Trade and Sustainable Development: The Global Picture
Aaron Cosbey
Program Manager, Trade Program
International Institute for Sustainable Development
Winnipeg, Canada
1. Introduction
The central questions I will address here are: Are there legitimate links between trade and environment issues? And if there are, why should the Republic of South Africa pay attention to them?
In answering these questions, I will first try to show at a theoretical level where the key linkages are. I will then try to argue at a practical level that they are important - like most market changes, they represent both a threat and an opportunity for those willing and able to act. I will then try to argue that the need is to broaden the discussion from trade and environment to trade and sustainable development. Finally, I'll try to make the case that trade openness is a necessary but not sufficient precondition for sustainable development.
2. The Key Linkages
The linkages between trade and environment are many, and complex. If we are discussing trade and sustainable development, as I will argue later that we should, those linkages multiply exponentially. It is possible, however, to group the majority of those linkages into three meta-themes. They are:
Trade can bring pressure to bear on environmental standards in either of two ways. First, it can spur demands for better environmental performance by foreign purchasers, or by multinationals with direct investments. Second, it can bring pressure to lower standards, or to poorly enforce existing ones, through the pollution haven effect. Together, this group of linkages can be thought of as the "competitiveness effect" of trade.
Markets that are closed or protected may impair sustainable development in two ways: by protecting inefficient, polluting domestic industries; and by denying exporters, particularly in developing countries, the opportunity to sell into the protected market.
The magnifier effect is so-called because it involves damage to the environment not from trade itself, but through trade acting as a magnifier of existing inadequacies of environmental policy. Perfect environmental policy would price environmental resources and services at their proper value - producers would be forced to pay the social costs of emitting effluents which pollute air, water and soils, or degrading renewable environmental resources such as forests and fisheries. These prices can be attached by a number of means, including charges, taxes, emission fees, deposit/refund schemes, etc. If they are not, then environmental resources such as forests, fisheries and minerals, and environmental services such as climate stabilization and fertility of soils, will in effect be valued at zero.
And therein lies the problem. Any input is used in relation to its cost. If palm oil is cheaper than soya bean oil, food processors will use palm oil. Similarly, if it is cheaper for a manufacturer to use the nearby river as a dumping ground for effluent than it is to use a process that produces no effluent, then the choice is obvious. When environmental resources are underpriced by poor existing environmental legislation, producers of goods and services will overuse environmental resources. Environmental economists would call this an inefficient outcome.
International trade, it can be easily shown, allows the scale of this inefficiency to be magnified beyond what it could be in a completely closed domestic setting. The fewer environmental costs are borne by a producer, the cheaper will be the final product, and the more of them will be demanded by a global market, particularly if foreign competitors are made to bear the proper environmental costs of production.
This brings us to the second linkage, or set of linkages, noted above: the competitiveness effect. One element of this effect is a result of the magnifier effect just elaborated. If regulators and producers understand that competitive advantage can be gained by avoiding environmental costs, there is pressure to keep such costs as low as possible. This can be done through non-enforcement or even lowering of existing regulations, or through "regulatory freeze" - the reluctance of environmental regulators to propound new and stricter environmental regulations, even in the face of evidence that they are needed.
This leads to the famous (or infamous) "pollution haven", where pollution-intensive manufacturing processes congregate in countries or jurisdictions which offer the lowest environmental costs. Evidence of the actual existence of such havens has been difficult to find. Most attempts, however, have focused on looking for industries which relocate looking for lower environmental costs, rather than those which get their way by merely threatening to relocate, which may be a far more common case. In the final analysis, of course, a firm deciding to relocate considers a wide variety of factors including labour costs, security of investment, availability of skilled managers, etc., of which environmental cost is just one.
The other type of competitiveness effect works in the other direction, encouraging improved environmental performance. International trade means that domestic producers may face a market demand for products which are "greener" than those they would otherwise produce. In markets such as the EU and North America, both retailers and manufacturers are increasingly demanding that their suppliers abroad produce to the high standards that are the norm in those markets. They may, for example, demand that certain toxic textile dyes not be used in the manufacturing process, or may even demand that the cotton used be organically grown.
In addition to this non-regulatory type of pressure, there is also the pressure exerted by quasi-regulatory regimes such as ecolabels. In order to be awarded an ecolabel in a foreign market, manufacturers need to meet the criteria - often production-related - that are set in those markets. These may have little relation to the environmental or social reality in the place of manufacture, but they are sometimes important nonetheless to winning export market share.
Of course, there is also the regulatory type of pressure - where laws in a foreign market dictate that certain environment-related conditions be met as a condition of market access. Packaging and labelling requirements are the most common regulations of this type. Exporters to Germany, for example, must package their products in 100% recyclable materials.
Finally, there is the competitiveness effect which comes from foreign investors/multinationals which establish production facilities in a country. Often, these may bring with them production techniques, technology or standards of operation which are the norm in their home country, but which exceed the environmental regulations existing in the country of operation.
The third type of linkage between trade and environment occurs in the context of closed or protected markets, and can be of two types. First, a protected market can impair sustainable development domestically, by sheltering domestic industries which are inefficient and polluting. The US steel industry, for example, is far less energy efficient than its counterpart in Japan, but thrives nonetheless in part because of protectionist barriers. The results are less than optimal for the US citizens, who must foot the bill by paying higher steel prices and higher taxes, and for the environment which must sustain all the damage inherent in excess production of energy.
Second, a protected or closed market can impair sustainable development in foreign countries by denying them the opportunity to export. For example, the Multi-Fibre Arrangement (MFA), a long-standing carve-out exception to the multilateral rules of trade, effectively limit the imports of textiles and clothing accepted by developed countries. The costs of this single piece of legislation, in terms of lost economic development particularly in developing countries, is enormous. A Canadian study found that the cost to Bangladesh alone of Canada's participation in the MFA exceeded the amount of Canadian official development assistance bound for that country.
Looking at the linkages detailed above, we can see that the trade-environment relationship is not straightforward. It is not a case of trade always being the enemy of the environment, or of environment legislation always being a barrier to trade. The actual effects vary according to the circumstances. And the inevitable presence of several effects working simultaneously mean that any cut-and-dried portrayals of the relationship are worthless. This points to a theme that will recur throughout this paper - the need for research, to better inform industry and governments of the realities in their particular settings. Without it, policies and investment decisions may have unintended and unfortunate results, such as environmental degradation or lost market share.
3. The Need for Concern
We have thus already begun to answer the question which will be the focus of this section of the paper: Given that these linkages exist, why should the Republic of South Africa be concerned?
First, it bears arguing that these linkages, for better or for worse, are real. Whatever the result of the theoretical debate over whether trade and environment are in fact related, the realpolitik is that the two policy areas are inextricably wedded.
The first demonstration of this was a trade dispute heard by the old GATT in 1991, over U.S. legislation which tried to change marine environmental practices abroad. This was the now famous U.S.-Mexico Tuna-Dolphin dispute., under which the U.S. sought to ban the imports of tuna from Mexico, arguing that the incidental killing of dolphins during the fishing process was higher than that allowed for U.S. fishermen. Another such case is now before the new WTO Dispute Resolution Panel; the U.S. has banned the import of shrimp from any country which does not have a regime comparable to its own for protecting sea turtles. In fact, the first dispute to be heard by the new WTO settlement mechanism was environmental - Venezuela and Brazil claimed that the US was discriminating against foreign refiners in a piece of legislation designed to improve the environmental quality of gasoline.
As well, the ISO 14000 system of environmental management has now been propounded, and looks to follow the example set by the ISO 9000. That is, it may soon be that if companies in certain sectors want to be internationally competitive, they will have to follow the ISO guidelines for environmental management of operations. And there is an ever-growing number of national-level ecolabelling schemes (over 25 world wide) which many worry can act as non-tariff barriers to imports. It was previously noted that there are also regulatory linkages binding trade and environment, a notable example being Germany's strict environmental laws on packaging and labelling.
There are also the non-regulatory examples of trade-environment linkages. Consumer bans and boycotts are all too familiar to South Africa, but these are now increasingly being based on environmental grounds, as my country knows too well. A European consumer boycott of fur seal pelts decimated Canada's sealing industry, and a recent effort by Greenpeace to publicize inadequacies in Canada's forestry practices led, among other things, to the loss of a $5 million contract with European purchasers.
Finally, I believe that at some point the WTO will be forced to formally begin the process of writing law which tries to separate legitimate environmental protection from protectionism disguised as environmental concern. In the same way that, when the general rules of trade were insufficient to address the specialized case of intellectual property rights, or the agricultural sector, the Members drafted special agreements addressing these areas, the WTO will eventually have to set out rules that dictate under what conditions environment may be used as a basis for trade measures, and what form the latter might take.
To date the WTO Members have shown little desire for such a process of negotiation. Primarily this is because developing country Members fear that any such law would end up legitimizing, rather than protecting against, protectionism masquerading as environmentalism. They would, understandably, prefer no agreement to a bad agreement.
But such an agreement must eventually come, for the good of not only the environment, but of the multilateral system of trade rules. Unilateral measures such as the U.S. shrimp ban are becoming only more common, and will continue to proliferate as environmental concerns heighten world wide. The current system, which by default calls on WTO Dispute Settlement Panels to decide what is protectionism and what is not, using rules written before the environment was ever a concern, is already straining under increasingly fractious disputes. And when the WTO does begin to address the issue seriously, resource exporters and smaller countries had better be in a position to articulate their interests.
So South Africa has a number of good reasons as a resource exporting country to be concerned about the complex relationship between trade and environment, and about the fora in which these issues are debated. The reasons argued above centre around the theme of the threat of lost market share.
Trade, environment and development
But there are other compelling reasons to pay attention to these issues as well. Good national policy must be informed by a good understanding of what is the national interest. It is not enough, for example, to assume that increased exports and rising GDP are beneficial without taking account of the associated environmental costs and benefits. The World Commission on Environment and Development (the "Brundtland Commission") first pointed out that the environment, the economy and development are inextricably linked, and that policies which ignore this fact risk failure even by their own narrow criteria. A wealth of empirical evidence has since accumulated in testimony to this fact. Another good reason to be concerned about the relationship between trade and environment, then, is to help properly define national interest, to include environmental goods on the balance sheet.
As an aside, it is important to note that the Brundtland relationship would have us focus more broadly than trade and environment, to include issues of development in the equation. In effect, many have argued that the debate needs to broaden from trade and environment to become a discussion of trade and sustainable development.
The distinction is crucial. The heart of the trade-environment debate is differences in environmental standards across developing and developed countries. We have seen that the trade-environment perspective produces solutions in the form of, inter alia, environmentally-based trade bans. A trade and sustainable development perspective, on the other hand, is able to better see the roots of the differences. Clearly, many developing countries have less capacity - technical, administrative, financial -- to address environmental concerns. And many simply have different priorities due to lower income levels, focusing for example more keenly on clean water issues than on issues such as global warming. Seen from this perspective, differences in environmental standards across countries should obviously be addressed not by trade bans, but by assistance which builds capacity to address the issues. This may take the form of technical or administrative assistance, transfer of environmentally preferable technology, producer-consumer agreements on production methods, financial assistance and so on.
The WTO Shrimp-Turtle dispute can be used as an example of the distinction. The trade and environment linkages in this case are not complex: some of the shrimp imported by the US entails in its production environmental damage - mortality of endangered sea turtles. A trade solution to the problematic linkage is also therefore not complex - a ban or threat of a ban should bring the environmental offenders into line. There are many problems with this approach, not the least of which that it poisons the atmosphere of international cooperation on sustainable development matters.
Adding a development perspective changes the picture. The shrimp fishermen have poor capacity to implement the changes mandated by the US legislation, and the Ministries involved have little administrative, technical or financial capacity to assist or monitor them. As well, there is little domestic constituency for such conservation measures, since income levels in the shrimp exporting countries are relatively low. Policy solutions resulting from this analysis of the problem are quite different. They might involve building capacity to use different fishing technology, via financial transfers, technology transfer or training. They might also involve assisting to build domestic constituency for the conservation concerns at hand. Such policy solutions, built on a trade and sustainable development analysis of the issue, are likely to be more robust in promoting sustainable development overall. They attack the real root of the problem, and by their nature they promote international cooperation.
Trade necessary, but not sufficient for sustainable development
My organization, the International Institute for Sustainable Development, has been promoting this sort of approach for a number of years. The conclusion we have reached over those years of analyzing the issues, is that trade liberalization and market access are necessary, but not sufficient, conditions for sustainable development. This is not a position that endears us to those in either the environmental or the pure free-trade camps, and bears some explanation.
Trade openness is necessary for sustainable development because, particularly in developing countries, more sustainable forms of development will not emerge without the growth brought by trade. Openness to foreign trade has a number of positive environmental effects:
But trade openness is not in and of itself sufficient to guarantee the achievement of sustainable development. Growth brought by trade only makes it possible for a country to increase its efforts at environmental protection. And it was argued above that if prices of environmental resources are distorted, by poor environmental regulation or by subsidies for environmentally damaging industries, increased trade may in fact exacerbate environmental problems.
In fact much of the remarkable surge in economic growth in Asia seems to have done just that. Between 1981 and 1990, the rate of deforestation in East Asia was more than 50% higher than in Latin America. Acid rain is a growing problem in Northeast Asia. And China's rapid economic growth could make it the world's largest single emitter of CO2 within 25 years. And, as per the Brundtland Commission warning, even the economic costs of these rates of pollution growth can be very high. Vaclav Smil, the Canadian economist, estimates that the costs to China may be as high as 20% of GNP per annum.
4. Conclusions
There are clearly a number of important ways in which trade and sustainable development are related, and reasons for exploring this relationship. One is the threat to export market share inherent in the greening of major developed country markets. There is also the opportunity brought by greening of markets, in terms of new market niches, and the improved efficiency that can be brought about via environmental concerns and the competitiveness effect. As well there is the close relationship at the domestic level between economic growth, environmental integrity and development.
In all parts of the world, but particularly in resource-exporting developing countries, there is an urgent need for more research to identify the ways in which trade and sustainable development are linked at the local level, and to better understand how these linkages are played out on the global stage. This research should inform policy makers in trade, foreign affairs and environment Ministries, and should make the case for better integrated policy formulation. Dialogues such as this one are an important step in the process of defining national strategies. Only through such efforts will vulnerable countries be able to avoid and preempt the threats inherent in the trade-sustainable development relationship, and exploit the opportunities for improved economy, environment and development.
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