Trade and Environment in the World Trade Organization: Dispelling Misconceptions

Trade and Environment in WTO Volume 8 Issue 3 1999

Trade and Environment in theWorld Trade Organization:Dispelling Misconceptions

Trade and Environment in theWorld Trade Organization:Dispelling Misconceptions

Doaa Abdel Motaal

IntroductionNumerous misconceptions abound about the role andwork of the World Trade Organization (WTO) on tradeand environment issues. To much of the outside world,the WTO is an organization which has exceeded its man-date – in addition to setting the rules for internationaltrade, it has done so for environmental protection, andperhaps even gone as far as to set the environmentalprotection standards that its member governments mustadhere to. This article identifies common misconcep-tions and attempts to dispel them. It is particularlyimportant to do so in the light of the WTO’s MinisterialConference in Seattle, Washington, in November 1999(which, will launch a new round of negotiations), so thatexpectations about the outcome of possible trade andenvironment negotiations in the round are not mis-placed.

Does the WTO have Rules onEnvironment?

The WTO Secretariat is frequently asked what WTO rulesare on environment. Those who ask are often struck bythe response that the WTO does not have rules forenvironmental protection. It is not an environmental pro-tection agency and does not aspire to be one. The WTO’sprincipal mandate is to work towards an open, equitable,non-discriminatory trading system. It only addressesenvironmental issues in so far as environmental policieshave trade-related aspects with a significant impact ontrade, which is very different from setting rules forenvironmental protection. Several other internationalorganizations have been created with environmentalprotection as their principal mission, such as the UnitedNations Environment Program (UNEP), and the WTO hasneither the mandate nor the competence to duplicatetheir role.

Well then, how does the WTO deal with the trade-relatedaspects of environmental policies, which is the right

Blackwell Publishers Ltd. 1999, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA.

330

question to ask. To answer, one must begin by categoriz-ing the types of environmental policies that have animpact on trade: while some take the form of productstandards (e.g. a requirement by a government that allvehicles be equipped with catalytic converters), otherstake the form of bans on certain products (e.g. a ban ona certain environmentally hazardous chemical), of sub-sidies for environmental protection, etc.

Product standards are dealt with primarily through theWTO Agreement on Technical Barriers to Trade (TBTAgreement). The TBT Agreement has been designed byWTO member governments in such a way that itacknowledges the right of each individual governmentto set environmental protection standards at the level itconsiders appropriate. However, the Agreementattempts to ensure that these standards are neither dis-criminatory nor create unnecessary obstacles to inter-national trade (the non-discrimination principle is thecornerstone of the WTO system as a whole and extendsbeyond the TBT Agreement). In other words, a countrymust apply any environmental standard for a product toall such products regardless of their source. It must notrelax its standards towards those which are importedfrom a particular source (but not to those that areimported from another), nor towards those that aredomestically produced – a requirement that comp-lements the environmental protection objective since itensures its consistent application. Second, while mem-ber governments may develop product standards thatcreate obstacles to trade, they must ensure that thoseobstacles are not avoidable ones. If avoidable, less trade-restrictive measures must be sought, which would allowboth the environmental protection objective to be achi-eved, and the open, equitable and non-discriminatorytrading system to be maintained.

Well, what about bans, how does the WTO deal withthose? Article XI of the General Agreement on Tariffs andTrade (GATT), on the General Elimination of Quantitat-ive Restrictions, outlaws the imposition of quantitativerestrictions and prohibitions. So any ban that is put inplace by a WTO member government would automati-

Volume 8 Issue 3 1999 Trade and Environment in WTO

cally be inconsistent with Article XI. However, as earlyas 1947 the contracting parties to GATT had realized thatthere could be situations where a country would needto use a trade measure that is inconsistent with the rulesof international trade to achieve an environmental objec-tive. They created a General Exceptions Article inresponse, known as GATT Article XX, which allows WTOmember governments to use trade measures to protectthe environment, even when the measures are inconsist-ent with GATT, provided that certain conditions are met.These conditions include: (1) that the measure be neces-sary for the protection of the environment, or be relatedto the conservation of exhaustible natural resources,and (2) that it be applied in a way that does not consti-tute arbitrary or unjustifiable discrimination betweencountries, or act as a disguised restriction on inter-national trade.

So, in practice, what does that mean? Well, if a WTOmember government can prove that a ban that it hasput in place (i.e. the trade measure) is truly needed forenvironmental protection (which is condition (1)), andthat the ban is not applied in a way that discriminatesbetween different countries without justification or isapplied in a way that protects domestic industry (whichis condition (2)), then it can obtain an exemption fromthe requirements of Article XI using an Article XX excep-tion. It is important to note that Article XX does not atall put the necessity of the environmental objective intoquestion; what it questions is the necessity of the trademeasure that is used to achieve the objective. If lesstrade-restrictive options are available to achieve thesame environmental objective, then those must be used.An Article similar to GATT Article XX also exists underthe WTO’s General Agreement on Trade in Services(GATS).

Next are environmental subsidies, how does the WTOdeal with them? The WTO’s Agreement on Subsidies andCountervailing Measures is an agreement that was cre-ated by WTO member governments to regulate their useof subsidies for non-agricultural products. Under theAgreement, certain subsidies are referred to as ‘non-actionable’ and these are generally permitted. The non-actionable subsidies include those that are put in placeto promote the adaptation of existing facilities to newenvironmental requirements, also provided that certainconditions are met. These conditions include, forinstance, that the subsidy be made available to all firmswhich can adopt the new equipment and/or productionprocesses, and that it be a one-time non-recurring meas-ure. So, in short, while subsidies have an impact ontrade, the Subsidies Agreement allows them to be usedfor certain environmental purposes but on the conditionthat, among other things, they are not intended to pro-tect particular firms and are not to be maintained eter-nally.

There are of course other types of environmental poli-cies that can have an impact on trade, but the ones dis-cussed above are the most common. Other WTO Agree-ments exist to deal with them (such as the WTOAgreement on Agriculture which addresses domesticsupport measures for environmental programmes). To

Blackwell Publishers Ltd. 1999.

331

recapitulate, therefore, the WTO does not set rules forenvironmental protection or any environmental stan-dards. It only sets conditions that environmental meas-ures must meet when they have an impact on trade.These rules are not designed to undermine the environ-mental protection objectives that member governmentstry to pursue. On the contrary, rules such as the prin-ciple of non-discrimination can only further environmen-tal protection by ensuring the consistent application ofthe objectives involved.

Can the WTO Contribute toEnvironmental Protection?

If the competence of the WTO is limited to trade policies,and to those trade-related aspects of environmental poli-cies with a significant impact on trade, does the WTOhave a role to play in improving the environment? Theanswer is yes, but only in certain well-defined instances.Once again, however, it is important to remember thatit is not an environmental protection agency.

The WTO Does Not Design EnvironmentalProtection PoliciesInternational trade forms a small part of overall econ-omic activity. It hurts the environment when economicactivity as a whole is not subject to appropriate environ-mental controls. To reduce the impact of economicactivity, including trade, on the environment, well-tar-geted environmental policy is required. It is the policydistortions introduced by governments (such as harmfulfishing subsidies) and the underpricing of scarceenvironmental resources that have encouraged theiroverexploitation.

For example, the fact that coal is subsidized in variouscountries today has encouraged the overuse of what isan extremely polluting energy source. Improved coalmanagement policies would involve (1) the removal ofthe environmentally harmful subsidies (i.e. correctingthe policy distortion), and (2) ensuring that the level ofcoal consumption is brought to its ‘optimal’ (i.e. thelevel at which the benefits of coal production equal itscosts to society, and not just its cost to its individualproducers). For the latter, a tax may need to be imposed.The magnitude of the tax will depend on the ‘value’ thatparticular societies attach to reducing their exposure topolluting coal emissions.

In the absence of appropriate resource managementpolicies, however, all economic activity involving the useof coal (including production and domestic and inter-national trade) may have a more polluting effect onsociety than society is willing to tolerate. Internationaltrade, however, is not the source of this problem. But itexacerbates the problem (as does all economic activityin general) when appropriate environmental policies arenot in place.

Put differently, to address the environmental impact ofeconomic activity on the environment, national govern-


ments must embark on the unavoidable exercise ofidentifying policy distortions and removing them, and‘valuing’ their environmental resources – i.e. setting anappropriate price for their consumption. Such valuationmust be followed by the design of appropriate economicincentives (such as the assignment of property rights,or the imposition of taxes) to guide society towards itsoptimal consumption/conservation level. This is an areawhere national environmental protection agencies andinternational environmental organizations must play thelead role.

The WTO’s Committee on Trade and Environment (CTE)(the CTE is the forum that has been created for tradeand environment discussions in the WTO) has consist-ently said that for trade and environmental policies tocomplement each other, appropriate environmental poli-cies need to be put in place. However, developing suchpolicies is not in the hands of the CTE (a trade body),and all it can do is appeal to other specialized inter-national fora (such as UNEP) as well as national govern-ments to do so.

The WTO Can Remove EnvironmentallyHarmful Trade Restrictions andDistortionsIt is certainly clear that numerous trade restrictions anddistortions contribute to environmental degradation(see the example of coal subsidies above). As the WTOhas as its mandate the liberalization of trade, it can cer-tainly make a contribution to environmental improve-ment by identifying and removing such trade restrictionsand distortions. The WTO has done this and continuesdo so. However, since liberalizing trade is the day-to-daywork of the WTO, the removal of environmentally harm-ful trade restrictions and distortions goes by unnoticed.The process of trade liberalization had started longbefore the establishment of the CTE, and is now beinggiven added impetus by discussions in the CTE.

Among the main recommendations of the 1992 Rio EarthSummit to the multilateral trading system has been thecompletion of the Uruguay Round. At the heart of thisrecommendation have been the notions that (1) tradeliberalization leads to a more efficient allocation ofresources, including environmental ones, and (2) thatliberalization has the capacity to generate the incomeneeded in developing countries for environmental pro-tection.

Not only has the Uruguay Round been accomplished, butanother round may soon begin. At the next round, theremoval of some of the many environmentally harmfultrade restrictions and distortions that remain could leadto further achievements. Since 1995, the CTE has beenworking on identifying the situations in which theremoval of trade restrictions and distortions in certainsectors could lead to ‘win-win’ situations for both tradeand the environment. It has examined a number of sec-tors, including: agricultural, energy, forestry, fisheries,non-ferrous metals, textiles and clothing, leather andenvironmental goods and services. Its work has led tothe identification of numerous instances in which such


332

‘win-win’ situations could be achieved. This is the areawhere the WTO has an important role to play, and whereit is likely to contribute the most to environmental pro-tection, as it falls directly within its mandate. As evi-denced by the recommendation of the Rio Earth Summit,it is an area of great importance.

The WTO Can Re-examine its Rules if theyUnjustifiably Frustrate EnvironmentalProtection InitiativesAnother important role for the WTO to play in this areais to ensure that its rules do not unjustifiably stand inthe way of environmental protection initiatives. It isoften claimed that its rules do so in three particularinstances: (1) when they prevent countries from puttingenvironmental protection measures in place that dis-tinguish between products based on the way they areproduced – for instance, when based on life-cycle analy-sis (particularly when the production process does nothave an effect on the final product); (2) when they putinto question the legal consistency of discriminatorytrade measures taken pursuant to multilateral environ-mental agreements; and (3) when they stand in the wayof the transfer of environmentally sound technology, theprotection of indigenous knowledge, and of dealing withthe ethical concerns of the patenting of living organisms.The CTE has already been examining WTO rules in theseareas to ensure that they do not unjustifiably frustrateenvironmental protection initiatives. While in certaininstances changes may be needed to the rules, in othersthey are not. The next section illustrates some of thecomplexities involved in these discussions.

Therefore, while it is not the role of the WTO to designenvironmental policies, it is certainly its role to removeenvironmentally harmful trade restrictions and distor-tions (although, arguably, their identification should bemade by specialized environmental organizations), andto make sure that its rules do not unjustifiably stand inthe way of environmental protection policies. It must bestated, however, that the latter role is one that can beavoided in future if there is improved co-ordinationbetween trade and environmental policy-makers at thenational and international levels. Had there been greaterco-ordination from the start, conflicting policies couldhave been avoided.

Why Has the Issue of Processand Production MethodsBeen Difficult for the WTO?

As previously stated, WTO rules are often accused ofstanding in the way of legitimate environmental policiesthat attempt to distinguish between products based onthe way they are produced (e.g. a country banning theimportation of a product because of its polluting pro-duction process). From an environmental perspective,such distinctions are essential in order to encourageproducts that are produced using clean process and pro-duction methods (PPMs), and to discourage those thatare not. From a trade perspective, these distinctions are


feared by some member governments, particularly whenthe PPMs do not have an effect on the final product(called non-product-related PPMs), on economic, polit-ical, environmental and legal grounds. The followingclarifies the issues involved in this debate.

Much of the trade and environment discussions underGATT were instigated in 1991 by the Tuna/Dolphin dis-pute between Mexico and the United States (US).1 Thedispute brought to the fore the difficulties involved inaccommodating under the trading system trade-relatedenvironmental measures based on non-product-relatedPPMs. The dispute dealt with a US ban on the import-ation of tuna from Mexico caught using perse seine nets,which caused the incidental kill of dolphins. The ban onthe importation of tuna did not have to do with tuna asa product, but, instead, with the way in which it wascaught. The Panel ruled in favour of Mexico, calling for alifting of the US ban, but consensus could not be reachedamong the contracting parties to GATT for the adoptionof the report.

Developing countries have, since that dispute, feared theextraterritorial imposition by developed countries oftheir environmental standards through the attachmentof an ‘environmental conditionality’ to their exports(with the condition being, in the Tuna/Dolphin dispute,the use of different fishing techniques by the Mexicans).Such conditionality, they argue, runs counter to theeconomic argument that different countries have differ-ent ‘optimum levels of pollution’ that reflect the trade-off that societies are willing to make between environ-mental and developmental concerns. As optimum levelsof pollution differ between countries, a country shouldnot impose its environmental standards on another.

Developing countries argue that the prevention of pro-duct differentiation based on PPMs allows countries toset standards, whether environmental or otherwise, thatare appropriate for their level of development, ratherthan having inappropriate ones imposed on them fromthe outside. In other words, it allows them to trade theirdevelopmental needs against their needs for environ-mental protection in a manner that is consistent withhow they themselves value these needs (and not on thebasis of how others value them for them). In order toprotect their environment beyond the ‘optimum’ level,developing countries have requested that technical andfinancial assistance, as well as clean technology, betransferred to them. The latter have together become asknown as ‘positive measures’ in the WTO.

While several countries, both developed and developing(in fact most of the developing), subscribe to the econ-omic argument presented above, other arguments arealso advanced to justify the prevention of product differ-entiation based on non-product-related PPMs; anenvironmental argument, a political one and a legal one.The environmental argument states that by preventingthe imposition of one country’s environmental standardson another, differences in environmental absorptivecapacities, environmental priorities and problems in dif-ferent parts of the world can be better accounted for.The political argument stresses the need to preserve


333

territorial sovereignty. The prevention of discriminationbetween products on the basis of PPMs means the pre-vention of intervention from the outside in policychoices that are made within national boundaries. It isargued that it is precisely due to the ability of the WTOto offer such security to its Members that its member-ship has expanded to embrace the large number of coun-tries that it currently does. Finally, the legal argumentstates that as one of the main functions of the WTO is toensure the predictability of international trade, productdifferentiation based on non-product-related PPMs islikely to make the system totally unpredictable. Coun-tries would not know what products will be discrimi-nated against and when they are likely to be pressuredinto changing a particular PPM.

The implications of the legal argument are best demon-strated through the following example. Assuming that animporting country (country A) is concerned about acidrainfall in its territory caused by a neighbouring country(country B). Acid rain comes from power generation,and electricity is embodied in almost all products. Ifcountry A were to address this problem by restrictingtrade with country B, how would the restriction bedesigned? If the electricity itself is not traded, then coun-try A would not be able to restrict trade in the productthat is directly being produced using polluting tech-nology. It would have to do so against other products.This would raise enormous concerns about blanketimport restrictions.

Critics of these arguments usually respond with two dif-ferent questions: (1) Does that mean that developingcountries should damage their environment in order toindustrialize, without benefiting from the experience ofdeveloped countries (i.e. learning lessons from the dam-aging effects that industrialization has had on theirenvironment); and (2) Do people not have the moral obli-gation to intervene (even in territories that lie outsidetheir jurisdiction) to protect an environment to whichvisible damage is being done? Would it be reasonable toask them to sit back on the grounds of national sover-eignty?

The response to these questions is that, of course,developing countries must be assisted in avoiding thepitfalls that developed countries have been through, andthat all countries have a moral obligation to protectenvironmental resources wherever these may lie. How-ever, what is at issue is the approach that should betaken to do so. It has been widely recognized thatdeveloping countries are in need of both technical andfinancial assistance, as well as technology transfer.While the Rio Earth Summit called for greater assistanceto developing countries, overseas development assist-ance has declined since the Summit. This issue is in needof urgent redress.

The approach that developing countries resent is tohave the higher (PPM-based) environmental standardsof their trading partners imposed upon them as a con-dition for trade, since in effect what that does is to pun-ish them for not having the resources to address theenvironmental problems they face. Moreover, they argue


that many of the global environmental problems that theworld currently faces have been created by developedcountries and not themselves. It is those countries, intheir view, that should bear the greatest burden fortheir resolution.

Numerous arguments are advanced, therefore, to justifythe prevention of discrimination against products basedon non-product-related PPMs using trade restrictions. Itis exactly these arguments which have made it extremelydifficult for the WTO to respond to the demands madeby some environmental groups for an accommodation ofsuch measures under WTO rules.

It is important to note, however, that the issue of non-product-related PPMs has not only arisen in the WTO inrelation to the trade restrictions imposed by govern-ments, but has also come up in the context of eco-label-ling schemes (usually developed by the private sectorand applied on a voluntary basis). These schemes donot restrict the market access of products as they aremostly voluntary, but they may potentially affect theirsales. Many developing countries are against havingthese labels being recognized as WTO-consistent, sincetheir products may not be able to obtain them if pro-duced in environmentally damaging ways. Somedeveloped countries sympathize with their fears. Thereis no doubt that the issue of non-product-related PPMswithin the context of eco-labelling schemes needs urgentresolution, so that WTO rules do not block the accessof consumers to product information.

Is the WTO Fair on Trade-related EnvironmentalDisputes?

Two trade-related environmental disputes have come tothe WTO since it was established: a dispute between theUS (as defendant) and Venezuela and Brazil (asplaintiffs) concerning new standards for gasoline thathad been imposed by the US;2 and another between theUS (as defendant) and India, Thailand, Pakistan andMalaysia (as plaintiffs) concerning a US ban on theimportation of shrimps caught without the use of turtle-excluding devices.3 In both disputes, the US soughtexceptions for its trade measures under Article XX. But,the Appellate Body ruled in favour of the plaintiffs.

It is frequently argued by critics of the WTO’s DisputeSettlement Mechanism that WTO rules encourage a raceto the bottom of environmental standards. It is also pro-pounded that Article XX has been designed in such away as to give supremacy to trade over environmentalobjectives. These criticisms, however, stem from a num-ber of misconceptions about national environmentalregulations, as well as about the application of ArticleXX.

First of all, it is important to identify the types ofenvironmental measures that are disputed in the WTOand which seek to be excepted under Article XX. These


334

are always measures with a significant impact on trade –otherwise, they would not be addressed in the WTO. Fur-thermore, they are only challenged when perceived tobe WTO-inconsistent, so their mere impact on trade isnot sufficient to challenge them. The proportion ofenvironmental measures with an effect on trade, relativeto the total number of environmental protection meas-ures in the world, is minuscule. And, it is only that min-uscule amount that may be subject to challenge in theWTO. Thus, the argument that is made about a generallowering of environmental standards due to the WTO ismistakenly founded, first of all, on the idea that allenvironmental standards have an impact on trade.

Second, it is often assumed that in their examination oftrade-related environmental disputes, panellists weighthe importance of the environmental objective of themeasure against its trade impact, and then decide onwhether or not it may be allowed to break the rules usingan Article XX exception. That in fact is not the case. TheWTO does not in any way engage in assessing the impor-tance or need for a country’s environmental protectionmeasures. In the Gasoline case between the US, Vene-zuela and Brazil, the Panel clearly stated that ‘it was notits task to examine generally the desirability or necessityof the environmental objectives . . . WTO Members werefree to set their own environmental objectives.’4

What the WTO attempts to do under Article XX when itis invoked to justify a breach of the rules is to examinethe extent to which the breach can be avoided (in otherwords, the extent to which a less-trade-restrictiveapproach can be used, that can equally fulfil the environ-mental protection objective that has been set), and thento look at whether or not the application of the measureis intended to be a disguised attempt to protect dom-estic producers or to favour one trading partner overanother. In the Gasoline case, the Appellate Body ruledthat the US’s Clean Air Act held imported gasoline to ahigher standard than domestic gasoline. Such a discrep-ancy could not be justified on either environmental pro-tection or trade grounds.

The WTO’s Dispute Settlement Mechanism also allowspanellists to consult outside experts on issues of a tech-nical or scientific nature. Experts were consulted in theShrimp/Turtle Dispute to the benefit of all panellistsinvolved.

Concluding RemarksA new round of trade negotiations will be launched inSeattle, Washington, in November 1999. With this dateapproaching, some countries have called for theinclusion of trade and environment issues in the negoti-ations (such as the European Communities and Norway),but others have opposed. It remains unclear whether ornot these issues will be taken up in a round. If they are,expectations on the outcome of a new round must bebased on a clear understanding of the role and functionof the WTO. The WTO must not be expected to deliverwhat it cannot. It is not an environmental protectionagency, and other specialized environmental organiza-


tions must play their part. In a number of well-definedinstances, however, the WTO can contribute to environ-mental protection, but it is important to know exactlywhat those are.

Notes1. Mexican Tuna Case I, September 1991, not adopted, reprinted in

(1991) 33 ILM 1594 and Mexican Tuna Case II, June 1994, notadopted, reprinted in (1994) 33 ILM 839.

2. United States – Standards for Reformulated Gasoline, AB-1996–1,WT/DS2/AB/R, 29 April 1996.

3. United States – Import Prohibition of Certain Shrimp and ShrimpProducts, AB-1998–4, WT/DS58/AB/R, 12 October 1998.


335

4. n. 2 above.

Doaa Abdel Motaal is Economic Affairs Officer inthe Trade and Environment Division in the WorldTrade Organization (WTO). Her responsibilities inthe WTO include researching different facets of thetrade and environment linkage and facilitatingnegotiations among WTO members countries. Thisarticle has been written on the sole responsibilityof its author. It does not reflect the views ofWTO members.

Documents

Trade and Environment in the World Trade Organization: Dispelling Misconceptions