Trade and environment questions are complex and frequently controversial. It might be useful to analyze these issues by considering four categories of linkages as follows:
1. The Impact of Production-related Environmental Regulations and Standards on Export Competitiveness
Environmental regulations tend to raise production costs and reduce the competitive position of the export countries. However, it may lower costs over the long term.
Environmental regulations applied to production tend to raise production costs in the supplier country, and reduce its international competitive position. The amount of cost increase depends on the measures chosen, e.g. zoning, emission and effluent discharge limits, polluter pays charges, technology investments etc. In some instances however, the regulations may lower costs through for example, energy savings, in plant materials, resource recovery. These savings accrue generally over the long term.
The international competitiveness will not be affected if environmental regulations are internationally harmonized. Otherwise, trade policies are needed to equalize environmental cost internationally.
Despite the tendency for production costs to increase, international competitive effects may be modest to the point of no policy concern. This is more likely to be the case if foreign competitors are also undertaking pollution abatement expenditures, the financing of which is internationally harmonized under the PPP, and environmental regulations are harmonized internationally. Others argue that the costs of environmental protection has an effect on international competitiveness, and that the imposition of ecoduties (typically import surcharges and export rebates) is needed to equalize environmental costs internationally and create conditions of 'fair trade'. Trade practitioners from developing countries are opposed to such duties because of their potential to act as disguised forms of protection against the export competitiveness of developing countries.
2. Product-related Environmental Regulations and Market Access Issues
Product-related environment regulations are initially designed to protect domestic consumers, but from a trade perspective, they might also be set up to shield domestic industries from competitive imports.
In contrast to production related regulations, product related environment regulations are designed to protect the health, safety and environment of an importing country and its consumers. Examples include maximum pesticide, heavy metals residue standards in food products, auto emission standards, packaging requirements, ecolabelling schemes etc. From a trade perspective the concern is that these standards may be drawn up to in ways that seek to shield ailing domestic industries from competitive imports. The issue therefore is how can these product standards be designed in a manner that is the least restrictive to trade as possible. From developing countries' perspective the fear is that they will lose market access as a result of 'green' conditionalities being imposed on their exports. Therefore, the issue is how can these standards be designed so that environmental objectives are not attained at the expense of international trade.
3. The use of Trade Measures in Multilateral Environment Agreements (MEAs) and the Relationship with the Multilateral Trading System (WTO rules)
Trade measures are needed to manage transnational externalities that arise when the benefits and costs of environmental protection are not congruent with national border.
Another set of policy issues relates to the use of trade measures in MEAs to attain certain environmental objectives. The question here is how does one manage transnational externalities that arise when the benefits and costs of environmental protection are not congruent with national borders? Under this scenario, the temptation to resort to trade measures to secure environmental objectives becomes understandable. However, in most cases the use of trade measures represent second best policy options that do not address the environmental problem at its source. For example, banning trade in endangered species has not proven to lead to the sustainable management of the species. It may even induce increased smuggling as the price remuneration of trade in the banned species increases.
There is a potential conflict between WTO rules and MEA trade provisions and WTO attempts to take environmental issues into consideration in policy making.
Another issue of contention is the relationship between WTO rules and the trade measures contained in MEAs. To what extent are trade measures taken in pursuance of MEAs in support or in conflict with WTO rules. Even though no WTO member has invoked WTO dispute settlement procedures pursuant to an MEA, the potential for conflict between WTO rules and MEA trade provisions exists. Consequently, when the WTO was set up in 1995, this was one of the issues assigned for further study to the WTO Committee on Trade and Environment for further study. At the Fourth WTO Ministerial Conference held in Doha in November 2002, negotiations were launched to develop rules that would clarify the relationship between the two.
4. The Impact of Trade Liberalization on the Environment and Natural Resources
The effect of trade liberalization could be positive or negative depending on the environmental sensitivity of the particular sector.
The fourth category regards the effect that trade has on the environment, an issue that is very relevant to the ESCAP region, given its export orientation and significant liberalization reforms. The net impact is unclear, despite an increasing body of theoretical and empirical research that has emerged over the past decade. The effects could be positive or negative depending in large part on the environmental sensitivity of the particular sector. In such sectors, e.g. leather tanning, the need for domestic environmental policies to be formulated and implemented effectively greatly increases.
To avoid negative impact on trade competitiveness, environmental and trade policies should be jointly formulated so that they are mutually supportive.
Furthermore, to ensure that environmental policies in turn do not impact negatively on trade competitiveness (see 1 and 2 above), environmental and trade policies should be jointly formulated so that they are mutually supportive.