RESTRICTED
WORLD TRADE WT/CTE/W/1
16February 1995
ORGANIZATION(95-0330)
Committee onTrade andtheEnvironment
ENVIRONMENTAL BENEFITS OFREMOVING
TRADE RESTRICTIONS AND DISTORTIONS
Note bytheSecretariat
ThisNote hasbeenprepared inresponse torequests forbackground information onthe
environmental benefits ofremoving trade restrictions anddistortions, onepartoftheCommittee 's
agenda under thesixth point oftheMinisterial work programme.
Delegations haveexpressed interest intreating thesubject from twopoints ofview. One
isthepotential environmental benefits oftrade liberalization onageneral, multilateral scale such
ashasjustbeencompleted intheUruguay Round negotiations. Thiswasreferred toextensively
intheUNCED results asoneoftheessential components ofpolicies toaccelerate sustainable
development, particularly indeveloping countries, anditwaspicked upinGATT inthecontext of
work onUNCED follow-up intheGroup onEnvironmental Measures andInternational Trade and
theCommittee onTrade andDevelopment. Thesecond covers thepotential environmental
benefits ofremoving specific trade restrictions anddistortions, andofliberalizing trade inspecific
products; mention hasbeenmade inthisrespect oftariff escalation, internal taxation andexport
restrictions, particularly astheyaffect trade intropical products andnatural resource-based
products, ofsubsidies, particularly those thataffect trade inagricultural products, ofmeasures to
supply rawmaterials tolocalproducers atlower thanworld market prices, andofdifferential
export taxes onrawmaterials andprocessed products.
TheNote isintended tobeusedasabasis forfurther discussion intheCommittee. It
summarizes different points ofviewwhich havebeenexpressed bothinfavour ofandin
opposition topursuing further trade liberalization inthelightofitsvarious environmental effects,
andprovides references toempirical evidence onthesubject.
Asrequested bytheCommittee, abibliography isprovided attheendoftheNote.
I. TRADE LIBERALIZATION AND THE ENVIRONMENT
Toaverylarge extent, environmental problems arecaused byproduction andconsumption
activities andnotbyinternational trade. Trade ishelddirectly responsible forenvironmental
degradation incertain respects; these aredescribed below. However, byfarthemost significant
partoftherelationship between trade liberalization andtheenvironment passes indirectly via
effects onlevels andpatterns ofproduction andconsumption. Theenvironmental benefits (and
potential costs) ofremoving trade restrictions anddistortions aretherefore likely tobeindirect as
wellandnoteasytoidentify other thaningeneral terms, particularly since trade policies areonly
oneofmany areas ofpolicy-making thataffect economic activity.
There islittledisagreement thatthrough increased involvement ininternational trade the
world economy canenjoy higher levels ofproduction andconsumption. From thatobservationWT/CTE/W/1
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derive claims bothofbeneficial andadverse effects fortheenvironment: forexample, increased
resources tohelpovercome poverty andpayforenvironmental clean-up butalsomore pollution
andnatural resource depletion. Agrowing body ofempirical work suggests thatinpractice both
effects arelikely tobeatwork andthatmany factors influence whattheparticular mixofbenefits
andcosts willbeindifferent countries, atdifferent stages ofeconomic development, andunder
different policy andmarket conditions. Themost widely citedfactor istheextent towhich market
prices correctly capture therealvalue ofenvironmental resources; where theydo,trade
liberalization canmake apowerful contribution tobetter environmental protection and
conservation, butincreased economic activity islikely toaccelerate thedegradation anddepletion
ofundervalued environmental resources. Policy adjustment isthencalled for.
Various policy proposals havebeenputforward. Themost widely supported intheory,
andoverthepastdecade alsoinpractice, isthatprogress must bemade indesigning efficient
environmental policies tovalue environmental resources correctly andinimplementing those
policies effectively, andthatinthemeantime thebroader benefits oftrade liberalization should not
beforegone. Maximum advantage should betaken ofthecomplementarities thatexistbetween
proper environmental policies andthebenefits (environmental andeconomic) ofliberal trade, the
twobeing necessary ingredients ofsustainable economic development. Analternative viewisthat
trade liberalization should notcontinue except inqualified circumstances, themain onebeing that
environmental costs ofproduction andconsumption arefullyinternalized inworld market prices,
andthatinanyevent certain trade flows should bemore restricted thantheyareatpresent.
Direct links from trade totheenvironment
Although analysis suggests thatinmost sectors ofeconomic activity thedirect effects of
trade ontheenvironment aresmall (OECD 1994a), trade ishelddirectly responsible for
environmental degradation inanumber ofrespects.
Thatisthecasefortrade incertain products (e.g.hazardous wastes andchemicals and
endangered species) which governments havedecided collectively tocontrol within theframework
ofmultilateral environmental agreements (MEAs). Forthepurposes ofthisNote general
propositions about theenvironmental benefits oftrade liberalization arenotapplicable tothese
cases, which arethesubject ofdiscussion under aseparate itemoftheCommittee 'swork
programme.
Oneclaim ofdirect, adverse, environmental effects oftrade isbased ontheobservation
thattheecological carrying capacity oftheplanet islimited. Trade allows some countries tolive
beyond thecarrying capacity oftheirownterritories (something which some seeinandofitself as
abadthing), butaggregate world trade cannot expand forever without encountering absolute
environmental constraints andinsodoing causing irreversible environmental damage, since
environmental resources arenotinfinite (Dahl 1994). "The viewpoint ofecological, orsteady
state, economics [isthat]theinput ofrawmaterials andenergy toaneconomy andtheoutput of
waste materials andheatmust bewithin theregenerative andabsorptive capacities ofthe
ecosystem" (Daly 1993), and"Free trade ...converts asetof[ecological carrying capacity]
problems, some ofwhich aremanageable atthenational level, intoonebig,integrated,
unmanageable, global problem." (Daly andGoodland 1994).
Thisclaim doesnotgouncontested. "Tocontrol economic growth ...ultimately ...may
bearequirement forasustainable society ...[but]...atthemoment itisneither necessary norWT/CTE/W/1
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desirable. There isvastscope for"decoupling" therelationship between economic growth and
environmental impacts" (Pearce 1991).
Where markets existfortheenvironmental resources inquestion (e.g.energy andraw
materials), feedback effects, intheform ofgrowing shortages andprice increases thatcurtail
demand, willhelptemper theeffects ofincreased trade onenvironmental degradation. Thatisnot
felttoprovide asatisfactory answer, however, unless theenvironmental value oftheresources in
question iscaptured fullyinmarket prices. Furthermore, there aredoubts thatcorrect market
prices caneverbeassigned properly tocertain non-renewable resources suchthattheycan
confidently betraded freely. Inthatcaseeconomic feedback effects cannot berelied upon atall.
Theargument involved hereisatleastasmuch acriticism oftheeffects onthe
environment ofproduction andconsumption activity asitisoftrade perse,butoneconclusion
drawn from itisthatallforms ofexploitation offragile environmental resources, including
international trade, needtobecontrolled sooner rather thanlaterandpossibly prohibited
altogether.
Afocus ofattention inthisregard istrade inprimary commodities, particularly semi- or
non-renewable resources. Arguments havebeenmade thatcommodity production forexports can
cause inherently more environmental harm thanproduction fordomestic markets, particularly in
developing countries. Thereasons arethatitmayaccelerate resource depletion tounsustainable
rates, entail ashiftfrom small-scale tolarge-scale production units thataremore capital andinput
intensive andmore polluting, andcontribute tochanging landownership andother property rights
asmarket economy activities replace subsistence practices (Madeley 1992, French 1993,
Linnemann etal1993, Ekins etal1994). Agood dealofcriticism about andopposition totrade
liberalization isgenerated overconcerns suchasthese.
Themain policy prescription thatisadvanced formaking trade insensitive environmental
resources sustainable iscooperative jointaction intheframework ofanMEA. Several agreements
ofthisnature existalready (e.g.CITES, ITTA), andthere areproposals forextending the
approach more broadly through International Commodity-Related Environmental Agreements
(ICREAs) oriented nottowards price stabilization buttowards environmental problems inwhich at
leastsome oftheproblems described above, totheextent theyareborne outempirically, could be
taken intoaccount (Kox 1993, UNCTAD 1994a). Whether direct control ofexports orimports is
feltnecessary inthecontext ofsuchagreements willdepend upon theparticular caseinpoint.
Other possible components ofcooperative multilateral action thathavebeenproposed in
thiscontext arereducing tariff escalation inprimary commodity importing countries toencourage
amore diversified structure ofeconomic activity inexporting countries, andproviding debtrelief
todeveloping countries heavily dependent onprimary commodity exports (French 1993).
Where commodity production forexport involves environmental concerns ofaprimarily
domestic nature, policy responses tomeetnational conditions andenvironmental objectives are
called for(World Bank 1992, O'Connor andTurnham 1992). Whatever harmful effects reach
consuming countries through international trade inadirect, product-related way, suchaspesticide
residues onfoodcommodities, caninprinciple bedealtwithsatisfactorily through environmental
product standards inthose countries; itisnotclear thatthere isanymeaningful rolebeyond that
fortrade policies toplay.
However, inthefaceofscientific uncertainty about where andwhen environmental
constraints maybemet,andtaking onboard theprecautionary principle tostayonthesafesideofWT/CTE/W/1
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themargin ofrisk,there havebeencallsfortheimposition oftrade restrictions, insome cases of
asweeping nature, while MEAs arebeing negotiated orevenasanalternative approach
altogether, notonlyinthecaseofcommodity trade butmore generally (WWF 1992a and1992b,
Wirth 1994). Some commentators come outclearly believing thatautarky would bemore
environmentally benign (Lang andHines 1993), oratleastthatthedefault position should beset
atfavouring production forthedomestic market overinternational trade (Daly 1993). However,
thatviewisnotwidely shared. Even declared sceptics oftheclassical benefits ofanopentrading
system seem toacknowledge that"anuncritical rejection oftrade isequally flawed [asuncritical
support offreetrade] since trade doesnotnecessarily havetobeenvironmentally andsocially
detrimental" (Ekins etal1994). Before policy conclusions aredrawn, therefore, environmental
costs attributable toexport-led growth needtobecompared withestimates ofenvironmental and
economic costs thatwould beincurred through lesstrade-intensive patterns ofgrowth and
development, suchasareturn toimport-substituting agriculture andindustrialization. "Continued
inward-looking, trade-restricting development policies might haveproduced equally serious
environmental problems along withsignificantly lower living standards." (Repetto 1994).
Separately, trade isheldresponsible forpollution caused bythetransport anddistribution
activities itinvolves (French 1993, Ekins etal1994). Itisofcourse likely thatinternational trade
willinvolve more long-distance transport thanproduction tosupply onlythedomestic market, and
trade liberalization willincrease bothinternational anddomestic freight flows. Oneestimate
(Madeley 1992) isthatinternational transport (including airtravel) isresponsible forone-eighth of
world oilconsumption, andfrom thatEkins etal(1994) conclude thattrade contributes
substantially toenergy-related environmental damage, notably airpollution. Claims suchasthis
mean littleinisolation; theyneedtobeevaluated inconjunction withpotential overall energy
savings derived from more efficient resource allocation worldwide andcompared withestimates of
theenergy-intensity ofalternative, lesstrade-intensive models ofdevelopment. Ithasbeen
pointed out,forexample, thatliberalizing trade intransport services canmake significant
environmental andeconomic savings byensuring thatgoods donothavetobeloaded offone
vehicle andontoanother ateachnational border andthatvehicles consequently donottravel
empty somuch ofthetime(ECCommission 1990). Amore telling criticism inthisareaisthatto
theextent transport costs donotcapture fullytheenvironmental costs involved, notably ofenergy,
thewelfare gains from trade willbeoverstated; however, unless transport forinternational trade
isspecifically subsidized inthisregard, thatsame criticism applies equally todistribution activities
carried outentirely within adomestic economy (Landis Gabel 1994).
Trade liberalization, economic activity andtheenvironment
There islittledisagreement thattrade liberalization willpermit anincrease inlevels of
economic activity. Standard analysis ofthegains from trade shows that,other things being equal,
liberalizing trade improves efficiency oftheallocation anduseofresources suchthatahigher
levelofoutput canbeobtained from thesame levelofinputs. These static gains arerealized ina
higher volume ofgoods andservices available forconsumption thanwould otherwise bethecase.
Dynamic gains canaccrue too,forexample through competition-induced improvements in
productivity andwider participation intechnological change, andsome viewthese asofgreater
potential importance thanthestatic gains. Over thepast50years, thevolume ofinternational
trade hasgrown onaverage faster thanproduction, andincreased involvement ininternational
trade andprogressive trade liberalization hasmade animportant contribution inalarge number of
economies tomaintaining highrealgrowth ratesoversustained periods oftime.WT/CTE/W/1
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Claims havebeenmade bothofpositive andnegative effects oftrade liberalization and
increased economic activity ontheenvironment.
Onthebenefits side,trade liberalization leads tomore efficient allocation anduseof
resources, including environmental resources. Thatoutcome isofatleastasmuch interest from
anenvironmental point ofviewasitisfrom aneconomic ortrade point ofviewsince itaddresses
theproblem ofunnecessary waste ofenvironmental resources. Animportant corollary tothis
claim isthatproper market values areassigned toenvironmental resources, since thatwill
determine theintensity oftheiruseasfactors ofproduction. Demand foranduseofthose witha
relatively lowmarket value willincrease byproportionally more eveniftheirlowvalue isa
function notofsimple resource abundance butofmarket and/or policy failure tocapture social
(environmental) aswellasprivate costs ofproduction inmarket prices. Inthatcase, corrective
intervention isindeed called for.However, thecreation oftrade restrictions ordistortions will
seldom betheoptimal policy response.
Trade liberalization cancorrect theadverse economic andenvironmental consequences that
derive from theexisting structure oftrade restrictions anddistortions inplace intheworld
economy. Long-standing trade restrictions andtrade-distorting measures inOECD countries, such
astariff escalation, non-tariff barriers andproduction andexport subsidies, holdbackincome
growth inother countries, impede theirexports oflabour-intensive (potentially more
environmentally friendly) goods, andoblige developing country producers tofallbackon
alternative production opportunities, notably intensifying output ofnatural resource-based
commodities toraisetheirexport earnings. Trade restrictions imposed bydeveloping countries
themselves havesimilar effects ontheirtrading partners. Trade restrictions alsohave
environmentally damaging effects inthecountries applying them, forexample soilandwater
pollution incountries withprotected agricultural sectors. Thisissue isexplored inmore detail in
thesecond partofthisNote.
Trade liberalization expands opportunities forthesaleanddissemination of
environmentally friendly goods, services andtechnologies. With respect tothelatter, Repetto
(1994) notes that"Countries thatareindustrializing rapidly withaccess tointernational
technologies areinadecidedly advantageous position, inthatalarge partoftheircapital stock is
relatively new. Newplants canreadily incorporate up-to-date process technologies thatuse
materials andenergy more efficiently, minimize emissions, improve product quality andreduce
costs. Companies aremore willing andabletomeetstrict emission standards when building new
facilities [than when retro-fitting oldones]". Anderson (1992e) suggests thatthepolitical costof
imposing more stringent environmental policies andstandards canfallwiththeopening upofan
economy totrade andforeign investment, since thatmakes environmentally benign products and
production processes more available andaffordable andthereby lowers thecostof,andhence
opposition to,implementing stricter standards.
Trade liberalization generates newresources thatcanbeusedtoreduce poverty, which is
widely acknowledged tobeoneoftheprincipal causes ofenvironmental degradation inmany
developing countries, andtopayfortheprevention orclean-up ofpollution. Estimates ofthe
potential increase inresources stemming from implementation oftheresults oftheUruguay Round
negotiations (OECD 1993c, GATT 1994a) suggest these could goalongwaytowards meeting
estimates oftheannual costofimplementing therecommendations contained inAgenda 21for
improving environmental protection andaccelerating sustainable development (Agenda 21,
Chapter 33). Aswasmade clear intheUNCED results, trade liberalization alone isnotlikely to
beenough toensure sufficient newresources aremade available tosatisfy sustainable developmentWT/CTE/W/1
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needs, particularly indeveloping countries --finance andtechnology transfer alsohasamajor role
toplay--butthatdoesnotreduce thesignificance ofitscontribution.
Although trade liberalization andeconomic growth willgenerate additional resources, it
doesnotfollow automatically thattheresources willbeusedtotackle pollution abatement and
environmental protection; anappropriate policy framework needs tobeputinplace todirect the
resources towhere theyareneeded. There islikely, however, tobeatleastonenatural source of
pressure ongovernments tomove inthatdirection. Empirical evidence indicates thatsociety 's
sensitivity toenvironmental problems risesalong withrealincome, atleastbeyond acertain
threshold level, andthatgovernments doreact todemands touseatleastsome ofthenew
resources made available through trade liberalization toaddress environmental problems directly
(Grossman andKrueger 1991 and1994, Radetzki 1992). Valid doubts arisewhen thislineof
argument isexaggerated. Notallforms ofpollution areobserved empirically todecrease with
economic growth (e.g.CO2emissions percapita areverylikely torise,eventhough SO2andNOx
emissions aswellasconcentrations ofsuspended particulate matter, leadandother heavy metals,
andanumber ofother forms ofpollution havebeenfound tofall)andsome more broadly defined
environmental problems areobserved togetworse asincomes rise(e.g.urban pollution andwaste
generation). However, thisnegative linkcanbebroken through appropriate national and
international policies, which inmost cases willnotinvolve trade restriction (World Bank 1992,
OECD 1994a).
Other claims ofpotential (somewhat longer-term) environmental benefits thathavebeen
made arethatpopulation growth ratestendtodecline asincomes rise,which reduces one
important source ofpressure onbothurban andrural environments indeveloping countries
(World Bank 1992), andthateducation investment expands withincome andwithitcomes more
skilful management ofallresources including private useofthenatural environment
(Anderson andStrutt 1994).
Insum, modernising communities withrising incomes andbetter education tendeventually
toimprove private property rights andputmore stringent environmental policies inplace, andthe
costs ofcompliance fallastrade liberalization expands opportunities toacquire more
environmentally benign production technologies, consumer products andinputs (Anderson and
Strutt 1994).
Claims about thepositive contributions thattrade liberalization canmake tobetter
environmental protection andtheacceleration ofsustainable development havebeensummarized in
fivebroad categories (Grossman andKrueger 1991, OECD 1994a):
- acomposition/structural effect: improved efficiency ofresource allocation and
use.
- aregulatory effect: reduction orremoval ofenvironmentally damaging trade
restrictions.
- atechnology effect: improvements inandthetransfer ofenvironmentally friendly
technology, giving reduced pollution perunitofoutput.
- aproduct effect: increased international availability ofenvironmentally friendly
goods andservices.WT/CTE/W/1
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- ascale effect: increased opportunities forsustainable growth anddevelopment and
economic diversification, andadditional resources touseforenvironmental
protection.
Claims thatthere isanessentially negative relationship between trade liberalization, higher
levels ofeconomic activity andtheenvironment havebeenmade inrespect ofeachofthese
fiveareas. Toalarge extent, theyrevolve around thebelief thattrade liberalization in
conjunction withthewrong supporting (mainly environmental) policies severely dampens andmay
entirely reverse thebeneficial effects described above. Amore extreme criticism isthatstandard
economic analysis ofthegains from trade isfundamentally flawed because ofinternational factor
mobility, imperfect markets, etc.,andthatinpractice international specialization ofproduction
andtrade flows involve suchinefficiencies andenvironmental costs thattheburden ofproof rests
withthose whoargue thattrade should bepermitted totakeplace atallrather thanviceversa
(Daly 1993). However, thispoint ofviewhasnotattracted much support.
Failure totakefullaccount ofenvironmental externalities canleadtoexaggerated claims
oftherealgains from increased trade andeconomic growth. Repetto (1994) citesestimates that
evenpartial economic accounting forenvironmental degradation andresource depletion in
developing countries suggests thecosts arelarge --oftheorder of4-5percentofGDP peryear.
Itisworth noting bywayofcomparison thatmeasurable efficiency gains from trade liberalization
havebeenestimated tobeintherange of1-2percentofGDP, rising to3-4percentincountries
suffering from extreme economic distortions (Jorgenson andHo1993).
Adverse composition/structural effects derive from trade liberalization intheform ofa
mis-allocation ofproductive resources andthewrong composition ofoutput ifenvironmental
assets arenotproperly valued andinternalized inmarket prices. Consumers thenwillbeattracted
toincorrectly low-priced, environmentally unfriendly products, andfirms thatspecialize in
polluting and/or environmentally-sensitive, resource-intensive activities willprosper. Bothof
these claims arelegitimate inprinciple; thequestion theyraiseiswhattheappropriate policy
response should be.Itisalsoargued thatasstricter environmental production standards are
applied insome countries andcorresponding production costs there rise,sopolluting activities will
migrate toother countries withlower environmental standards (so-called "pollution havens") and
fears oflossofnewinvestment tolocations overseas maycreate resistance athome toupgrading
environmental standards further (French 1993, Ecological Economics 1994). Thepractical
significance ofthisclaim seems doubtful, however, onthebasis ofconsiderable empirical
evidence which supports neither thathigher environmental standards make asufficiently significant
impact oncosts ofproduction thatthere willbeincentives formost industries tomigrate, northat
suchmigration hasinfacttaken place onanysignificant scale. (Leonard 1988, Tobey 1990,
Grossman andKrueger 1991, Dean 1992, Birdsall andWheeler 1992, Wheeler andMartin 1992,
andLow1992).
Negative regulatory effects areclaimed toariseiftrade liberalization andtheadoption of
stricter multilateral rules regulating tariff andnon-tariff trade barriers undermine environmental
policy-making (WWF 1992b, Ecological Economics 1994). Particular concern hasbeenexpressed
inthisregard overpossible threats totheintroduction andmaintenance ofnational environmental
product standards atlevels higher thaninternational standards (Charnovitz 1992). Thisissue has
beenreferred tointheCommittee 'sdiscussions under thethirditemofitswork programme, but
experience withtheoperation oftheGATT Agreement onTechnical Barriers toTrade shows no
evidence inthepast15years ofcommercial challenges being lodged against theconsiderable
number ofnational environmental product standards thathavebeennotified (PC/SCTE/W/1).WT/CTE/W/1
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Product effects canbenegative totheextent trade liberalization contributes toincreased
trade inenvironmentally harmful orsensitive products (e.g.hazardous wastes, chemicals,
endangered species, orproducts thatfailtomeetnational environmental standards inimporting
countries). Asnoted earlier, itshould bepossible toaddress these effects satisfactorily through
MEAs orthrough non-discriminatory border measures applied toenforce domestic environmental
taxes, regulations andstandards. Amore sweeping claim isthatanyandalltrade inproducts
whose price doesnotreflect fullyenvironmental costs oftheproducts 'life-cycle willbe
detrimental since itwillresult inhigher levels ofconsumption andproduction pollution thanis
considered (bythose making theclaim) tobeoptimal. Adverse technology effects mayoccur if
trade leads tothespread ofenvironmentally harmful technologies through, forexample, industry
migrating to"pollution havens", butaswasnoted above empirical evidence doesnotbearoutthe
likelihood ofthisoccurring.
Thescale effects oftrade liberalization areclaimed tobenegative aslongas
environmental costs ofproduction arenotfullyinternalized andreflected correctly inmarket
prices. Higher output thenleads tohigher pollution andenergy andresource usethanis
environmentally sustainable, andundervalued environmental resources willbeover-exploited
(Daly andCobb 1989). Reference ismade inthisrespect tothepastexperience of
industrialization inOECD countries andtothekindofrapid industrial development thathasbeen
associated more recently withexport-led growth inSouth-East Asiaandelsewhere (French 1993).
This, itisclaimed, hasnotbeenaccompanied byadequate investment ininstitutional capacity and
infrastructure forenvironmental management (Repetto 1994). Investment oftheincreased
resources derived from intensive engagement intrade aremore readily ploughed backintodirectly
productive activities while environmental regulations remain vague, orwhere theyarecreated
theirenforcement islaxandmonitoring inadequate, andinfrastructure tohandle, forexample, the
collection, treatment, storage anddisposal ofwaste, ortocopewithurban water andairpollution,
lagsbehind. Notonlycanincreased economic activity thenharm theenvironment, buttheeffects
cancome fullcircle andreduce theproductivity ofresources suchasland(through poisoning it
withchemical inputs), people (who suffer higher health hazards), etc(Lopez 1994).
Onevariant oftheargument thatthescale effects ofeconomic growth arenegative
highlights overconsumption, particularly inOECD countries, astheprimary source of
environmental degradation worldwide (Lang andHines 1993). However, thatargument doesnot
evidently leadtotheconclusion thatrestricting trade makes sense. Even ifrealeconomic growth
were tobereduced deliberately tonegative levels, asthose holding thispoint ofviewapparently
wishtosee,itwould stillpaycountries totakeadvantage ofthestatic gains from trade.
Empirical studies
General claims about theenvironmental benefits andcosts oftrade liberalization leave a
great dealofambiguity inpredicting whatthelikely outcome maybeinparticular circumstances.
Case-by-case analysis hastherefore akeyroletoplayindeveloping abetter understanding ofthe
issue, andthisisintheprocess ofbeing developed.
Official studies oftheenvironmental effects oftrade liberalization havebeenprepared in
Europe inthecontext oftheSingle Market andinNorth America inthecontext oftheresults of
boththeNAFTA andtheUruguay Round. They focus onsectoral environmental effects thatmay
occur andonprocedural andenvironmental policy initiatives thatcould orshould accompany trade
liberalization (ECCommission 1990, Canadian Government 1992 and1994, USGovernment 1993
and1994). Byandlarge, these studies donotattempt toquantify theeffects.WT/CTE/W/1
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Very useful work inprogress byUNCTAD (UNCTAD 1993) involves alarge number of
developing country andtransition economy casestudies of,interalia,theeffects oftrade
liberalization ontheenvironment. Thecasestudies which arefurthest advanced (Brazil, China,
Colombia, India, Philippines, Poland, Thailand, Turkey andZimbabwe) "...donotprovide any
emphatic evidence thattrade liberalization hassystematically hurttheenvironment. There are
specific situations inwhich environmental pressures havebeenreduced andothers inwhich ithas
increased. Where ithasbeenincreased, some ofthecasestudies haveidentified policies that,if
effected, could mitigate thedamage without losing thebenefits oftrade liberalization. Infactone
could argue thatinallcases where negative impacts havebeenidentified, some policies of
environmental protection, thatwere acceptable from atrade point ofview, could havebeen
introduced toreduce thatimpact." (UNCTAD 1994b).
Other, valuable empirical work isavailable, notallofituncritical ofthelinks between
trade liberalization andtheenvironment (e.g.World Bank 1992, Cruz andRepetto 1993,
OECD 1994a, Sullivan 1994). Inthecaseof25Latin American economies, forexample,
Birdsall andWheeler (1992) found that"openness" tointernational trade andinvestment wasa
significant factor inexplaining reduced pollution intensity; Repetto (1994), ontheother hand,
points tocountry casestudies which suggest trade liberalization canexacerbate environmental
damage significantly, although thekeyinthese cases appears tobethateffective domestic
environmental policies were notinplace atthetimetrade wasliberalized. More studies ofthis
nature, particularly atthenational level, willhelpincrease understanding ofthelinks between
trade liberalization andtheenvironment.
General policy considerations
Toalarge extent, thekeytoevaluating claims oflikely costs orbenefits oftrade
liberalization fortheenvironment lieswiththequestion ofwhether thevalue ofenvironmental
resources iscorrectly captured inworld market prices. Where theyarenot,claims thatadverse
environmental effects canresult would findnogreat disagreement from those holding thatthe
effects oftrade liberalization ontheenvironment areessentially beneficial. Trade actsasa
"magnifier": where proper policies forenvironmental protection andsustainable development are
inplace, trade liberalization willcomplement andreinforce those policies; where theyarenot,
trade liberalization willexacerbate existing environmental problems andpromote development that
isnotsustainable, butthensowilleconomic activity generally eveninanaeconomy which is
completely closed totrade (GATT 1992).
Themain differences ofopinion therefore ariseoverthedesign andsequencing ofpolicies
toaddress thisproblem.
Inthestandard gains from trade model, market prices correctly capture allcosts, social as
wellasprivate, andpolicy-makers intervene efficiently tocorrect price distortions where these
occur. "Ifenvironmental assets areproperly valued, theirworth taken intoaccount in
international prices andmarkets, theirusenotdistorted bygovernment policy interventions, trade
would betheidealvehicle forfurthering sustainable development attheglobal level."
(OECD 1994a). Inreality, bothmarket failures andpolicy failures occur, andthishasledto
analysis ofhowtocorrect those associated withenvironmental externalities, thevaluation of
eco-systems andthedefinition andassignment ofproperty rights overenvironmental resources.WT/CTE/W/1
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Thatisavastsubject (see,forexample, Baumol andOates 1988), most ofwhich lies
outside thescope ofthisNote. There isalarge measure ofagreement, however, based ongeneral
principles ofeconomic policy assignment thatpolicies should actasneartothesource ofthe
distortion aspossible iftheyaretobeeffective andhavetheleastsecondary costs, andthateach
distinct policy objective should haveaseparate policy instrument assigned toit.Since different
countries havedifferent environmental resource endowments andconstraints andsocial
preferences, andsince theiroverall mixofpolicy objectives willnotnecessarily orevenprobably
bethesame, theefficient policy prescription toensure environmental resources arevalued
properly before theyaretraded willvaryfrom onecountry toanother. Where acommon or
unique policy solution isdesirable, cooperative action through anMEA iscalled for.Ineither
event, imposing trade restrictions isnotlikely tofindasignificant roleother thaninveryspecific
circumstances; interms ofoptimal policy intervention tocorrect distorted prices ofenvironmental
resources, trade restrictions aregenerally alongwaydown thelist,wellbehind environmental
policies andtheassignment ofproperty rights overenvironmental resources.
Thefirst-best policy prescription istherefore forcountries toputinplace environmental
policies torevalue environmental resources sothatwhen theresources enter themarket-place their
prices reflect bothsocial andprivate costs ofproduction. Decisions onfurther trade liberalization
should betaken independently andbased primarily oneconomic considerations. "Ifacountry
lacks adomestic environmental policy thatreflects itsenvironmental values andpriorities, ...the
most effective action istoconcentrate onintroducing appropriate environmental policies rather
thantrying towork around badonesbyforegoing trade liberalization orattempting tofine-tune
interventionist trade policies." (GATT 1992). More often thannotrestricting trade toreduce
pollution orconserve resources willinvolve more hidden costs andwillbelesseffective and
efficient inmeeting theenvironmental objective thanmeasures aimed directly atchanging
production andconsumption patterns. "Trade policies should aimtoreduce trade barriers, while
remaining environmentally neutral; iftheycreate (orfailtoreduce) environmental costs, then
separate policy instruments arecalled for"(Runge 1994).
Inpartatleast, these propositions donotappear tobeparticularly contentious. Ekins etal
(1994), forexample, admit that"Where [environmental] externalities havenotbeentaken into
account ...onecanreadily agree inprinciple withtheGATT Secretariat andtrade theorists that
thefirst-best means ofaddressing domestic environmental damage islikely tobethrough domestic
policy thatdirectly tackles theenvironmental problem, rather thanthrough trade policy". Heand
others goontoargue, however, thatthefirst-best policy response maynotbepolitically feasible,
especially ifithasserious competitiveness implications forthedomestic economy, andthat
negotiation ofanMEA mayinvolve suchdifficulties thatunilateral action becomes necessary
instead.
Thepractical policy conclusions drawn from thislineofargument arebasically twofold.
One(Repetto 1994) isthat"thesecond-best policy, intheabsence ofeffective domestic
environmental policy, isnotnecessarily togoahead withtrade liberalization anyway". The
problem withthisisthatitbecomes essentially nihilistic; ifneither domestic environmental
policies nortrade policies aretobechanged, thestatus quowillprevail evenifitishighly
prejudicial totheenvironment aswellastoeconomic growth anddevelopment.
Thesecond ismore deliberately interventionist. Trade policy, eventhough itis
acknowledged tobeaninferior policy instrument, should beusedtoencourage theadoption of
binding international treaties forenvironmental protection ontheonehandandappropriate
domestic environmental policies ontheother (Ekins etal1994). Partofthispolicy prescription is
familiar from theCommittee 'sdiscussions under thefirstitemofitswork programme ontheuseWT/CTE/W/1
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oftrade measures pursuant toMEAs. Theother covers boththeuseofunilateral trade sanctions
totrytosecure changes inenvironmental policies abroad, andtheusebycountries thatdo
internalize theirenvironmental costs ofcompensating tariffs against competition from imports
whose environmental costs ofproduction havenotbeeninternalized (WWF 1991, OECD 1993b,
Daly andGoodland 1994). Arguments supporting theuseoftrade restrictions ineither ofthese
circumstances, particularly thelatter (Barrett 1993), areweak bothanalytically andempirically.
They raisequestions about theuseoftrade policy forextra-jurisdictional, non-trade purposes on
theonehand, andontheother toneutralize differences incompetitiveness thataregrounded in
national environmental resource endowments andconstraints and/or differences innational policy
objectives andpriorities. Neither hasbeentaken upsofarasaserious topic forconsideration in
theCommittee.
II. THE ENVIRONMENTAL BENEFITS OFREMOVING SPECIFIC TRADE
RESTRICTIONS AND DISTORTIONS
A. Policies
Trade restrictions andtrade-distorting policies areusedforavariety ofnon-trade and
trade purposes, butnever withtheintent ofcausing environmental damage. Itfollows thatthe
environmental benefits ofremoving specific trade restrictions anddistortions arenotlikely toenter
inisolation intoagovernment 'scalculations oftheeffects ofpolicy change; theywillbereviewed
along withestimates ofother benefits and(largely political andsocial) costs. Itisonlyfairly
recently thatthepotential environmental benefits involved havebegun tobestudied andincluded
atallincalculations ofthisnature, sothattheempirical evidence isstillthin. What there isofit
suggests thatontopoftheeconomic advantages involved theenvironmental benefits ofremoving
trade restrictions anddistortions canbeconsiderable, particularly inprimary sectors ofeconomic
activity, butthatmuch depends upon whether appropriate environmental anddomestic resource
management policies areinplace.
Instandard trade analysis, environmental damage istreated asanexternality which drives
awedge between marginal private andsocial costs ofproduction (Anderson 1992b). Thepolicy
objective istointernalize theexternality suchthatthewedge isremoved. Imposing trade
restrictions canrarely assist inthatregard; environmental problems arecaused predominantly by
production andconsumption activities, notbyinternational trade, andaddressing them atthe
border willbelesseffective and/or more costly thanaddressing them attheirsource.
Trade restricting anddistorting policies can,however, drive thewedge further in.Inthat
case, removing them cancontribute positively tointernalizing environmental externalities, and
offer anopportunity totackle twopolicy objectives atthesame timeandreapenvironmental as
wellaseconomic benefits.
Tariffs andnon-tariff import restrictions
Tariffs andnon-tariff import restrictions raisetheprice ofimports relative todomestically
produced likeproducts, encouraging anincrease indomestic production oflikeproducts anda
switch inconsumption (along withproduction andimports) tosubstitute products.
Whether theresult ofremoving these trade restrictions willbeenvironmentally beneficial
totheimporting country isanempirical question thatdepends on(i)therelative consumptionWT/CTE/W/1
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pollution characteristics oftheproduct whose imports arerestricted andofitssubstitutes, and
(ii)thechange inproduction pollution thatwillresult from moving resources outoftheproduction
oflikeandsubstitute products andintoother activities. Environmental benefits would accrue, for
example, iftheimports restricted (e.g.bicycles) generate lessconsumption pollution than
substitute products (e.g.cars), andiftherestrictions areshielding relatively polluting (bythe
importing country 'sstandard) firms andindustries ofbothbicycles andcarsfrom international
competition andhence increasing theirscale ofoperation attheexpense ofother activities.
Evidently, thepotential environmental benefit totheimporting country from reducing production
pollution derives from shifting production toproducers inother countries, where production
pollution mayconsequently increase. Thatisalsolargely anempirical question which needs tobe
answered byrelating increased production pollution inother countries towhatthose countries
consider tobetheirown"optimal" pollution levels, notbycomparing reduced pollution inone
country toincreases elsewhere onaone-to-one basis.
Other thaninparticular instances, there willbeadeadweight lossofeconomic welfare
associated withusing atrade taxorrestriction rather thanamore efficient domestic consumption
taxtomake theswitch inconsumption patterns described above. Thatwillbefeltinadecline of
domestic income. Thehigher andmore widespread arethetrade restrictions inquestion, themore
significant willbetheincome decline tothepoint thatitmayprejudice thevolume ofresources
available touseforenvironmental purposes. Given that,there willbebenefits from removing
tariffs andnon-tariff import restrictions while applying targeted environmental measures tocontrol
consumption andproduction pollution, notjustthatrelated toconsumption ofimports orthe
production ofimport substitutes buteconomy-wide.
Theargument isreinforced when account istaken alsoofthepotential economic and
environmental benefits thatwould accrue tothirdcountries. They willenjoy anincrease in
production forexport andinincome. They mayalsoexperience anincrease inproduction
pollution, which should beaddressed bydomestic environmental measures; suggesting itshould
becontrolled byforeign countries 'import restrictions runsaverypoorsecond asapolicy
prescription andinreality could onlybeenvisaged asanon-cooperative solution. Thepoint
would bewell-illustrated inthecaseofhighimport restrictions confronting exports ofwhole
product lines(e.g.theMultifibre Arrangement) which cause large-scale distortions ininternational
resource allocation, depriving relatively poorexporters (whose comparative advantage inlabour
intensive methods ofproduction maybeinherently lessdamaging totheenvironment than
competing production techniques intheimporting country) ofincome thatisneeded tohelpthem
fightpoverty andfinance sustainable development.
Tariff escalation
Beyond theenvironmental effects ofhightariffs alone, tariff escalation hasitsmain effect
through itsinfluence onthelocation ofproduction. Itisassociated typically withtheprocessing
ofprimary commodities, andhasbeencitedparticularly inthecontext oftrade inforestry,
mining, fisheries andagricultural products (OECD 1994a, Anderson 1992c). Tariff escalation
encourages anexpansion ofdownstream processing industries intheimporting country anda
corresponding contraction inthirdcountries. Ifthethirdcountries concerned arealsothemain
suppliers totheworld market oftherawmaterials (which theyneednotnecessarily be;Barbier
1994), tariff escalation mayincrease pressure there toexpand output ofrawmaterials forexport
inorder tomaintain foreign exchange earnings, causing environmental damage possibly beyond
sustainable limits.WT/CTE/W/1
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Acomplementary effect stems from constraining value-added inthirdcountries,
particularly when theyaretherawmaterial exporters, which limits theresources available to
reduce poverty andpayforbetter environmental protection. French (1993), forexample, citesa
study suggesting thatmining bauxite usesabout 10percentofthetotalenergy usedinmaking the
finalaluminium product andproduces 90percentofthewastes while accounting for10percent
oftheprofits; processing alumina accounts forabout 80percentofenergy use,andgenerates
9percentofthewastes and20percentoftheprofits; thefinalstage ofmanufacturing accounts
forabout 10percentoftotalenergy use,generates 1percentofthewaste and70percentofthe
profits.
Tariff escalation alsoreinforces other obstacles toeconomic diversification, thevalue of
which wasdescribed inAgenda 21asdiminishing dependence onarestricted range ofcommodity
exports andthereby avoiding pressure toover-exploit environmentally sensitive rawmaterials
when there isaweakening ofparticular commodity prices onworld markets.
Initssummary oftheresults oftheUruguay Round, theSecretariat (GATT 1994a) noted
thatwhile there hasbeen, ingeneral, adecline intariff escalation, inthecaseofanumber of
products (e.g.rubber, jute,lead, zincandhides, skins andleather) inmajor developed country
markets theleveloftariff escalation hasincreased.
Internal taxes
Internal taxes (applied equally todomestically produced andimported products) cause a
switch inconsumption andproduction tosubstitute, untaxed products. Where thetaxes havebeen
applied forenvironmental purposes, there willevidently beanenvironmental cost,notbenefit,
from removing them. Where theyhavebeenapplied forother purposes (revenue raising for
example) without taking account oftheirenvironmental consequences, theenvironmental benefits
ofremoving them willdepend upon therelative consumption andproduction pollution caused by
taxed anduntaxed products.
Subsidies
ThisNote concerns onlytrade restrictive anddistorting subsidies. Inatrade context, that
covers subsidies which areprohibited oractionable under theWTO Agreement onSubsidies and
Countervailing Measures; i.e.those contingent onexport performance oronusing domestic
inputs rather thanimported products, andthose thatcause adverse effects tothecommercial
interests ofanother country, forexample injury tooneofitsindustries.
Keycharacteristics ofsuchsubsidies arethattheyarespecific toparticular firms or
industries andtheyarenotde-coupled from output. They cantherefore affect directly the
composition, location andscale ofproduction, sothatthepotential environmental benefits of
reducing orremoving them lieprimarily inthecomposition/structural, product, andscale effects
described inthefirstsection ofthisNote. Reducing orremoving production andexport subsidies
willyield direct environmental benefits when theproducts theyfavour aremore polluting orare
produced inamore polluting waythancompeting products ofoverseas suppliers. Lessdirect, but
nonetheless potentially significant benefits willaccrue from removing thebiasagainst competing
producers inother countries whohavebeenbeforced intoalternative, more environmentally
damaging activities andwhose lossofincome hasaggravated resource constraints toputting inWT/CTE/W/1
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place better environmental protection, andfrom reallocating theresources usedtopayforthe
subsidies toalternative usesthatsupport sustainable development directly.
From anenvironmental standpoint, subsidies which favour lesspolluting products or
production methods maybefelttobemore desirable thantaxes onpollution since theycanbe
focused onexanteprevention rather thanonexpostregulation andclean-up. Although much
depends upon thespecific circumstances involved, theargument isnotnecessarily wellsupported
intheory. Pigovian taxes onpollution aregenerally considered optimal; subsidies arenot,
primarily because theycansustain otherwise unprofitable producers andhence maintain total
industry output andpollution athigher thanoptimal levels (Baumol andOates 1988). Also,
subsidizing production thatpollutes relatively lessinonelocation maynevertheless result inmore
netenvironmental damage ifitdisplaces production thatpollutes absolutely lesselsewhere.
Theuseoftrade distorting subsidies forenvironmental purposes isrejected bythe
OECD 'sPolluter PaysPrinciple (PPP) forbothenvironmental andeconomic reasons. ThePPPis
acostallocation rulethataimstopromote policy efficiency andequity; market prices should
incorporate environmental costs ofproduction, andpolluters (producers andconsumers), not
governments, should bearthecostofpollution abatement andcontrol measures. Explicit
exceptions tothePPParepermitted, butitaimstoremove thepossibility ofdifferent financing
schemes adopted indifferent countries topayforenvironmental control costs leading totrade
distortion. Public assistance forpollution control "should notcreate significant distortions in
international trade andinvestment." (OECD 1975).
Discussion ofprecisely whatexceptions should bepermitted hascontinued intheOECD
since thePPPwasfirstelaborated, andthedifferent ways inwhich thePPPisinterpreted in
individual OECD member States suggests thatitcontains anumber ofambiguities (OECD 1989,
OECD 1994b). According totheOECD, "Itisalleged thatsome governments maygivetheir
firms advantages ininternational competition through financing pollution control costs under wide
interpretations oftheexceptions allowed" (OECD 1994a). Nevertheless, thePPPsends aclear
message thatavoiding trade restrictions anddistortions isnotonlyconsistent withacoreprinciple
ofenvironmental policy-making butisconsidered anecessary complement toit.
Empirical evidence suggests thatofficial financial assistance forpollution prevention and
control inOECD countries issmall anddoesnotconstitute forthetimebeing atleastaserious
source ofconcern from thepoint ofviewoftrade restriction ordistortion (OECD 1990). Thisis
supported byevidence alsothattotal(public andprivate) pollution abatement andcontrol
expenditures in1989 were modest, averaging inseven OECD countries lessthan1.5percentof
GDP ofwhich public sector expenditure accounted for0.7percentofGDP (OECD 1993a).
Themain evidence thattrade restricting anddistorting subsidies canhavesignificant
adverse environmental effects comes from primary sector production andrelated processing
activities. Evidently, thesubsidies arenotapplied forenvironmental purposes; their
environmental effects aresecondary andappear largely tohavebeenunanticipated. Examples are
thesubsidization ofagricultural inputs andexports andenergy production (coal andhydroelectric).
Thepotential environmental benefits ofremoving them along withother trade restrictive and
distorting measures aredescribed indetail below forthecaseoftrade inagricultural products.WT/CTE/W/1
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Export restrictions
Export restrictions aretypically associated withtrade inrawmaterials. When applied by
themain suppliers, theycanraiseworld market prices ofarawmaterial. Thathasbeenclaimed
bysome tomake them anattractive policy instrument forraising theworld market price of
environmentally sensitive products, buttheappeal islargely hollow. While export prices maygo
up,prices onthedomestic market arelikely togodown unless overall supply restraints areputin
place, inwhich casetheexport restriction isredundant inthiscontext. Reduced prices ofraw
materials todomestic customers willencourage increased domestic processing capacity, including
forexport, sothattotaldemand fortherawmaterial islikely toremain unchanged ormayeven
goupsince prices ofrawmaterials toconsumers inthedomestic market willhavefallen.
From thepoint ofviewofthelocation ofrawmaterial processing activities, export
restrictions canproduce thereverse oftariff escalation. They increase value-added andvertical
integration intherawmaterial producing country, which canbring benefits intheform of
increased income, aportion ofwhich maybespent onenvironmental objectives. However,
export restrictions distort trade, andcanleadtoaninefficient, economically andenvironmentally
costly, relocation ofproduction. There isnoprima facieeconomic casetobemade forsiting
processing activities inrawmaterial producing countries, andthere maybeenvironmental aswell
aseconomic costs associated withdoing so.Inthealuminium processing casedescribed above,
forexample, siting thehighly energy-intensive stage ofprocessing alumina inthecountry where
bauxite ismined maybethoroughly inappropriate.
B. Sectoral studies
IntheCommittee 'sdiscussions under thisitemofitswork programme, aswellasmore
generally intheliterature onthissubject, particular attention hasbeendrawn tothepotential
environmental benefits ofremoving trade restrictions anddistortions thataffect trade in
agricultural andnatural resource-based products. During theUruguay Round negotiations on
these subjects, awiderange ofmeasures withpotentially trade restricting anddistorting effects
wasdiscussed, including hightariffs andnon-tariff measures (ontheirownandwhen applied
differentially torawmaterials andprocessed products soastocreate tariff escalation andhigh
levels ofeffective protection), internal taxes, production subsidies andrelated practices (including
dualpricing practices involving thesupply ofrawmaterials tolocalproducers atlower thanworld
market prices), export taxes andother export restrictions onrawmaterials (orapplied
differentially torawmaterials andprocessed products), andexport subsidies.
Theremaining sections ofthisNote review thepotential environmental benefits of
removing orreducing thetrade restricting ordistorting effects ofmeasures suchasthese with
respect totwosectors: agriculture andforestry. Further studies onthese andonanumber of
other sectors ofproduction withalarge trade orientation (e.g.fisheries andcoal, OECD 1994a
andAnderson 1992c) arehelping toclarify matters further.
Agriculture
Agricultural production isparticularly sensitive from anenvironmental viewpoint because
ofitsdirect links tonatural resources (land, water, soil,biodiversity, etc.). Theagricultural
sector contains many examples ofthefailure ofmarkets toincorporate environmental externalities
which areparticularly difficult toestimate andtomonitor (Runge 1994a), andthetaskofWT/CTE/W/1
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designing proper environmental policies todealwiththatisnoteasy. What hasmade thissector a
matter ofsuchenvironmental concern, however, isthatmarket failures havebeencompounded by
trade restricting anddistorting policies withnegative environmental consequences oftheirown,
making policy failure aproblem demanding attention forbotheconomic andenvironmental
reasons.
Although itisdifficult toisolate precisely theimpact oftrade restricting anddistorting
policies from other factors, economic, environmental andpolicy-induced, thataffect farm
management practices, theresults ofthestudies undertaken todatepaint alargely unambiguous
picture ofdirect, negative, andoften significant environmental effects stemming from market
access restrictions, domestic support policies andexport subsidies ontheonehand, andfrom high
taxation ofagricultural production relative toother economic activities ontheother (notonly
directly butalsoindirectly through exchange rateover-valuation andimport protection ofother
sectors ofactivity). (e.g., Runge 1994a, Anderson 1992a andd).
Adverse environmental effects typically associated withpolicies applied bycountries that
protect agricultural production behind market access restrictions anddomestic support policies are:
production subsidies, support prices anddeficiency payments increase theintensity ofuseoffixed
factors ofproduction (e.g.land, water), discourage croprotation anddiversification, thereby
requiring theuseofmore fertilizer, andleadtodeforestation andthedrainage ofwetlands for
agricultural extension andtoovergrazing bylivestock; input subsidies encourage more intensive
useofagro-chemicals (pesticides, fertilizers andfeedstock) andenvironmentally sensitive inputs
suchaswater forirrigation; andlandset-asides leadtolessextensive useofmarginal landbut
alsotomore intensive useoflandthatiscultivated. Multiple trade restrictive measures cancause
compounded environmental damage invarious ways: forexample, water, airandsoilpollution
from agro-chemicals andanimal effluent, soilerosion, which attheextreme canresult in
desertification, falling groundwater levels andthesilting oflakes andwatercourses, andshrinking
wildlife habitat (Reichelderfer 1990, Faeth etal.1991). "Driven bythese incentives, farmers
adopt chemical-intensive monocultures thatleadtomore soilerosion, chemical run-off, lossof
biological diversity, andconversion ofoncenatural eco-systems tocropland thanwould otherwise
takeplace" (Repetto 1994).
Inaddition, agro-chemical residues infoodisamatter ofgrowing concern inmany
countries (Lang 1992).
Valuable empirical work oftheenvironmental effects ofspecific policies inspecific
countries andregions isavailable. Runge (1994a), forexample, reviews indetail evidence of
environmental damage stemming from trade restrictive anddistorting agricultural policies inthe
United States andtheEuropean Communities. Repetto (1993) describes theeffects ofpolicies to
protect sugar production intheUnited States inthefollowing terms: "Markets forlowincome
foreign producers, suchastheDominican Republic andthePhilippines, havebeenseverely
restricted, crippling thesugar industries inthose countries andsending millions ofpoverty-stricken
workers intoupper watersheds tobecome slash-and-burn farmers. Meanwhile, water and
chemical usesbyFlorida sugar-cane growers havedevastated theunique Everglades ecosystem."
Margot Anderson (1994) provides details oftheimplications forMexican agriculture oftrade
liberalization under theNAFTA.
Using evidence ofNewZealand 'sexperience overthepasttenyears, Reynolds etal
(1993) conclude thatreduced support totheagricultural sector, andinparticular decoupling
support from output andfrom theuseofspecific inputs, hasacted inconjunction withother
factors (ofwhich thegeneral downturn incommodity prices wasimportant) toreduce fertilizerWT/CTE/W/1
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use,reduce landclearing, increase diversification, reduce pesticide useandreduce livestock
concentration. Certain problems arealsonoted, suchasreduced investment insoilconservation,
lower levels ofriskmanagement forclimatic changes, andlower investment inagro-forestry asa
result ofreducing artificially highreturns tofarming, forwhich thestudy suggests targeted
resource management policies needtobeintroduced tocomplement further reductions in
agricultural support.
Incountries where agriculture isheavily taxed rather thansubsidized and/or there isan
anti-export biasinthepolicy mix,problems ofrural poverty mean thatlowprices induce poor
farmers tocultivate marginal lands subject toerosion andrun-off andtoclear forests for
agricultural extension, andtheincentive structure canwork against crops thatcanbe
environmentally beneficial (e.g.treecrops forexport suchascoffee, teaandcocoa canbe
beneficial forsoilstability) (Pearce andWarford 1993). Attempts tooffset thepolicy biasby
providing input subsidies forfertilizers andpesticides hasbeenshown toproduce much thesame
results ofsoilerosion andintensive chemical useasinhighly protected agricultural markets
(Repetto 1985), butalsotoinvolve greater threats tothehealth oflocalfarmers andconsumers
from incorrect application ofagro-chemicals (Runge 1994a).
Agricultural export subsidies depress prices ofagricultural products onworld markets
generally, andspecifically intargeted export markets. They reduce farmincomes andinhibit
badly needed investments inagriculture inthirdcountries, andcanresult inthespread of
low-yielding farming andranching intoecologically vulnerable tropical forests (Repetto 1994).
They alsoaggravate rural poverty which isassociated more generally withenvironmental
degradation. Within arestricted world market environment, preferential access arrangements can
alsobeenvironmentally damaging. Runge (1994b) notes, forexample, thatspecial arrangements
forimports ofmanioc intotheECfrom Thailand, inaddition tocontributing toincreased nitrate
pollution intheNetherlands, hadcaused inthelate1980s extensive soilerosion anddeforestation
inThailand.
Twopoints should bemade here. Oneisthatthekinds oftrade restrictive anddistorting
agricultural trade policies described above arebeing wound down through theresults ofthe
Uruguay Round negotiations. However, there islittleempirical evidence forthetimebeing about
whatkindofenvironmental benefits thatmight bring. Research ontheimpacts ofpolicy on
agricultural sustainability insixcases studies hasbeencarried outbytheWorld Resources
Institute (Faeth, etal.,1991; Faeth, 1993).
Thesecond isthatremoving orreducing trade restrictions anddistortions willnotbe
enough onitsowntocorrect alltheenvironmental problems towhich theycontribute. Thishas
beenwellsummarized byRunge (1994a): "Theadverse environmental impacts ofagriculture in
developing countries aretiedtotheiragricultural income problems which arisefrom bothdomestic
andinternational trade distortions. Inorder toresolve these interrelated dilemmas, three types of
policy reforms would havetooccur together. First, developing countries would havetobe
prepared toreform domestic policies which taxfarmers andlower incentives toproduce. Second,
developed countries must beprepared toopenmarket access todeveloping country exports, andto
reduce thelevelofsurpluses andexport subsidies usedtodump these surpluses onworld markets.
Together, these tworeforms would leadtohigher prices andexpanded commodity trade for
developing country agricultural producers, resulting inincome growth. Given thisincrease in
growth percapita (assuming thatdebtburdens donotdraw offthese gains), developing countries
would thenbepositioned toundertake thethirdmeasure: theexpensive regulatory taskof
environmental intervention nowonlybeginning intheOECD countries, inwhich lands sensitive to
environmental damages areprotected from unsustainable practices."WT/CTE/W/1
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Twoareas inwhich concern hasbeenexpressed thatliberalizing trade inagriculture may
bring withitadverse environmental effects arethattherural countryside willbelessvisually
attractive andlesspopulated thanitisinhighly protected markets atpresent asfarmers respond to
lower domestic production incentives by"getting bigger orgetting out", andthathigher food
prices oninternational markets willcause relocation ofagricultural production todeveloping
countries andraiselandprices there, which willstimulate agricultural extension into
environmentally sensitive areas andheavier doses ofchemical inputs toincrease yields
(GATT 1992). Inneither case, however, doesthisadduptoastrong argument against reforming
trade restrictive ordistorting agricultural policies; itpoints, rather, totheneedtocomplement
trade policy reform withappropriate resource management policies aimed directly atcorrecting
environmental problems attheirsource.
Furthermore, empirical evidence suggests thatfears ofthissortmaybeexaggerated.
Anderson (1992a and1992d, Anderson andStrutt 1994) simulated theeffects ofthecomplete
removal ofallfarmsupport policies inallindustrial countries andtheUSlandset-asides in1990,
withfulladjustment inthatyear. Even withsuchhugeliberalization andquick adjustment, the
estimated impact onworld foodoutput inaggregate isnegligible andtherelocation ofproduction
isminor. Much ofthedecline inproduction would beconcentrated inwestern Europe andJapan,
which lends support toconcerns thatthere could beafairly radical transformation ofthe
countryside there asadjustment tookplace. Itisalsointhose regions, however, thatmajor
environmental benefits from reduced intensity ofagricultural production would beconcentrated.
Indeveloping countries, theincrease inproduction would represent onlyasmall share ofcurrent
output, especially forgrain. Consequently, although theuseofagro-chemicals hasbeenfound to
behighly correlated withprices received byproducers, Anderson concludes thatpressure to
increase chemical useandexpand landareacropped would belessthanmight beexpected. As
regards livestock, therelocation ofproduction tolightly populated, poorer countries would be
associated withareduction ingrain-fed andsupplement-fed (e.g.growth hormones) livestock and
anincrease inpasture fedlivestock. Theuseofless-intensive methods would reduce notonlyair,
soilandwater contamination from fertilizers andanimal effluent butalsochemical additives inthe
meatproduced. Asregards land, there would bemore intensive cultivation incountries not
currently subsidizing production; howmuch isanempirical question, butitwould bestarting
from arelatively lowbaseinmany ofthem andevidence suggests arelatively lowelasticity of
landareatofarmprices. Insum, Anderson concludes there would beamuch larger reduction in
environmental degradation inindustrial countries thanthere would beanincrease inenvironmental
degradation indeveloping countries, withanoverall netbeneficial effect.
Reforming agricultural trade policies alone willnotresolve alltheenvironmental problems
associated withagricultural production; targeted environmental policies tobetter define andassign
property rights, taxpollution and,where appropriate, subsidize conservation, arealsoneeded ina
combined policy package (Krutilla 1991, Gray andVocke 1994). Furthermore, removing trade
restrictive anddistorting agricultural trade policies inisolation without anyaccompanying
environmental policies tocorrect thefailure ofmarkets totakeenvironmental costs properly into
account mayexacerbate specific environmental problems (e.g.lower animal feedprices resulting
from liberalizing market access mayencourage anexpansion oflivestock production with
consequent problems foranimal waste disposal (Haley 1994). Overall, however, "One ofthe
most potentially constructive effects oftheinterdependence oftrade andenvironmental issues is
thatindeveloped countries, accompanying environmental interventions canhelpto"sell" trade
reform inagriculture toabroader public. Indeveloping countries, ontheother hand, thebenefits
oftrade reform including market access, higher prices andexpanded exports, canhelpthese
nations "buy" needed environmental improvements" (Runge 1994a).WT/CTE/W/1
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Wood andwood products
Deforestation isassociated withenvironmental problems ofbothalocal(e.g.land
degradation) andglobal nature (e.g.climate change andlossofbiodiversity). Dataindicate that,
overthepastdecade orso,theareaoftemperate forest intheworld hasremained broadly stable
butthatnetdeforestation ofthetropical rainforests hasoccurred, according tosome estimates at
anaccelerating pace(Barbier 1994). Asaresult largely ofthatfact,andeventhough thebulkof
theworld 'sforest resources areinNorth America, theex-Soviet Union andChina, andNorth
America andWestern Europe account forabout 80percentofworld exports offorest products,
concern about theroleofinternational timber trade inpromoting forest depletion anddegradation
hasfocused verylargely ontropical timber andonthethree major tropical timber exporting
countries --Brazil, Malaysia andIndonesia.
Felling timber forfuelwood isconsidered byfarthemost important cause ofdeforestation
intropical timber producing countries. Aninsignificant share offuelwood production enters
international trade. However, aclear linkexists between thegeneral economic benefits of
removing trade restrictions anddistortions tohelpraiseincomes inthose countries andreducing
thissource ofpressure ontheirforest resources.
Asecond major cause ofdeforestation intropical timber producing countries isthe
conversion offorests toagricultural use(Hyde etal1991, Binkley andVincent 1991, Amelung
andDiehl 1992, Barbier etal1993, Barbier andRauscher 1994). Deforestation inbothMexico
andBrazil, forexample, hasbeenlinked totheexpansion ofcattle ranching (Amelung andDiehl
1991, Anderson M.1994), andinMalaysia totheexpansion oftreecrops forexport (Giordano
1994). Trade restrictions anddistortions areimplicated, therefore, inthatcutting down forests to
make wayforagricultural extension isdriven tosome extent bytheprevailing structure of
incentives fortrade inagricultural products. Furthermore, theenvironmental problems involved
thenextend beyond deforestation intothedamage associated withmore intensive andextensive
agricultural production onconverted forest land(World Bank 1992).
Theenvironmental caseinfavour ofreforming agricultural trade restrictions and
distortions wasoutlined above. Totheextent thisleads toaninternational reallocation of
agricultural production, pressure foragricultural extension intomarginal land(including forest
areas) canbeexpected toincrease, although probably onlytoalimited extent, incountries where
agricultural output iscurrently restricted byeither internal measures ortrade measures applied in
thirdcountries. However, where thatisconsidered tobeenvironmentally damaging itshould be
addressed through domestic resource management policies toprotect forest resources andraisethe
value offorest products, notbyforegoing thebenefits ofagricultural trade liberalization.
Beyond thefelling oftimber forfuelwood, tropical timber producing countries consume
farmore oftheirowntimber production thantheyexport. Nevertheless, several studies indicate
thattrade intropical forest products mayaccount forupto10percentoftotaldeforestation
(Barbier 1994). Theextraction oftimber tosupply thistrade isbelieved tohaveparticular
adverse environmental effects inthatitcaninvolve damage tosurrounding forest resources during
thefelling andextraction ofselected stands oftimber orindividual treeswhich haveaparticular
export value. Frequent mention ismade inthisrespect, forexample, ofconstruction ofaccess
roads andtheconsequent opening upofforest resources toexploitation forother purposes,
notably agriculture.
Thepotential global implications ofdeforestation, andthe(albeit limited) contribution
which theinternational timber trade isclaimed tomake todeforestation, havegenerated pressureWT/CTE/W/1
Page20
torestrict trade inforest products, particularly intimber-importing countries inorder interaliato
coerce timber-exporting countries toreduce forest exploitation. Atthesame timestrong doubts
havebeenexpressed onthegrounds ofequity, effectiveness andworkability ofusing trade
restrictions inthisway, anditisfeltthatunder certain conditions theywould prove
counter-productive (Binkley andVincent 1991, Hyde etal1991, Barbier etal1993, Barbier and
Rauscher 1994). Totheextent thattrade restriction isviewed asapotential partofthesolution to
deforestation, cooperative action bytimber producing andconsuming countries through negotiation
ofamultilateral agreement would seem tobecalled for(Barbier 1994). Theexisting agreement
ontrade intropical timber (ITTA) hasbeenrenegotiated. Itemphasizes theneedforthe
conservation andsustainable management ofalltypes offorests, notonlytropical forests, andit
rules outtheuseoftrade restrictions under itsauspices (SCTE/W/3).
Research andempirical evidence isdeveloping ontheeffects ofexisting timber trade
restrictions anddistortions ondeforestation andthepossible implications ofremoving them.
Ontheimport side,tariff escalation isviewed asthemain source oftrade restriction and
distortion inthissector. There isaclear tendency fortariffs ontimber andtimber products to
escalate inmany developed anddeveloping countries (Bourke 1988). Ithasbeenstated inthe
Committee, forexample, thatpost-Uruguay Round ratesofeffective protection ofwood products
stillreach close to30percent, which decreases thevalue offorest resources andhampers efforts
toinvest insustainable forest management.
Barbier (1994) states, however, thatitisdifficult todetermine whattheenvironmental
effects ofimport restrictions, suchastariff escalation, maybeontimber exporting countries. One
argument, henotes, isthattrade barriers prevent efficient forest-based industrialization. World
prices forrawlogsarekeptartificially low,further exacerbating thedisparity between stumpage
prices andtherealeconomic scarcity value oflogs. Theresult isthatold-growth forests are
logged excessively, andthetransition ofthesector from old-growth tosecond-growth forests, and
thecoordination ofprocessing capacity withtimber stocks, isnotmade. Hepoints outalso,
however, certain complications withsuchanargument. Following Bourke (1988), comparative
advantage inprocessing activities maybelong nottothetimber-producing countries buttothird
countries, sothatremoving trade barriers toprocessed products mayinfactfavour thirdcountries
more andhavelittleeffect onthespecialization oftimber-producing countries inexporting raw
logs. Also, tariff escalation andother import restrictions intimber producing countries may
already favour theirownprocessing industries, andanygeneralized removal oftrade restrictions
would reduce thatprotection.
Export taxes andrestrictions onunprocessed timber areusedbysome timber-exporting
countries toencourage forest-based industrialization. These arereinforced incertain cases by
other measures giving preferential treatment todomestic processing industries, suchassupplying
rawmaterials tolocalproducers atlower thanworld market prices. Incertain cases theymaybe
viewed asameans ofcompensating domestic processors fortariff escalation andother market
access barriers faced inmajor export markets. However, strong doubts havebeencastonthe
economic benefits ofsuchmeasures andthere isevidence thatithassupported insome cases
inefficient andwasteful processing operations withadverse consequences overthemedium term
fortherateoftimber extraction andforest management (Barbier 1994). Braga (1992), for
example, analysed Indonesia 'slogexport banaimed atcurtailing deforestation andfound thatits
effects mayhavebeenpartially offset because theresulting fallindomestic logprices provided a
subsidy tothedownstream wood processing industry, thereby increasing thedemand forlogs.
Given thelowlevelofefficiency ofthisindustry, theadverse environmental consequences ofthe
subsidy implicit intheexport banwere felttobesignificant. These could havebeenavoided hadWT/CTE/W/1
Page21
theexport banbeenreplaced anequivalent production tax.Braga estimated thatifthelocal
processing industry hadbeenoperating under realistic price signals instead ofbeing subsidized by
theexport ban,annual timber harvests would havebeen10percentless. Other examples citedin
theliterature areexport bansontropical hardwood timber thathavelowered domestic timber
prices incountries suchasEcuador, discouraging conservation andencouraging unsustainable
ratesofcutting (Southgate andWhitaker 1992).
Barbier (1994) notes thatverylittleevidence exists ofthepotential benefits oftimber trade
liberalization. Applying ageneral model oftrade liberalization (Anderson 1992b), Barbier
suggests thatasmall, timber-exporting country thathashighenvironmental costs associated with
itstimber exploitation would actually gainfrom trade liberalization onlyifitinstigated appropriate
timber management andother policies associated withinternalizing theenvironmental costs ofits
forestry operations. Failure todosowould reduce thewelfare gains from trade liberalization, and
could mean thatadditional environmental costs would result from increased timber production and
export. Results ofstudies ofthePhilippines alsosuggest thatremoving export restrictions could
leadtosubstantial increases indeforestation (Cruz andRepetto 1993) intheabsence ofimproved
resource-management policies.
Insum, Barbier (1994) concludes thatwhile theenvironmental effects ofcurrent timber
trade policies maybesignificant, empirical evidence forthetimebeing isscarce andthe
environmental effects ofremoving trade restrictions anddistortions without putting inplace any
compensating domestic resource management policies isambiguous. Totheextent the
environmental value offorest resources isnotcaptured fullyinworld market prices there is
clearly ariskthattrade liberalization would result in(undervalued) forest products being traded to
agreater extent thanissustainable, although howgreat thatriskis,andwhatitsimplications
might befordeforestation overall, arenotclear. Asinthecaseofagriculture, "Given the
pervasiveness ofthedomestic market andpolicy failures, liberalizing export regimes intheforest
sector ofdeveloping countries maynotbesufficient toreduce unnecessary deforestation" (Barbier
1994). Acomprehensive package ofpolicy reforms isneeded.WT/CTE/W/1
Page22
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