WORLD TRADE
ORGANIZATIONWT/CTE/W/180
9 January 2001
(01-0077)
Committee on Trade and Environment Original:  English
ITEM 1:  THE RELATIONSHIP BETWEEN THE PROVISIONS OF THE MULTILATERAL
TRADING SYSTEM AND  TRADE MEASURES FOR ENVIRONMENTAL PURPOSES,
INCLUDING THOSE PURSUANT TO MULTILATERAL ENVIRONMENTAL
AGREEMENTS
Communication from New Zealand
I. INTRODUCTION
1. In its submission WT/CTE/W/162 of 10 October 2000, New Zealand emphasized that the
negotiation of MEAs remained an essential mechanism through which countries can address
environment objectives.  The submission also recognized that trade measures will continue to be a
feature of some MEAs and that therefore it was important to further develop our understanding of therelationship between such Agreements and WTO rules.  While WT/CTE/W/162 acknowledged that
the range of potential conflicts between MEAs and the WTO Agreements was tightly circumscribed,
it noted that questions may arise, when provisions of an MEA are unclear as to the action they
mandate, even among the Parties to it, or in situations where the Parties to an MEA are applying trade
measures against a non-party.
2. In the context of these observations, New Zealand suggested that the Committee on Trade and
Environment consider, inter alia , the contribution that a consultative mechanism guided by first-best
principles could make to clarifying the WTO/MEA relationship.  At its meeting of
24-25 October 2000, the CTE expressed interest in this proposal and requested an elaboration of the
way in which a consultative mechanism might work.  This submission responds to that request.
II. THE CONSULTATIVE MECHANISM
3. In WT/CTE/W/162, New Zealand acknowledged that trade measures are seldom the first-best
policy tools to achieve environmental objectives.  In this context, New Zealand believes that, before a
decision to apply a trade measure as part of an MEA is taken, a voluntary consultative mechanism
could be utilized to assess whether the trade measure is the most effective instrument available to
address the environmental problem at issue.
1  The principle underpinning this voluntary consultative
mechanism should be to assist in the identification of a first-best instrument from a range of options toresolve the environmental issue identified as problematic.
2
4. The concept of first-best enables the policy maker to evaluate resource allocations and decide
whether they are "good" or "bad" from the point of view of society.3   The general rule by which to
                                                     
1A minority of MEAs (e.g. CITES) already possess such a mechanism but the majority of MEAs with
trade measures do not have any such built-in instrument.
2 It is worth noting that the use of such a methodology to guide policy decisions in the WTO context at
least is not new. The most important exceptions in GATT Article XX, for instance, address situations where
negative externalities need to be remedied.
3In a simplified situation in which there are just  two goods and an initial allocation of these goods
between two individuals, if it is possible for a realloca tion of these goods to take place, whereby one individual
gains in satisfaction whilst the other is no worse off, then this change in distribution meets the first-best criterionand is Pareto efficient.WT/CTE/W/180
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identify a first-best solution in any specific circumstance is that it should be the one which most
directly addresses the market imperfection or distortion.  First-best therefore provides for:  a hierarchy
of policy choices;  contains a presumption in favour of the most efficient and least distortive choice;
and, in this way, allows national policies to be balanced by global welfare issues.4  In the context of
the issues being addressed by the consultative mechanism proposed by New Zealand, the first-bestsolution should therefore most directly address the environmental problem which has triggered the
potential for the application of a trade measure in the least distortive and most efficient manner
possible.
5. New Zealand recognizes that, in any utilization of the voluntary consultative process, there
will always be a wide range of possible policy options for consideration.  A solution which may work
for one environmental problem may not work for others.  Experience shows that in many cases,
environmental problems are not the result of a deliberate policy of environmental destruction, but maybe a by-product of economic activity or may be triggered by a lack of technology and/or technical
know-how.  In such circumstances, the application of a trade measure may be inefficient because it
may fail to address the negative behaviour at the source and may not necessarily alter the action which
has led to the environmental degradation originally targeted for action by the trade measures.  In
response to trade measures by MEA Parties, countries may also move to sell the environmentallydamaging products to countries which are not Parties to the MEA.  Alternatively, trade in the
prohibited substance may be driven underground.  In certain cases, therefore, an instrument other than
a trade measure may deliver a more efficient and less distortive outcome.  The provision of technical
assistance, for instance, may in certain circumstances achieve the primary objective, i.e. protect the
environment more efficiently and effectively than a trade measure.
6. It should be noted, however, that the use of the voluntary consultative mechanism does not
rule out the prospect of trade measures in MEAs.  New Zealand recognizes that in certain
circumstances trade measures can play an important role in MEAs and that, in some cases, they may
indeed deliver an effective and efficient solution to address the environmental problem directly (e.g.
CITES).
III. AN EXAMPLE
7. The practical application of the consultative mechanism outlined above may be described
with reference to the following hypothetical example.
8. Let us assume that countries A and B are both Members of the WTO, but only country A is a
member of an MEA.
5  This hypothetical MEA is an international convention open to all countries.  Its
membership comprises Parties in all stages of economic development and includes members of each
of the UN regional groupings.  Under the terms of the MEA, the Parties have explicitly sought toprohibit the trade in product CS1 which damages the environment.  Country B produces CS1 and
trades a limited amount of this product annually to clients based in country A.
9. Country A learns of the desire of country B and, in compliance with the terms of the MEA,
has the right to refuse the import of CS1 from country B.  Before the trade measure is applied,
                                                     
4First-best may be contrasted with second-best, which states that if two or more of the conditions for
efficiency are not satisfied, changes which cause some more, but not all, of the efficiency conditions to besatisfied may not be beneficial.
5While this example focuses on the use which can be made of the consultative mechanism by WTO
Members, it could be utilized more widely.  It may, for instance, be possible for members of an MEA to consult
with a significant non-party. While outside the scope of this paper, there may also be circumstances where sucha voluntary mechanism could be helpful to address globa l environmental problems which are not covered by the
terms of an MEA.WT/CTE/W/180
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however, countries A and B mutually agree to initiate the voluntary consultative mechanism outlined
above to identify a first-best solution to the problem.
10. During the consultations, country A outlines the evidence it has regarding the environmental
degradation (either generally and/or specifically) caused by the ongoing production and trade in CS1
by country B.  In response, country B notes that the production of and trade in CS1 provideseconomic benefits for a section of its population.  Having outlined the problem as both sides see it,
country A and country B decide to consider a hierarchy of policy instruments to address the
environmental problem generated through the production of CS1.  The instruments considered may
include:  the imposition of a trade measure;  the supply of limited financial assistance for the
development of new skills for the factory workers producing CS1;  development assistance for the
wider community affected by the prohibition of CS1 production;  and the transfer of technology
and/or technical know-how.  Countries A and B cons ider all of these options and should select the
instrument which meets the criteria of first-best.
11. It should be emphasized that New Zealand does not believe that a voluntary consultative
mechanism in and of itself would guarantee the delivery of an acceptable solution to all parties at all
times.  The use of the voluntary mechanism does not, as noted earlier, rule out the use of trade
measures.  Indeed, trade measures need not await the outcome of the voluntary consultation, if one of
the Parties considers this is proceeding unsatisfactorily.  It should be further noted that the voluntary
utilization of the mechanism does not preclude other action, nor is it designed to undermine the
application of control measures.  Rather, New Zealand considers that such a voluntary instrument
may:  facilitate an improved understanding of different points of view;  allow for the identification of
a range of different policy options;  maximize the potential for an agreed solution;  minimize conflictsbetween parties on trade and environment related policies while at the same time avoiding inefficient
environmental and economic outcomes.  In particular, a substantive and meaningful engagement by
countries in a consultative process designed to identify first-best policy options is likely to reduce the
potential for discriminatory or arbitrary measures.
IV. CONCLUSION
12. Over the longer term, it is proposed that MEA negotiators who represent countries which are
Members of the WTO should consider including a voluntary consultative mechanism guided by first-
best principles in new MEAs.  In the meantime, New Zealand recommends that Members of the WTO
who participate in existing MEAs may wish to favourably consider utilizing such a consultative
mechanism before trade measures are applied.  The Committee for Trade and Environment may wish
to note these recommendations in its record of proceedings.
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