Business, trade and the environment: An agenda for stability in world trade

Business Strategy and the EnvironmentBus. Strat. Env. 7, 271–284 (1998)

BUSINESS, TRADE AND THEENVIRONMENT: AN AGENDAFOR STABILITY IN WORLDTRADE

Paul Ekins*

Keele University, UK

*Correspondence to: Dr. Paul Ekins, Department of EnvironmentalSocial Sciences, Keele University, Keele, Staffordshire ST5 5BG,UK.

Conflicts between trade liberalization,as promoted by the World TradeOrganisation, and demands forenvironmental protection have thepotential seriously to disrupt the world’strading system to the detriment of,among others, the business community.The paper sets out the essential issuesraised in the trade/environment debate,with some case study analysis as to howand why problems have arisen. One ofthe principal constraints of freer trade onenvironmental policy making is fears ofimpacts on business competitiveness. Thepaper concludes that, while these fearsare often exaggerated, they are justifiedfor some environmentally intensivesectors, and they certainly constrain theintroduction of environmental policies.The paper makes proposals as to howthe rules governing world trade, andtheir interpretation, could be modified tomake domestic environmental policymaking easier, and suggests that it isstrongly in the interests of internationalbusiness to see these modifications

CCC 0964-4733/98/050271–14 $17.50? 1998 John Wiley & Sons, Ltd and ERP Environment.

BUSINESS STRATEGY AND

implemented. ? 1998 John Wiley &Sons, Ltd and ERP Environment.

Accepted 30 April 1998

INTRODUCTION

T here are two elements of the context inwhich the majority of businesses operatetoday which present quite new challenges

to the corporate world: globalization of economicactivity and the liberalization of trade which isboth its cause and consequence; and growingevidence of environmental damage, and threat, ona global scale, for which business is sometimesblamed, and to which it is increasingly expectedto make a sensitive response.

Trade liberalization presents business with boththreats and opportunities. The opportunities comefrom an expanding market, with associated possi-bilities of economies of scale. The threats comefrom intensified competition, as tariff and non-tariff barriers to trade, which give protection todomestic industries, are removed, in a businessenvironment that is changing at an acceleratingpace. The stakes, in terms of both the risks and thepotential rewards, are high.

The negotiations on trade liberalization thathave been pursued, first under the auspices of theGeneral Agreement on Tariffs and Trade (GATT)and now under the World Trade Organisation(WTO), entail complex calculations of nationaladvantage. Industrial protection at home is given

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up for gains in market access abroad in a trade-offwhich always involves winners and losers. Dealsare only possible because of a perception thatliberalization will result in a bigger cake overall, inthe division of which all national participants willbe made better off in aggregate, although therestructuring that is required to produce thebigger cake is not painless. Trade negotiationsare among the most sensitive areas of nationalpolitics.

Those businesses that are well placed to takeadvantage of global markets are, not surprisingly,among the most enthusiastic promoters of tradeliberalization. Business associations and publica-tions have generally argued strongly that freetrade is one of the principal stimulants to globaleconomic growth (for example, Business Week in1993 opined ‘[F]reer markets and freer trade in thenew global economic system are what will ulti-mately put an end to slow growth and highunemployment in the industrial world’), whilebusiness and environment groups such as theBusiness Council for Sustainable Development(now the World Business Council for SustainableDevelopment) have added that it can also be aforce for environmental improvement (forexample, Schmidheiny, 1992, p 69, considers that‘free trade has a role to play in progress towardssustainable development’). These argumentsfound their way without qualification into theAgenda 21 document of the 1992 Earth Summit,which adopted as one of its objectives ‘To pro-mote an open, non-discriminatory and equitablemultilateral trading system that will enableall countries . . . to improve their economicstructures and improve the standard of living oftheir populations through sustained economicdevelopment.’ (Earth Summit ’92, p 50).

There is now a substantial literature whichcontests the claim that free trade is necessarilybeneficial either for the environment or forsociety as a whole (see, for example, Ekins et al.,1994 and some of the other articles in this specialjournal issue on trade and environment, Brack,1995; Andersson et al., 1995). Some writers gofurther and cast trade liberalization as amajor threat to the environment (e.g. Daly andGoodland, 1994). Still others regard globalizationas a process of intensification of corporatehegemonic power at the expense of both theenvironment and ordinary people (e.g. Korten,1995).

This paper is principally concerned with theconflicts between trade liberalization and environ-mental protection, whether perceived, potential or

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actual. Whatever the causes or ultimate implica-tions of the powerful social, economic and tech-nological forces that are driving globalization, thetrend towards freer trade is likely to continue. Atthe same time the governments, especially in thenorth, that are involved in trade negotiations arenow under increasing pressure to deliver environ-mental improvements, arising from both theirinternational commitments to move towards sus-tainable development and domestic demands forimproved environmental quality. Only rarely willthe environmental policy which they adopt as aresult be trade neutral. Sometimes it will imposecosts on domestic business. Sometimes it cancreate business openings and competitive advan-tage, by stimulating innovation, by tightening upmanagement or by developing capacity in theenvironmental sector. Sometimes the policies willact as a barrier to trade. Policies of the last typemay be expected to be especially attractive togovernments, for they enable them simul-taneously to satisfy their environment and busi-ness lobbies, while not adversely affectingprospects for their exporters. On the other hand,if generalized, such policies could do much tonegate the painstaking removal of tariff andnon-tariff barriers that have been the result ofeight hard rounds of GATT negotiations.

For business the most important desirable char-acteristic of globalization is the orderly develop-ment of world markets in a climate of economicstability. Environmental unsustainability has thepotential not only to destroy market stability atthe global level (an impact it has already hadon some parts of the insurance industry, seeSchmidheiny and Zorraquın, 1996, pp 117–119,121–125), but also to engender large scale socialchaos. The World Resources Institute (WRI), incollaboration with both the Development andEnvironment Programmes of the United Nations,has concluded, on the basis of one of the world’smost extensive environmental databases, that‘The world is not now headed toward asustainable future, but rather toward a variety ofpotential human and environmental disasters’(WRI, 1992, p 2).

The trade/environment debate is therefore ofprofound importance to business. Its outcomeswill affect not only the nature and extent ofenvironmental policy, but also the marketplacewithin which business, especially internationalbusiness, is conducted. This paper makes somepragmatic suggestions of ways in which the worstof the conflicts between trade liberalization andenvironmental protection can be resolved in

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BUSINESS, TRADE AND THE ENVIRONMENT

favour of the environment. The suggestions fallfar short of ‘the new protectionism’ which, forexample, Lang and Hines (1993) see as necessaryif sustainable development is to become a reality.The danger to business is that, if trade anddevelopment continue to proceed in an environ-mentally unsustainable manner, even the newprotectionism may seem utopian compared to theeconomic turmoil to which this unsustainabilitycould give rise. Business is thus well advised toengage in the trade/environment debate, the out-comes of which could have profound implicationsnot only for the slope of the playing field onwhich it finds itself playing, but whether there is aplaying field at all.

THE GATT ARTICLES AND THEENVIRONMENT

The GATT articles are founded on the principle ofnon-discrimination in trade with regard to

a) trading partners – any country that is aGATT signatory must accord all otherGATT signatories the same trading con-ditions as it accords to its ‘most favourednation’ – and

b) national treatment – like products must betreated in the same way irrespective of theircountry of origin.

Article XX permits limited exceptions to these‘most favoured nation’ and ‘like product’ prin-ciples, including exceptions related to the conser-vation of natural resources, but so far there hasnever been an environmental dispute underGATT in which an exception on these groundshas been upheld.

In 1992 the GATT Secretariat spelt out whatenvironmental protection is compatible withcurrent trade rules:

‘GATT rules . . . place essentially no con-straints on a country’s right to protect its ownenvironment against damage from eitherdomestic production or the consumption ofdomestically produced or imported products.Generally speaking, a country can do any-thing to imports or exports that it does toits own products, and it can do anythingit considers necessary to its productionprocesses.’ (GATT, 1992, p 23)

Following the Uruguay Round agreement in1994, this formulation somewhat overstates a



country’s discretion on policy towards theenvironment and human health, for the newagreement requires policies in these areas thathave trade effects to be based on ‘scientificevidence’ if they are not to be open to challengefrom another country which feels them to be toostringent. Given substantial scientific uncertaintyin many issues related to the environment, thereis likely to be a wide margin of interpretationof what constitutes ‘scientific evidence’ in thesecases. Nor is it clear that the WTO possessesthe scientific expertise to make judgements inthis area.

In a related area, that of food safety, consider-able influence on scientific issues, and thereforepower to adjudicate on food safety, has beengranted by the WTO to the Codex AlimentariusCommission. Although Codex is jointly financedby the UN Food and Agriculture Organisation(FAO) and World Health Organisation (WHO),concern has been expressed that it is undulyinfluenced by transnational corporations (Evansand Walsh, 1994, p 23; Lang and Hines, 1993,pp 100–103; NCC, 1998, pp 96–97). It maytherefore be more attuned to business and tradepriorities than to safeguarding human and animalhealth, and either discourage or disallow regu-lations stricter than Codex-agreed internationalstandards, which some countries and interestgroups perceive as being too lax.

Even leaving to one side the problem of whatconstitutes ‘scientific evidence’, the GATT pro-nouncement quoted above about what a countrycan do to protect the environment throws intosharp relief what it cannot do under GATT rules.

• It may not use trade policy to protect itsenvironment from foreign production. It couldnot impose trade sanctions, for example, on aneighbouring country which persistentlyexported air or water pollution, no matter howdamaging its effects.

• It may not use trade policy to protect theenvironment outside its own jurisdiction,whether a global commons or the territory ofanother country. GATT rules do not currentlyenvisage the possibility of trade measuresbeing applied in support of, for example, theprovisions of the Montreal Protocol (discussedbelow), the Framework Convention on ClimateChange or the Law of the Sea.

• It may not impose on imports charges or otherrestrictions related to their process and produc-tion methods (PPMs), even when it is imposingidentical treatment on its own production (i.e.

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its policy is non-discriminatory). This obvi-ously acts as a major discouragement to applystrict environmental policy measures to pro-duction processes where it is perceived thatsuch measures may have a negative effect onthe competitiveness of domestic business.

• Some environmental regulations may bedeemed inadmissible as technical (or non-tariff)barriers to trade. GATT rules require suchregulations to be the least GATT inconsistentthat are available. Esty (1994, p 48) comments‘This sets an almost impossibly high hurdlefor environmental policy, because a policyapproach that intrudes less on trade is almostalways conceivable and therefore in some sense‘‘available’’’.

From an environmental point of view theseGATT prohibitions impose considerable con-straints on environmental policy. There followsome examples which illustrate how such provi-sions under GATT have either brought tradeliberalization, trade rules and environmentalpolicy into conflict or might do so.

EXAMPLES OF TRADE/ENVIRONMENTINTERACTIONS

The US/Mexico Tuna/Dolphin Dispute

In 1991 the US banned Mexican-caught tuna fromthe US market on the grounds that the Mexicanfishermen killed an excessive number of dolphinswhen fishing for tuna in the Eastern TropicalPacific Ocean. Further to a challenge fromMexico, a GATT panel ruled that the US ban wasGATT illegal because it related to process andproduction methods (PPMs) and resulted in dis-crimination against ‘like products’ (tuna) andbecause the US was seeking to apply its lawsoutside its jurisdiction.

In fact, the way the US applied the regulationwhich led to the ban was also clearly discrimina-tory against Mexico (as the GATT panel alsofound) in that the permissible dolphin-kill ratio(number of dolphins killed per net dropped) wasdefined retrospectively based on what the USfishermen had achieved. There was thus no wayMexican fishermen could know in advance howmany dolphins they could kill without triggeringthe US ban. This aspect of the case raises theclearest suspicions that the US action was at leastpartially motivated by commercial and notenvironmental considerations. Its trade measurecould easily have either specified a maximum



dolphin kill ratio, equally applicable to Mexicanand US fishermen; or banned tuna caught withcertain kinds of net (whether by US or Mexicanfishermen) from the US market and insisted oninspection and certification arrangements to vali-date this. Had it done so, the measure might stillhave been deemed GATT incompatible (ongrounds of extrajurisdictionality and the irrel-evance of PPMs), but at least it would be clearthat the US was seeking purely environmental,and not commercial, gain.

Another GATT ruling went against the USwhen it was challenged in 1992 for seeking to bantuna imports from third countries that had firstimported the tuna from Mexico. This time thepanel called into question the ability of anycountry to use the GATT exemptions clause,Article XX, for any kind of unilateral trade restric-tion (for further discussion of the tuna/dolphincase see Esty, 1994, pp 30–31, 268–269; Brack,1995, pp 501–502).

In the event neither of the judgments wasadopted by the GATT Council, but they infuri-ated environmentalists and did much to providethe political impetus for the environment/tradecampaign, which resulted in the NAFTA tradeagreement incorporating an environmental sideagreement and which turned trade and theenvironment into a major international issue.

The Trade Provisions in the MontrealProtocol

A number of international environmentalagreements contain trade provisions (listed byAndersson et al., 1995, pp 117–119), of which themost important are probably the Convention onInternational Trade in Endangered Species (CITES,1973), the Montreal Protocol on Substances thatDeplete the Ozone Layer (1987), and the BaselConvention on the Control of TransboundaryMovements of Hazardous Wastes (1989), ofwhich the second is briefly discussed here.

The Montreal Protocol contains trade pro-visions relating to parties to the Protocol, insofaras imports of ozone-depleting substances (ODSs)are subject to the control schedules, and relatingto non-parties with regard to trade in ODSsthemselves, in products containing them and,potentially, in products manufactured with them.These provisions are complex and have beenexamined in detail elsewhere (Brack, 1996). Hereit need only be noted that the reports of theGATT tuna/dolphin panels ‘appeared to cast con-siderable doubts over the GATT-compatibility of

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the Montreal Protocol. Its control measures leadto quantitative restrictions on trade; its trade pro-visions directed against non-parties can be appliedagainst WTO members who are not Protocolsignatories, and envisage trade restrictions on thebasis of process and production methods (PPMs);and both sets of measures could be regarded asextrajurisdictional.’ (Brack, 1996, p 72).

The Montreal Protocol has gained the acces-sion of the great majority of countries (150 by1995), and has fixed stringent controls on theproduction of ODSs which have greatly reducedthe quantities which would otherwise be in circu-lation. Many observers of and participants in theProtocol process believe that the trade provisionsmade an important contribution to these achieve-ments. Clearly the uncertainty which still sur-rounds them does not help with the negotiationof future international environmental agreementswhich might benefit from such provisions, andit reinforces the perception of environmentalinsensitivity with which the WTO is sometimesregarded.

The US/Venezuela Gasoline ReformulationDispute

New rules made by the US EnvironmentalProtection Agency (EPA) under the 1990 CleanAir Act Amendment required that from 1995 allgasoline sold in the US had to be of an equal orgreater cleanliness than that sold in 1990. Domes-tic refiners were allowed to qualify for an individ-ual baseline standard derived from documentationof their gasoline formulations in and after 1990.Importers, however, had to meet an imposedstandard based on the average for the USindustry.

Venezuela, later joined by Brazil, appealed tothe WTO in 1995, alleging discrimination. TheUS sought to defend itself with the Article XXexceptions relating to health and the conservationof resources (in this case, clean air). The finalWTO judgment accepted that air was a ‘deplet-able resource’ under the terms of Article XX, andaccepted the relevance of the health exception inthis case, but found in favour of Venezuela andBrazil, because the US could have achieved itsenvironmental goals in a less discriminatory way,namely by setting a single standard for domesticproducers and importers (ITLR, 1996).

Because, unlike in the tuna/dolphin case, theregulation was applied to a product, there was nochallenge to the US setting the standard, but, aswith tuna/dolphin, the unnecessarily discrimina-



tory way in which the regulation was formulatedleads to suspicion that commercial as well asenvironmental protection was an objective of themeasure.

The Danish Bottles Case

In the early 1980s Denmark instituted a manda-tory deposit-refund system for drinks containersand, to facilitate their reuse, stipulated that con-tainer designs would need to approved by theGovernment. Foreign producers objected thatthe regulation was discriminatory against them,because the system effectively ruled out con-tainers other than glass, which were more expen-sive to transport, and prevented productdifferentiation through innovative packagingdesign. On challenge the European Court ruled in1988 that the deposit-refund was a legitimatemeans for Denmark’s pursuit of its environmentalobjectives, which were in turn justified by theEuropean Community’s commitment to environ-mental protection. However, it also ruled that thestipulation on container designs acted as a dispro-portionate restraint on trade compared to theenvironmental benefit it yielded, and so it wasdisallowed (Esty and Geradin, 1997, pp 297–299).Had the challenge been brought to GATT, it maywell be that the deposit-refund system wouldhave been disallowed as well, because GATT hadno general commitment to environmental protec-tion and the system may well have been founddisproportionately trade restrictive.

The Finnish Carbon Tax

Finland was the first country to introduce acarbon tax, in 1990, which has evolved intoa wide-ranging carbon/energy tax. Economictheory suggests, and Finland’s own studies con-firmed, that a carbon tax would be the mosteffective instrument to curb carbon emissions,which was the aim of the tax. Thus coal, the mostcarbon-intensive fossil fuel, bore a carbon/energytax that was 78% carbon related (Teir, 1996,p 246).

10% of Finland’s electricity is imported and themarginal generating fuel is coal, so that theFinnish carbon/energy tax had potentially seriousimplications for competitiveness of domestic coal-fired generation, to address which Finland levied atax on imported electricity at a rate which was theaverage of the Finnish carbon/energy tax onelectricity overall, but still only about half that oncoal-generated electricity. However, even this tax

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on imported electricity is considered to run coun-ter to the Treaty of Rome, because Finnishelectricity, as such, is untaxed. Neither Europeannor WTO trade regulations permit a tax onimports to balance input taxes on domesticproduction.

The result has been that, at the end of 1995, theFinnish Government decided to remove its carbontax and replace it with an overall tax on elec-tricity, which would comply with the trade rules.However, the electricity tax will be substantiallyless effective at reducing carbon emissionsbecause it will do nothing to encourage switchingto low-carbon fuels in electricity generation,which, in other countries, is one of the principalways in which CO2 reductions have beenachieved.

The European Commission’s Carbon/energyTax

In 1992, just prior to the Rio Summit, theEuropean Commission introduced its proposal fora carbon/energy tax as one of its proposedmeasures to reduce carbon emissions in order tomitigate climate change. The proposal exemptedthe six most energy-intensive industrial sectors,was made conditional on a similar tax beingintroduced in North America and Japan, andrecommended both that governments shouldintroduce it on a revenue-neutral basis and thattax rebates should be given against investmentsin energy efficiency. Nevertheless, the tax wasvehemently opposed by the business community.‘Activities undertaken independently by com-panies, national trade associations, European tradeassociation and industry confederations such asUNICE added up to a major anti-tax campaign.’(Ikwue and Skea, 1996, p 100).

The principal argument employed by businessin its campaign was that the tax would impactnegatively on corporate and national competitive-ness. In fact the exemptions and other proposalswould have rendered the economic impacts mini-mal in practically all sectors. According to Ikwueand Skea (1996, pp 101–102) ‘The key issueremains one of trust. Industry does not trustgovernments to introduce such a measure withoutturning it into a revenue-raising device at somepoint in the future. The tax is seen as ‘‘the thinend of a wedge’’’. Reduction in competitivenesswas the most important threat that such a wedgerepresented. Notwithstanding the growing rhet-oric in favour of environmental taxation, this willbe very difficult to introduce in a systematic and



broad-based way while such a threat is stillperceived to exist. The next section examines theextent to which such a perception is soundlybased.

BUSINESS COMPETITIVENESS ANDENVIRONMENTAL POLICY

Where environmental policies cause companies toincur costs or otherwise result in the prices oftheir products being raised, both economic theoryand common sense suggest that this will impaircompanies’ competitiveness, and therefore that ofthe countries in which they are located. However,there are a number of reasons why corporateresponses to environmental policy may in factconfer economic benefits rather than costs.

• Preventing pollution at source can save moneyin materials and in end-of-pipe remediation.

• Voluntary action in the present can minimizefuture risks and liabilities and make costlyretrofits unnecessary.

• Companies staying ahead of regulations canhave a competitive edge over those strugglingto keep up.

• New ‘green’ products and processes canincrease consumer appeal and open up newbusiness opportunities.

• An environmentally progressive reputation canimprove recruitment, employee morale, inves-tor support, acceptance by the host communityand management’s self-respect.

Smart (1992) gives many examples of firms whichhave benefited financially for these reasons fromvoluntary environmental management initiatives.A similar view of the possibly beneficial effects ofcorporate environmental action, also illustrated bya number of examples, came from the BusinessCouncil for Sustainable Development (BCSD),which stated: ‘Many of the waste reduction andenvironmentally positive programs in business areeconomically viable and are providing positiverates of return in relatively short time periods.’(Schmidheiny, 1992, p 96). De Andraca andMcCready (1994, p 70), also of the BCSD, empha-size the competitive benefits to be gained byinnovation and eco-efficiency induced by strin-gent regulations and high prices of environmentalresources.

This generally positive view about the way inwhich environmental policy has so far impactedon firms is reflected at the macroeconomic level in

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a perception that the competitiveness effects ofenvironmental policy have not been great. In1996 the OECD review of this issue concluded:‘The trade and investment impacts which havebeen measured empirically are almost negligible.’(OECD, 1996, p 45). Similarly, Pearce (1992, p 27)has claimed that ‘there is no evidence thatindustrial competitiveness has been affected byenvironmental regulation’.

But, however slight the past effect of environ-mental regulations on competitiveness, threeobservations are pertinent. The first is that pastenvironmental policies have not resulted in adiminution of environmental concern and thenew goal of sustainable development seemsto be requiring more stringent policy, with morepotential effects on competitiveness, than inthe past.

Second, there is widespread agreement that intoday’s global economy ‘ever fiercer competitionprevails’ (HMSO, 1993, p 1), which, according tothe US Office of Technology Assessment, raisesthe possibility that ‘environmental regulationscould be more of a competitive disadvantage thanbefore.’ (OTA, 1992, p 8).

Finally, it seems likely that environmentalpolicy in the future will make more use ofenvironmental taxes than in the past. Such taxeshave distinctive implications for competitiveness,which need to be examined separately froman assessment of the impacts of an environ-mental policy which has so far relied largely onregulation.

Although they allow society as a whole toachieve environmental goals more cost effectivelythan total reliance on regulation, in one wayenvironmental taxes and charges raise more seri-ous competitiveness issues than regulations forfirms that are in particularly environmentallyintensive sectors. This is because, after compliancewith regulations firms may use the environmentwithout further payment; with environmentaltaxes firms pay for all use of the environment,even that which is within the limits specifiedby society. Of course, it is this continuing pay-ment which gives the incentive for continualimprovement which is a feature of environmentaltaxes.

Because of fear of their potential competitive-ness effects, most countries that have introducedenvironmental taxes have given vulnerable firmsor sectors tax exemptions or concessions. Thesereduce the economic efficiency of the environ-mental tax and reduce the economic advantageto be gained from clean production systems. They



also slow down the process of structural change inthe economy such that energy- and environment-intensive economic sectors both become less in-tensive and less important economically relativeto less environment-intensive sectors. It is there-fore important to note that the overall effects onbusiness competitiveness from the tax will dependon how the tax revenues are recycled through theeconomy: while environmentally intensive sectorsmay end up worse off, clean businesses are likelyactually to benefit from it.

In fact, the effect on competitiveness of acarbon tax will be determined by a number ofinfluences, including

• the size of the carbon tax and the nature andextent of the offsets (how the revenues arerecycled through the economy),

• the carbon intensity of the product and• the trade intensity of the product (ratio of

exports plus imports to production).

Pezzey (1991) calculated the cost impact on tendifferent sectors of a carbon tax of $100/tonnecarbon levied on the fuel inputs. He found that aslong as the revenues are returned to industry,losses of price-competitiveness in the four rela-tively carbon-intensive sectors will be counter-balanced by gains in the six non-carbon intensivesectors. Moreover, the carbon-intensive sectorswill only lose competitiveness to the extent thatthey do not reduce their carbon intensity at a rateequal to the tax being applied. This point isdiscussed further below.

International competitiveness depends not onlyon cost increases but also on the trade intensityof the affected products. Relative price rises ofuntraded goods may affect demand for thosegoods in domestic markets, but they will notaffect international trade. In Pezzey’s simulationthe low trade intensity of iron and steel andnon-metallic minerals (both sectors comprisingheavy, bulky goods including iron and cement)substantially reduces the trade impacts that thesesectors will suffer from the carbon tax. Indeed, thetrade impacts on chemicals are also reduced bythe medium trade intensity of this sector, leavingnon-ferrous metals as the only sector in which ahigh trade intensity and high cost increase fromthe tax may cause significant trade effects fromthe tax. Against this it may be noted that 57% ofUK exports in 1995 were to EU countries, so thatif the carbon tax were imposed on an EU-widebasis (as was the proposal from the EuropeanCommission in 1991), all the trade effects forthese sectors would be much attenuated.

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While such a simulation only takes account ofimmediate, first-round effects of the relative price-changes, rather than eventual adjustments to equi-librium, the main mechanisms through whichimposing environmental taxes influences sectoralcompetitiveness are clear, as is the differencebetween the impacts from environmental taxes onsectoral and national competitiveness. The costincreases in the four most affected sectors willimpair their position in domestic markets withrespect to the products of other sectors. The sixsectors whose costs are decreased by the revenue-recycling will be particular beneficiaries from theshift in relative prices. For the country as a whole,however, there is no reason for thinking that itscompetitiveness will be affected at all by the shift.More sophisticated modelling of a tax shift fromlabour to the use of natural resources (e.g. DIW,1994; Barker, 1995; WIFO, 1995; INFRAS, 1996)comes to much the same conclusion for a numberof European countries.

This also seems to have been true of the actualexperience of Denmark, which has a small, openeconomy, and which has been a pioneer in thearea of environmental taxation. According to itsMinistry of Economic Affairs ‘Danish experiencethrough many years is that we have not damagedour competitiveness because of green taxes. Inaddition, we have developed new exports in theenvironmental area’ (Kristensen, 1996, p 126). Thestudy of the Norwegian Green Tax Commission(1996, p 90) has also endorsed this essentialconclusion: ‘Reduced competitiveness of an indi-vidual industry is not necessarily a problem forthe economy as a whole. . . It is hardly possible toavoid loss of competitiveness and trade effects inindividual sectors as a result of policy measuresif a country has a more ambitious environmen-tal policy than other countries or wishes to bean instigator in environmental policy. On theother hand, competitiveness and profitability willimprove in other industries as a result of arevenue neutral tax reform’.

However, this does not resolve the problemof fear of competitiveness effects obstructingenvironmental policy, because the individual sec-tors threatened by such effects can be expected tolobby vociferously against any measures that areperceived to be likely to cause them, and it isquite possible that they will have enough politicalinfluence for the measures to be changed orabandoned.

For example, at the time of the debate on theEuropean carbon/energy tax the Financial Times(Abrahams, 1994) reported on why ‘European



chemical companies are shifting bulk capacityto Asia’: ‘(They) are being driven away fromtheir home bases by high costs and what manu-facturers perceive as an ever-tightening regulat-ory stranglehold’. The paper quotes two topexecutives from the industry in this vein.

Policy makers in industrial countries take thesekinds of statement seriously and in a number ofcountries regulatory structures are regularlyreviewed, in an effort to reduce costs on business.In the case of the carbon/energy tax proposaldiscussed earlier, not only did the proposal,against all environmental/economic logic, exemptthe energy-intensive industries from the proposedtax on grounds of competitiveness, but the pro-posal was made conditional on North Americaand Japan introducing a similar measure of theirown. In the event, of course, the tax was notintroduced at all. In Finland, as also discussedearlier, the tax was introduced and retained, butmade less environmentally effective in order forthe government to be allowed under trade rulesto compensate for effects on competitiveness.

It is little wonder that environmentalists arealarmed by what is variously called the ‘politicaldrag’ or ‘regulatory chill’ on environmental policyof concern over competitiveness. Esty (1994,p 162) notes ‘This political dimension of competi-tiveness is a reality in almost all environmentalpolicy debates’. It is hard to avoid the conclusionthat if countries are not to shy away from difficultenvironmental policy because of fears of competi-tiveness, if such fears are not to present seriousobstacles to environmental policy, the issue mustbe addressed head on, in such a way that traderules are amended to allow competitivenesseffects to be explicitly addressed and neutralized.

RECONCILING TRADE RULES WITHENVIRONMENTAL POLICY

It is encouraging that the preamble to the agree-ment to establish the WTO places the centralobjective of the new organization – raising livingstandards – in the context of ‘optimal use of theworld’s resources in accordance with the objectiveof sustainable development, seeking both to pro-tect and preserve the environment and enhancethe means for doing so in a manner consistentwith (countries’) respective needs and concerns atdifferent levels of economic development’. How-ever, this form of words need mean very little inpractice. In order for it to do so, the WTO will

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have to consider how to deal constructively withthe three types of policy for environmentalprotection which, as seen from the earlierexamples and discussion, may be constrained bytrade-related concerns:

1. international environmental treaties whichenvisage trade measures as part of theirenforcement system,

2. environmental policies which act as non-tariff barriers to trade or which include trademeasures and

3. environmental policies which are perceivedto impair domestic competitiveness.

If trade is to be supportive of sustainable devel-opment, it is essential that policies of these kindsare not militated against by trade rules. They arediscussed in turn to see how this might beachieved.

International Treaties

It is generally agreed that international or trans-boundary environmental problems should beaddressed by international agreement or treatiesinvolving all affected parties (GATT, 1992, p 35).However, such agreements are notoriously diffi-cult to conclude, especially when large numbers ofcountries are involved, so international agree-ments on transboundary environmental problemsinvolving all affected parties have proved elusive,leaving national policies or agreements between asubset of the relevant parties to fill the gap.

Once concluded, there are relatively few waysin which international environmental agreementscan be enforced. Trade measures rank high amongthese few ways, whether in the form of conces-sions to encourage participation in and observ-ance of the agreement, or restrictions andsanctions to discourage cheating and free-riding.At present, as was seen with the Montreal Proto-col, trade measures to help enforce multilateralenvironmental agreements are of at least doubtfulGATT validity. This is clearly unsatisfactory ifthe trading system is to be seriously concernedto promote sustainable development. A necessaryreform is that the GATT rules must explicitlypermit trade measures to back up widelysupported international agreements.

Environmental Regulations as Non-TariffBarriers and Trade Measures

The purpose of environmental regulations is toprevent, mitigate or remedy environmental



damage. Such damage can ensue from the con-sumption of products or from their processesand methods of production. Ecologically thereis no meaningful distinction to be drawnbetween the environmental harm deriving fromproducts or from their PPMs. Sustainable devel-opment demands that regulations be equallyavailable to address both sources of environ-mental damage.

Yet at present even voluntary eco-labels thatgive information to consumers about PPMs inother countries have been under attack as consti-tuting GATT-invalid constraints on trade. TheWTO Committee on Trade and the Environmentnotes in its 1996 report of its first two years’discussions that, on this issue, ‘many delegationsexpressed the view that voluntary standardsbased on [non-product related] PPMs are incon-sistent with the [Technical Barriers to Trade]Agreement as well as with other provisions ofGATT’ (WTO, 1996, paragraph 70, p 14). Man-datory eco-labels would appear to be even furtherbeyond the pale. When in 1992 the AustrianParliament passed a regulation requiring all tropi-cal timber to be labelled, a threat of trade sanc-tions and of a GATT challenge by Malaysiaresulted in the regulation being withdrawn(Cairncross, 1995, pp 230–231).

It should not be impossible to design condi-tions under which countries can pursue sustain-able development to their desired extent withinan orderly multilateral trading system, but with-out constraint from it on their environmentalpolicy making. Such conditions might require thefollowing.

• The policies must be specific with regard to theseriousness of the environmental damage theyare seeking to address and where this damageis being or will be felt.

• Esty (1994, p 283) adopts a three-point categor-ization of environmental harms: serious (rapid,major, certain irreversible harms); moderate(less rapid, major and certain or reversibleharms) and limited (least certain, slower, revers-ible or narrower harms). Provided the environ-mental damage physically affected the countryconcerned, or the global commons, and unlessthe damage is both limited and reversible, boththe policy necessary to address it, and trademeasures to enforce it, should be deemedlegitimate. No distinction with regard to theseenvironmental policies need be drawn betweenthose directed at products and those directedat PPMs.

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• Ecolabels to facilitate the provision of informa-tion to consumers concerning the life-cycleenvironmental impacts of goods and services,with regard to the products themselvesand their PPMs, should be considered fullycompatible with WTO articles.

• The environmental policies and measuresderived from them must be legislatively non-discriminatory between foreign and domesticproducers or products. With regard to eco-labels, for example, it is possible that, in theAustrian case mentioned above, the proposedeco-label would have been less controversialif it had been applied to temperate as wellas tropical timber. The policies should alsobe introduced only after due notice (e.g. 12months) has been given, during which inter-national agreement with potentially affectedparties should be sought that would make themeasures unnecessary.

If the GATT rules had been consistent with thesesuggestions, clearly the arguments in the casestudies discussed earlier would have been verydifferent, but it is interesting to note that the trademeasures involved would still not necessarilyhave been immune from challenge. For example,in the tuna/dolphin case it was noted above thatthe GATT panel ruled that the US ban was GATTillegal because it related to PPMs and not prod-ucts and because the US was seeking to apply itslaws outside its jurisdiction.

Under the proposals above neither of thesereasons would have invalidated the US ban.However, Mexico would have had several otherpossible grounds of challenge.

1. The killing of the dolphins could be consid-ered a ‘limited and reversible’ environmentalharm. Dolphins are not classed as an endan-gered species and it could be argued that thetaking of 30 000 dolphins per year out ofa population numbered in millions (Esty,1994, p 188) is sustainable.

2. The application of the US ban could bedeemed discriminatory (and the GATTpanel ruled it so) in that, as noted above, thepermissible dolphin-kill ratio (number ofdolphins killed per net dropped) was definedretrospectively based on what the USfishermen had achieved.

3. The US proceeded to its ban without givingformal notice to Mexico of its intent to doso, nor did it try less drastic measures first.Interestingly, Esty (1994, p 251) observes‘The US tuna ban . . . had very little practical



effect on Mexican exports to the UnitedStates because the demand for Mexican tunahad collapsed as a result of commercial andconsumer pressures, intensified by the UStuna-packers voluntary dolphin-safe label-ling scheme. The market for tuna lackingthe dolphin-safe label almost completelydried up’.

Under the terms of the proposals set out above,the GATT panel could well have come tothe same conclusion about the US ban, but fordifferent reasons.

Similar considerations apply to the gasolinereformulation dispute. It would have been quitepossible to design the detailed regulation differ-ently such that it attained the same level ofenvironmental protection but did not discriminateagainst non-US refineries. Only in the Danishbottles case, given that the regulation addresseda Danish physical environmental problem, wouldthe above suggestions have made the regulationunequivocally GATT compatible.

Threats to Competitiveness

One approach to seeking to allay fears of com-petitiveness effects from environmental policiesinvolves the progressive harmonization ofenvironmental standards or policies. There isundoubtedly some scope for this, and Esty andGeradin (1997, pp 283–294) explore in somedetail various approaches to potential harmoniz-ation which still take some account of differencesbetween countries. However, such a process isbound to be slow in a global community inwhich these differences – economic, social andenvironmental – are so profound.

Another approach is to seek to minimizeeffects on competitiveness by announcing thepolicies well in advance and introducing themgradually enough to give industry time toadjust to them. This is standard good practice forpolicy making in general but may not allowenvironmental problems to be addressed quicklyenough or may give too much time for organizedinterests that are profiting from unsustainabilityto mobilize against or water down policyproposals.

Finally there is the possibility of allowingborder tax adjustments (countervailing duties,CVDs, on imports, or export rebates for exports)to offset the effects of environmental policies oncompetitiveness in both domestic and foreignmarkets. This response is the one generally

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favoured by environmental organizations (see, forexample, Arden-Clarke, 1993), when it is oftencoupled to a suggestion to return the revenuesraised by CVDs to developing countries to helpfinance environmental improvements. The practi-cal problems associated with this response areformidable: the cost-internalization approach tocalculating the level of CVDs is often infeasible,because of the complexity of the environmentaleffects concerned; the proposal raises the keenestfears among developing countries of an environ-mental smokescreen for commercial protection-ism; its implementation could involve asubstantial bureaucracy and the means of dis-bursement to developing countries of funds col-lected would be difficult to design, establish andcontrol.

However, if it is true that the political dragfrom competitiveness is proving a serious impedi-ment to environmental policy making, then acommitment to sustainable development mayrequire the introduction of a way of mitigatingeffects from environmental policy on competitive-ness that does not undermine world trading rules.For example, the ability to levy CVDs onimported products (or give export rebates toexported products), where these have been givena competitive advantage (or disadvantage) bydomestic environmental legislation, could besubject to provisos such as the following.

• The environmental legislation must be seekingto address a global or physical transboundaryenvironmental problem and represent morestringent policy than in the past.

• The CVD or export rebate can only be leviedor granted for a strictly limited period (e.g.three years) after the introduction of theenvironmental legislation.

• The amounts of the CVD or rebate must bebased on independently audited estimates bythe industries concerned of the cost to them ofthe environmental legislation, and the conse-quent rise in the prices of their products. Aminimum threshold of competitive disadvan-tage might need to be shown (e.g. 5% on theprice of a product) before CVDs or rebateswould be allowable.

• The estimates should again be subject to inde-pendent scrutiny one year after the introduc-tion of the legislation to verify that acompetitive disadvantage had in fact beenincurred because of compliance. Should this notbe the case, the CVD or rebate must beimmediately revoked.



• The CVD or rebate would have to beannounced in advance of its introductionand be open to challenge. CVDs should beplaced in a fund to help developing countriesimprove the environmental performance oftheir economies.

The purpose of permitting such a procedurewould be to remove the influence of argumentsabout competitiveness from environmental policymaking, by permitting companies that can showgenuine disadvantage from it to be protectedfrom its effects for a limited period while theyadjust to the new reality. A concerned companywould have to go to considerable trouble andshow significant disadvantage, which should deterfrivolous applications and insignificant CVDs orrebates. The environmental legislation wouldhave to deal with a genuine transboundary griev-ance. Moreover the whole procedure would beopen to challenge.

Surprisingly the actual textual changes to theWTO articles that would be required to imple-ment the foregoing proposals on internationalenvironmental agreements, environmental regula-tions and CVDs are very few. What is over-whelmingly required is a change of interpretationof the current WTO articles, rather than theirwholesale redrafting. This principally applies toArticle XX which appears to give significant scopefor the protection of the environment and thehealth of living things, but various restrictiveinterpretations have significantly narrowed thisscope. To bring them into line with the proposalsmade earlier would require the following changes.

1. In Article XX g) the words ‘and the environ-ment’ should be added after ‘naturalresources’.

2. Clarification should be issued that hence-forth non-discriminatory action to protectthe environment with regard to transbound-ary physical spillovers and the global com-mons, whether unilateral or not or related toPPMs or not, would not per se be ruledincompatible with GATT. Rather the keytest will be the seriousness of the environ-mental harm addressed in relation to thedisruption caused to trade.

3. The extent of disruption to trade fromenvironmental measures taken under (ii)should only be a criterion for challengewhen the environmental harm beingaddressed was limited and reversible.

4. The need for sound science in the appli-cation of environmental policy should be

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interpreted in accordance with the pre-cautionary principle (see, for example,O’Riordan, 1993) by an independent groupof experts, which is open to the receipt ofsubmissions from interested parties andgives a detailed account of its proceduresand decisions.

5. Similar procedures of openness, transpar-ency and public involvement should beadopted by the WTO itself, especially in itsresolution of disputes.

The suggestion about permitting a levying ofCVDs to give limited protection against competi-tive disadvantage arising from environmental pro-tection would require a new sub-clause in Clause8 of Article III (on national treatment of likeproducts), to the effect that the provisions ofArticle III would not apply to the kinds of limitedprotection described above.

The fact that it is predominantly reinterpreta-tion of the WTO rules rather than their redraftingthat is required does not mean that the changeswill be easily implemented. Almost certainly thechanges in interpretation will need to beaccompanied by financial provisions to ease thetransition to sustainability for poorer countries,which will otherwise continue to be suspiciousthat the greening of the WTO is protectionism indisguise. Richer countries have the choice whetherto make this investment in sustainability now, orwait until the pressures of unsustainability in anecologically interdependent world erode the pos-sibilities of global cooperation and security and,perhaps, of civilized life itself.

CONCLUSION: HOW SHOULDBUSINESS RESPOND?

The world trading system stands at a crossroads.Global economic integration and the intensifi-cation of economic competition have broughtnew issues onto the trading agenda and re-emphasized the importance of some old ones.These issues include the environment, humanrights, labour standards, the maintenance of com-petitive markets and other issues concerned withthe regulation of corporate conduct.

It will not be easy for the WTO to addressthese issues in a way that both wins internationalconsensus and satisfies those who are concernedwith them. There will be a temptation to try toproceed with business as usual and avoid the fullnegotiations on the issues that are increasingly



seen to be necessary. The complete failure ofthe work to date of the WTO’s Committee onTrade and Environment to make any substantialprogress on the environmental issues it has con-sidered has already done much to confirm inenvironmentalist eyes the essential insensitivity ofthe WTO to the environment. This in turncontributes to the growth of protectionist forceswhich are inclined to reject the objective of abroadly open international trading regimealtogether.

For business three of the possible outcomesof the debate between trade and social andenvironmental issues are likely to be distinctlyuncomfortable.

• A failure to take the necessary measures tomove towards sustainable development seemsincreasingly likely to bring about environ-mental disruption on an unprecedented scale.The insurance industry is the first to find thatpast environmental errors can result in hugeliabilities. For example: ‘The estimated bill forhazardous waste and asbestos damages andremediation in the United States is $2 trillion,based purely on the projected costs of meetingU.S. claims against general liability insurancepolicies written by U.S. and European insurers’(Schmidheiny and Zorraquın, 1996, p 120).The same source quotes the president of theReinsurance Association as saying that climatechange could bankrupt the industry. Insuranceis one of the core institutions of capitalism,allowing risks to be spread to reduce theexposure of individual entrepreneurs. Highercost or, at the limit, unavailable insurance,would constitute a serious brake on businessactivity.

• A resurgence of protectionism that put global-ization into reverse would cause market andfinancial chaos. There are real and theoreticallywell founded fears that considerations of com-petitiveness will result in ‘a race to the bottom’(Korten, 1995, pp 229–237), as a result ofcompetitive social and environmental deregu-lation. There is little evidence as yet of such arace in industrial countries, but should it beginto bring about falling social and environmentalstandards, or should competitive pressures bewidely perceived to be blocking necessaryregulations in the face of growing environ-mental crises, a ‘new protectionist’ alliancebetween labour, environmental and social inter-ests could make international business activityanything from more costly to infeasible.

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• Attempts by individual countries to implementthe policies necessary for sustainable develop-ment while exposed to the full competitiverigour of globalized markets could cause indus-trial and economic pain, or perceptions of suchpain, beyond social and political endurance.Although, as discussed above (and in moredetail in Ekins and Speck, 1998), there is littleevidence that environmental policy in the pasthas had a significant impact on competitive-ness, business consistently opposes environ-mental policies, and especially environmentaltaxes, on competitiveness grounds, and eventhreatens relocation. Such threats, whatevertheir basis, make policy making fraught anduncertain. Most governments back down in theface of such corporate opposition, increasingthe likelihood of major disruption from unad-dressed environmental problems, as discussedin the previous paragraph.

This paper has made some suggestions as tohow the WTO rules could accommodateenvironmental policy making for sustainabledevelopment. The suggested changes are notrevolutionary. It is in fact rather surprising thatthe WTO rules, formulated just after the SecondWorld War, when environmental issues werenot even on the agenda of most organizations,should be so easily adapted to an era when theachievement of environmental sustainability hasbecome one of the principal global challenges.As already noted, this does not mean that thechanges will be uncontroversial or easilyeffected. It is all too possible that, left to itself,the WTO Trade and Environment Committeewill stretch its discussions interminably andinconsequentially into the next millennium. Eachof the three possible consequences sketched inthe previous paragraph suggests that is notin the interests of business to allow this to hap-pen. Business now has the global reach andinfluence which would enable it to help to bringthese discussions to a more positive conclusion,if it chose to become involved. It should startto draw a clear distinction between non-discrimination, which is the foundation of freetrade and of the GATT and WTO, whichpromote it, and indiscriminate deregulation,which is a recipe for environmental and socialunsustainability. Business should start to put itsweight behind the kind of minimum globalregulation of world trade that would ensurethat its playing field is stable and green, aswell as level, and much less prone than



at present to disruption by environmentallyinduced disintegration in society at large.

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BIOGRAPHY

Dr. Paul Ekins is Reader in Environmental Policy,at the Department of Environmental SocialSciences, Keele University, Keele, StaffordshireST5 5BG, UK.Tel: +44 (0)1782 583160. Fax: +44 (0)1782584144.

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Documents

Business, trade and the environment: An agenda for stability in world trade