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Conflict Between Free Trade and Environmental Protection
------Where we go and what we do tomorrow
Co-author: Bailey Xu, Chambers Yang, Marshal Chen & Morris Lin
Introduction
In the early 1990s, there were two significant events affected the whole world dramatically. One was that the completion of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) and the establishment of the World Trade Organization (WTO) in 1994. It is believed that trade liberalization is important to enhancing world economic welfare. The other was that the concept of sustainable development was arisen during the United Nations Conference on Environment and Development in June 1992 and the concept was stressed in the Rio Declaration. Environmental protection has become an exceedingly important objective. As time going, people are more and more concerned with the environmental degradation and tried to find out the cause. Some believe that free trade leads to depletion of natural resources and pollution of environment. Some identify poverty as the primary cause of environment degradation and recognize the need for a new era of economic growth. Some countries use trade measures to protect environment, but are opposed by some other countries. The linkage between trade and environment becomes a major controversial topic in the areas of both international environment law and international trade law. The Committee on Trade and Environment (CTE) was established aiming to identify the relationship between trade and environmental measures in order to promote sustainable development. However, so far the connections between the two fields remain unresolved and controversial. It is clear that the opinions of those who are primarily concerned with the environment are completely different from those prefer free trade, and there are also obvious difference in attitude to the issue between developed and developing countries.
This article is to briefly outline different points of view and attitudes, discuss some important cases in this area, and try to provide our suggestions based on the different solutions.
Part One: Conflicting opinions and attitudes to free trade and environmental protection
As mentioned above, there are different opinions and attitudes to the relationship between trade and environment. Those prefer free trade regard environment factors as part of the comparative advantages that one country may have to another. If all the countries have the same environmental standards or environmental resources, it will distort the free trade because it is negative to comparative advantages that are the basis of the belief of free trade. They believe that a country would only raise its environmental standards when the marginal benefits of that protection would be equal to the marginal costs. It is this market-based idea that determines the efficient allocation of resources between environment and other concerns. Actually, when the economic growth of the developing countries has reached the threshold, they begin to take steps to raise their environmental standards. One example is that Singapore has adopted its own eco-labelling scheme, the "Green Label" in 1992. In the past, the eco-labelling scheme was regarded to be used only by the developed countries to protect environment.
Another point of those in favour of free trade is that there should be no inherent conflict between trade and environment. The common objective of the two sides is better life, trade is regarded as a means to attain sustainable development, and we should use trade measures to further protect the environment, but not use environmental measures to restrict trade. They argue that as countries developing, they spend more on environmental controls and so tend to pollute less than they did when they were less advanced economically. The changed attitude of the developed countries is the best example. It is the same to the developing countries. China has 1.3 billion people living in the limited territory. In the past, peasants had to destroy plenty of forest and grassland for cultivating to support so many people. Now, some of these peasants are encouraged to give up cultivating and to plant more trees and grasses because China central government promises to provide free food to them. And it was also reported that between 1998 and the end of 2000, China's central government would have spent a total of RMB 27 billions (US$3.26 billions) for ecological and environmental project. It is incredible and unprecedented in China's history.
So countries especially developing countries argue that economic growth and trade liberalization have a positive role to play in the achievement of sustainable development. And an open, equitable and non-discriminatory multinational trading system has a key contribution to make to national and international efforts to better protection and conserve environmental resources and promote sustainable development. Further liberalization of international trade has a crucial role to play in order to generate revenue that can be devoted to environmental protection, to allow for a more efficient allocation of environmental resources and for the removal of trade restrictive policies. It is also argued that trade restrictions are neither the only nor necessary policy instruments to use in multilateral environmental agreements. It is also stated in Principle 21 of the Rio Declaration that "unilateral measures should be avoided as far as possible".
There is no doubt that the developing countries are the initiators and supporters of above-said opinions. The developing countries are also concerned with the attitude of the developed countries. The developing countries argue that developed countries are seem to be more concerned with environment, but actually not, because they consume more energy and thus cause more pollution, but they are unwilling to reduce energy consuming. It seems that they are more concerned with promoting environmental protection, but actually not, because environment standards they use are not always for environmental protection, but for something else. The NAFTA is a good example, what the US labour unions wanted to do was that they want to prevent the loss of job to lower-cost Mexico. It seems that they are more concerned with environment of the whole world, but actually not, because they export goods that are domestically prohibited in their own territory to the developing countries, they even export hazardous and other wastes to the developing countries. It seems that they are more concerned with environment of the whole world, but actually not, because they are more powerful, they use the carrot and the stick to raise environmental standards, but they are miserly in finance and technology assistance. The developing countries are left to be lack of information and technology to change their production methods to meet the environmental standards.
However, on the other hand, many environmentalists are critical of trade liberalization. In their view, free trade is responsible for many aspects of environmental degradation and for the failure of policy makers to protect the environment adequately.
They argue that free trade shifting the production of pollution-intensive goods toward the low-income, high-polluting South and that will increase global pollution, because the decrease in northern emissions is insufficient at the margin to compensate for the increase in southern emissions. They also think that because pollution is not local but trans-boundary or global in nature so pollution in one country may affect another country’s environment. Green house is a good example.
Another important argument that environmentalists hold is that the trade liberalization can make the developing countries and developed countries lower the environment standard together. Why? In practice, every businessman wants to make the great profits in the international business, whereas lowering the cost is the best and most efficient way. Since WTO agreements require member states to abolish the tariff barrier so as to make trade flow free and thus develop the domestic economy, the importation and exportation became easy. With revoking the tariff barrier, businessman thinks much more about the other aspects of the investment surroundings than the tariff. For some pollution-intensive products, the environment requirements become the most important. The developing countries want to develop the economy as soon as possible. For them, the first important thing is to attract the foreign investment to develop domestic economy. The environment protection undoubtedly including the strong policies and requirement will increase the cost of some products—high requirements will improve the cost twice or three times than the cost under lower requirements so as to impede some pollution intensive industry. So the developing countries usually lower the environment requirements for some industries so as to attract the foreign investment. Whereas the international trading system, actually encourages any participant country, particularly one that is less wealthy, to relax its environmental standards to gain a competitive advantage. Once any country does so, other countries, also struggling to develop sustainable economics, feel compelled to relax their standards in order to stay competitive in the international markets. So we can imagine the horrible result. Both the developing countries and developed countries will lower the environment standards. Under such circumstance, trade liberalization like a breeze makes the burned house---already harmed environment---much worse. Countries compete with each other in a " race to the bottom" with respect to the environmental standards to attract or keep capital. Even though competing countries want environmental protection at high levels, the countries’ inability to agree with (or trust) each other means that each country will opt for lower levels of protection in order to maximise their market share in the world economy.
The environmentalists also criticise the world trade organisation plays negative role as to the environmental protection. It is also a big issue; we will discuss it in the following part:
Part Two: The possibility to solve the conflict between environment and trade under existing WTO framework.
WTO is a trade organisation, which was founded to limit discriminatory trade practice and help trade flow as freely as possible. However, there are some environmental considerations in WTO. The preamble of <Marrakesh Agreement Establishing the World Trade Organization> states "seeking both to protect and preserve the environment". Actually Article XX of GATT does recognise the ability of a country to place other concerns ahead of obligations under the GATT, especially sub-article (b), (g). Such article was regarded as "environmental exception" or "Green Exception".
Although there are black letters in white paper, it is another issue whether they are working. So next we would like to introduce some of the leading cases handed down by the Dispute Resolution Panel of the GATT/WTO, which are specific related to environmental protection. Then we can see whether the trade organisation really concerns about environmental protection.
Under the U.S. Marine Mammal Protection Act, countries seeking to export tuna to the U.S. had to show that they had a tuna fishing regulatory program comparable to that of the U.S. and the dolphins taken incidentally by their tuna fishing boats was no greater than 1.25 times the US rate. The U.S. argued the "green exception" allowed it to do so. However the GATT dispute panel found that the measures in the Act were not "necessary" to the protection of animal life within the reservation of Article XX (b). The decision was criticised by lots of environmentalists for its narrow interpretation of Article XX. One commentator felt that this decision "jeopardised the future efficacy of international environmental treaties" and argued the decision put free trade a "far higher priority than environmental protection".
In order to protect clean air, the USA amended the 1990 Clean Air Act. Under the new rule, only "reformulated" gasoline was allowed to be sold. The dispute stemmed from the fact that domestic refiners had three different standards that they could use to meet the requirement of the regulation, whereas foreign refiners has only one.
Although both the Panel and the Appellate Body ruled against the U.S., the reason was a bit different. The Panel found that the regulation must be "primary aimed at" the conservation of exhaustible natural resource in order to be upheld under Article XX. The Appellate Body, on the contrary, recognised the action was "primary aimed at" protecting the environment and should be viewed as such for Article XX (g) purposes. But it ruled the regulation of the U.S. discriminated between domestic and foreign producers.
In the following case, the decisions between the Panel and Body were much different.
According to USA regulation, beginning on May 1, 1996, all shipments of shrimp and shrimp products into the US were required to have a declaration that the shrimp was harvested in a manner that did not adversely affect sea turtles. India, Malaysia, Pakistan, Thailand challenged the regulation was inconsistent with the GATT.
In the first instance, the Panel ruled against USA, it stated that " when considering a measure under Article XX, we must determine not only whether the measure on its own undermines the WTO multilateral trading system, but also whether such type of measure, if it were to be adopted by other Members, would threaten the security and predicability of the multilateral trading system."
This was a very bad decision. According to this test, whether an environmental protection action cold be fallen into Article XX exception or not, firstly it should pass the "threat to the multilateral trading system" test. In other words, under the WTO’s dispute settlement system, trade always prevails the environment in case of conflict.
However, the Appellate Body ruled that the Panel’s legal analysis was in error, noting that to maintain the multilateral trading system "is not a right or an obligation, nor is it an interpretative rule which can be employed in the appraised of a given measure under the chapeau of Article XX".
Finally the Appellate Body found against the U.S. on its discriminatory "implementation" of the Act, but not the Act itself. Indeed the Body spent a full paragraph to emphasize a need to protection for sea turtle:
"We have not decided that the protection and preservation of the environment is of no significance to the Members of the WTO. Clearly, it is. We have not decided that the sovereign nations that are Members of the WTO cannot adopt effective measures to protect endangered species, such as sea turtles. Clearly, they can and should. And we have not decided that sovereign states should not act together bilaterally, plurilaterally or multilaterally, either within the WTO or in other international organisations, to protect endangered species or to otherwise protect the environment. Clearly, they should and do."
It is worth noting that the Appellate Body did not explicitly prohibit US from regulating production methods for shrimp harvesting outside its own jurisdiction. So some observers argued that this case opened the theoretical possibility for extrajurisdictional environmental regulation to be consistent with WTO rules. However, in practice it would be quite difficult for extrajurisdictional unilateral environmental regulation to pass scrutiny.
From above we can see that under existing WTO dispute settlement system, none of trade measures to protect environment was successful. Although there were some environmental points or values recognised, it was far from the expectations of environmentalists.
Meanwhile, On October 14,1999, the Secretariat of the WTO issued a report on "Trade and Environment". The report was widely perceived to be an effort by the WTO Secretariat to put international trade in a more favourable light, so-called "Olive branch". But the report asserts without proof that the gains from trade are sufficient to repair any environmental damage, which made many environmentalists unhappy.
Part Three: Solutions to reconcile the environment and trade.
As the existing WTO dispute settlement system could not deal with the conflict well in the view from environmental protection, there have a lot of potential solutions been recommended.
The WTO agreement explicitly allows parties to waive GATT obligations in exceptional circumstances. So it is worth considering to exempt multilateral environmental agreements from GATT rules. Of course, such waiver should be approved by a three-fourths majority of GATT parties. It is not impossible in some circumstances.
Although someone argues that this approach appears to rank the GATT/WTO and trade liberalization above multilateral environmental protection, it would prove to be useful in the interim.
Because of the vague language used in Article XX of GATT and the narrow interpretation of these grounds by the Panel and the Appellate Body, it became very difficult for a country to use it as safeguard to protect environment. So there are suggestions to amend the GATT and give express provision to exempt environmental protection action, ie, a real "green exception".
Assuming for a moment that GATT/WTO in the proper forum for adjudication of trade and environment disputes, there are ways to make future WTO tribunals more conducive to fair and informed decision-making. For example, the selection of panellists. The objective of panellists is to create a sufficiently diverse background and a wide spectrum of experience. So one can argue the WTO tribunals should include experts in the realm of environmental protection. The panel member should be recognized by both trade and environment concerns. Maybe things will be different in that case.
Other suggestions include setting up a new global environmental organisation equal to the WTO regime. Some environmentalist even suggest that "in order to force a more environmental friendly interpretation of Article XX, one of the member countries, particularly the United States or the European Union, may have to start ignoring the WTO’s decisions." However, we think it is not a positive attitude to solve the problem and the above-said suggestions are either infeasible in some aspects or difficult to achieve. In our view, the eco-labelling scheme is comparatively practicable solution. So next we would like to introduce it. It is impossible for us to introduce all details of the eco-label, so we only discuss some main points:
Eco-label is also referred to as green-label which means putting labels on products to inform consumers of their environmentally-friendly character. It comes into being accompanied with the political awakening and rising level of public concern with the environment protection. In 1971 the Germany government put first forward the concept of Eco-label for consumer products, and in 1978 the first Eco-label program in the world was launched in Germany. Now there are over 20 countries, especial industrilized countries, including Canada, Japan, Norway, Austria, France, Singapore, etc, have adopted the Eco-label program in many different forms at local, national, regional and international level.
Under all programs currently existing or proposed there are committees with broad representation—with members from the government department concerned, as well as consumer, environmental, and industry interests—that determine or suggest to a government minister which product categories are eligible for labelling. Within each category the scope of products is defined, and the threshold criteria a product must meet is established with the help of experts. Domestic or foreign manufacturers may, if they so wish, submit products for consideration. If the product meets the criteria of the product category, a label can be obtained and used when marketing the product, in accordance with the terms and conditions of the contract concluded with the committee or administering body.
The main objective of eco-labelling programs is to harness market forces and channel them towards promoting more environmentally-friendly patterns of production. Eco-label provides consumers with easily recognisable symbol, indicating the product environment friendliness has been assessed and approved by certain organisations or governments. Thus, it can help consumers, especial "green consumers" to make informed purchasing decisions. Meanwhile eco-label also leads to higher and higher environment consciousness of consumers. Eventually, the manufacturers will be forced to change their product process into a more environmental friendly process. If the manufacturers don’t improve the image of their product, they will lose their market. Because of its market function, Eco-label is regarded as less trade restrictive measures than bans or outright product regulation. Eco-label has increasingly become an effective instrument for harmonizing the conflict between the free trade and environment protection.
Although the eco-labelling scheme is an effective method to protect the environment with more compatible with the WTO, and most of the labelling scheme is voluntary, it is still argued that it may act as de facto trade barriers. Especially the developing countries think that the labelling scheme may often result in discrimination against foreign producers and is a non-tariff barrier to free trade in fact. They argue that the nature of the labelling scheme is discriminatory because its goal is to select only those product that have significantly less environmental impact compared with other products in their category. And also whether certain processes and production methods are, or not, environmentally sound would depend on how a national label awarding body defines the criteria for a product to be eligible for a label. Another reason for labelling program being viewed as a trade barrier is that it involves requirements that put small and foreign producers at a disadvantage because of the costs involved or other reasons.
In the past years, some disputes have arisen from the labelling schemes. We would like to introduce the dispute of Austria Mandatory Labelling Law. In 1992 in order to protect the tropical forest, the Austria parliament introduced new legislation with the aim of stopping all imports of tropical timber and tropical timber products from areas that were not sustainable managed. It requires all tropical timber and products sale in Austria must carry a label identifying them. The ASEAN complained to the GATT's Committee that the law did not required mandatory labelling of other types of wood and wood products imported into Austria or produced domestically. They charged the Austria law was in violation of both the "most-favoured-nation" (MFN) and "National Treatment" provisions of the GATT and was discriminatory, unjustifiable and an unnecessary obstacle to trade. While Austria argued that the labelling requirement did not constitute an obstacle to trade since product labelling per se was not a trade restriction and the law did not impose any quantitative or qualitative restriction on imports from any destination. It also alleged the law was not discriminatory in nature because it applied to any tropical timber or tropical timber product, irrespective of the country of export or origin. However, faced with likelihood of losing the case if it were to be referred to the GATT Panel, Austria amended its law. Under the amended law the labelling requirement is (like any other eco-labelling program) voluntary, and the quality mark can now be issued to all kinds of timber and timber products from sustainable managed forest.
From the discussion above we can see that the eco-label is an effective way to protect environment and has less negative implication to free trade. In order to avoid dispute the key issue is that the trade impact of ever-growing environmental labelling programs will depend substantially on how the schemes are administered. This is also recognised by the CTE, which stated "well-designed eco-labelling schemes/programs can be effective instruments of environmental policy to encourage the development of an environmentally-conscious consumer."
Aiming to the effectiveness of eco-labelling schemes, the following proposals should be incorporated into the Eco-labelling program in the future:
Harmonisation. There are many different Eco-labelling scheme standards among different labelling scheme countries in the world, even some are diverse. At the same time, different standards increase costs for producers if they have to meet a variety of labelling requirements in different countries. Harmonisation can help mitigate the adverse effects and decrease the cost of products while maintaining environmental goal. It is important to small foreign suppliers and those from the developing countries.
Mutual Recognition. It means to recognise the validity of divergent environmental criteria and ensures that trade interests are not unduly affected by this diversity. It can escape the condemn of discrimination and extrajurisdiction. Mutual Recognition will be much easier between countries having compatible levels of economic development.
Transparency. Because eco-labelling scheme primarily focus on domestic condition, it is difficult for foreign producers to gain access to the information to comply with those schemes. Promoting transparency to all interested parties, including exporting and developing countries, can help the interest of other countries, and facilitate environmental objectives and trade. It also can alleviate political pressure from other countries.
Technical Assistance. Providing technical assistance to developing countries may help reduce the potential negative trade effects of environmental labelling on developing countries. Technical assistance can play an important role in helping developing countries establish their own programs and will consequently lead to international deliberations.
Conclusion:
Whether there is conflict or not between free trade and environmental protection in theory, in practice there is controversy between the two issues which are both important to us. However, WTO is a trade organization anyway, so environmentalists are concerned with and disappointed to the approach of WTO existing system. Hence, more and more countries prefer eco-label program, especially voluntary scheme to protect environment. The idea behind is to encourage more and more people to care about environmental protection. If more and more consumers are concerned with the environment, we can have more and more clean water, clean air, and clean everything. We have only one earth, so what we do tomorrow? Where we go tomorrow? Let’s do something!----"Heal the world!"(song by Michael Jackson)
Footnotes:
(b) necessary to protect human, animal or plant life or health;
(g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption;
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