and fully benefit from these potentially important negotiations.

In addition, a transparent negotiating process is essential to assess the environmental trends that are likely to result from proposed liberalization in sensitive sectors, such as forestry and fisheries products, chemicals and raw materials. Negative environmental impacts could be particularly significant in these areas for countries that do not have established structures of environmental governance. Negotiators should take these challenges into account and identify flanking measures or, where necessary, refrain from negotiating further liberalization.

It should also be noted, however, that while WTO negotiations on non-agricultural market access could have major environmental consequences, trade liberalization through autonomous policies and bilateral and regional trade agreements could be just as influential. For example, if a country, such as China, has enormous demand for environmentally- sensitive natural resources and decides to autonomously reduce its applied tariffs regardless of the WTO, this could also have environmental (and developmental) consequences in the exporting countries.