Environment benefits from removing trade restrictions and distortions: background for WTO negotiations

The interaction between environmental policies and trade policies emerged as an issue at the end of the Uruguay Round of trade negotiations in 1994. It has been feared by developing countries as a potential excuse for protection, but the work of the Committee on Trade and the Environment at the WTO has tried to shift the debate to looking also at ways in which improving access by developing countries to developed markets can lead to more environmentally friendly production, in addition to the conventional gains to income and development from trade and the potential effect of reducing poverty on increasing care for the environment. The CTE has provided a forum for discussing some of the issues and started to identify products, but there is now a need to clarify the analysis and look at products in more detail. Liberalising trade improves the efficiency of production by allowing production to shift to the cheapest location. The objective of an environmental approach is to seek liberalisation of those products where that increase in efficiency is particularly concentrated in efficiency with respect to processes which might damage the environment. This criterion can be added to the conventional negotiating objectives of finding products with severe problems of access and a significant impact on the exporting economy. Because developing countries already have a range of schemes giving preferential access to developed countries, analysing the effects of any new preferences or improvement in access can be complex; the clearest possibilities are likely to be found among goods where developed countries subsidise domestic production because there has been less liberalisation at multilateral level and there are few examples of preference. These criteria and the suggestions made in the discussions at the WTO give a preliminary list of products to consider. For some there is a clear potential for reforms in trade policy and subsidies to help both development and the environment:

• Fish: this faces high tariffs in some markets and significant subsidies in many developed countries. The regime for foreign ships in some developing country waters provides insufficient payment and little control on over-fishing. Measures to remove trade distortions could reduce over exploitation and transfer some income to developing countries.
• Meat and sugar: these face high tariffs, restrictive quota regimes, and domestic subsidies in developed countries. There is evidence of environmental damage from over-production.
• Cotton, textiles and clothing face high tariffs and (at least until the end of the Multi-fibre Arrangement in 2004) restrictive quotas.
• Clothing is also a traditional route into manufacturing for developing countries, so if liberalisation permitted more countries to move into this sector, there could be significant development effects.
• Fish, meat and clothing are particularly interesting goods to liberalise: as well as the effects on efficiency, the environment, income, and development, there are potential effects on poverty in developed countries because all take a greater than average share of spending of poor households.
• Coal: subsidies and other encouragement of domestic production in developed countries restrict access by developing countries; developed countries would see a clear environmental gain from liberalisation.
• Ethanol: a substitute for other fuels with advantages of sustainability and environmental effects of production. Subsidies to domestic fuels in developed countries may restrict its access, but it is not certain whether it would be competitive even in the absence of market distortions.
• Jute: natural fibres face problems of access because competing synthetic fibres may not face the full costs of production, partly because of subsidies to energy.
• Non-ferrous metals: these also face competition from production in developed countries which benefits from low-cost energy, and some products face high tariffs.

Other goods have less clear environmental benefits, but could benefit some countries.

• Cocoa, coffee, and tea: these still face high tariffs, particularly on processed forms. Liberalisation could both increase income and allow diversification into processing in developing countries.
• Fruits and flowers: Many face high tariffs, and some, restrictive quotas. They are also goods for which demand is growing and diversifying as incomes increase in developed countries. Liberalising them could therefore give useful opportunities for developing countries to diversify their production and exports.
• Environmental goods: (goods used to protect or clean the environment) liberalising these could improve efficiency of production, and lower costs for developing countries, but it is difficult to define such goods in a trade-consistent manner, and the present structure of their trade suggests that the effects would be small.
• Wood and other forest products: encouraging sustainable production in developing countries has clear environmental benefits, but trade measures may not be able to help directly. There are few tariffs or other interventions, and there are universal problems of low and long-term returns. Some initiatives from environmental policy may be more relevant. Some non-wood products (nuts, spices, oils and gums) do face high tariffs, and reducing these may provide indirect encouragement for forests.

Any policy on trade in environmentally friendly goods must meet the normal rules of the WTO, and therefore it is necessary under current rules to find forms of liberalisation which are non-discriminatory (at least among developing countries at a similar income level), and which are directed at specific products, not methods of production. There are also initiatives in environmental negotiations, which could impose new rules on fishing or provide new benefits for forestry which could supplement any action on trade, and on property rights which raise issues about national or international standards. Trade liberalisation, particularly removal of subsidies, could be an important stimulus in some products, and may be a condition for progress in others. It would need to be accompanied by measures to correct transitional and other unintended effects, to help developing countries to meet administrative, legal, and technical requirements, and by initiatives specifically targeted at environmental problems. There is a need for the international agencies to improve data on subsidies and on environmental costs to apply the analysis. Environmental arguments could be a stimulus to make advances on trade liberalisation which have been unable to secure sufficient support for economic motives alone. But the linking of economic and environmental goals implied by the discussions for which this paper is background raises important issues about how the international system can manage not only conflicting interests, but potentially conflicting ways of defining interests: economic, the long term sustainability relevant to environmental questions, the new emphasis on property rights, as well as the traditional other interests of governments, including protection of industries. The economic framework in this paper can only offer partial answers. [author]