Trade and Environment: Conflicts and

Opportunities

May 1992

OTA-BP-ITE-94

NTIS order #PB92-182088
Recommended Citation:

U.S. Congress, Office of Technology Assessment, Trade and Environment: Conflicts and

Opportunities, OTA-BP-ITE-94 (Washington, DC: U.S. Government Printing Office, May

1992).

For sale by the U..S. Government Printing Office

Superintendent of Documents, Mail Stop: SSOP, Washington, DC 20402-9328
Foreword

The interactions between trade and environment have recently—and suddenly-emerged as

an important concern in Congress and in the world community. Given our increasingly

interdependent world, this should not be a surprise. Both environmental protection and trade are

crucial to the welfare of nations; and yet policies in both areas have developed, for the most part,

in isolation from each other.

This background paper describes what appears to be an enlarging potential for conflict between

the two, as reflected in disputes about the trade impacts of environmental laws and about the

environmental impacts arising from efforts to liberalize trade and investment. These controversies

have prompted discussions about ways to more closely coordinate policies, both nationally and

internationally. The issues are complex; hence progress could be slow. However, the payoff will be

important, not only in terms of avoiding future conflicts, but in making the objective of

environmental protection and the objective of economic progress more compatible. There is

growing international awareness, reflected in the upcoming United Nations Conference on

Environment and Development this June in Rio de Janeiro, that environmental protection will be

essential for achieving economic progress in a sustainable reamer. And, when countries have

effective environmental policies in place, some of the resources generated from trade and

investment can be turned to environmental protection.

The background paper explores some trade and environment questions, especially from the

context of the General Agreement on Tariffs and Trade, which provides a framework of rules

governing most of the world’s trade. It is the frost publication in an assessment on American industry

and the environment, requested by the House Committee on Foreign Affairs, the House Committee

on Energy and Commerce, and the Senate Committee on Finance. Another link between trade and

the environrnent, the growing+ global market for environmental technologies, products, and services,

will be among the topics discussed in the final report of this assessment.

(_) JOHNH. GIBBONS

Director

. . .

Ill
Advisory Panel—American Industry and Environment

Roland W. Schmitt, Chairman

Rensselaer Polytechnic Institute

Troy, NY

Edgar Berkey

National Environmental Technology Applications

Corp.

Pittsburgh, PA

Judith Dean

School of Advanced International Studies

Johns Hopkins University

Washington, DC

Robert E. Driscoll

U.S.-ASEAN Council for Business and

Technology, Inc.

Washington, DC

Peter Emerson

Environmental Defense Fund

Austin, TX

Harry L. Foster

General Motors Co.

Detroit, MI

Stewart J. Hudson

National Wildlife Foundation

Washington, DC

Mary Kelly

Texas Center for Policy Studies

Austin, TX

Jeffrey Leonard

Global Environment Fund

Washington, DC

David S. Marsh

Marsh Plating Corp.

Ypsilanti, MI

Jessica Matthews

World Resources Institute

Washington, DC

Robert S. McNamara

U.S.-Japan Foundation

Washington, DC

J.A. Meyer

Chevron Research and Technology Co.

Richmond, CA

TC. Parsons

Center for Industrial Services

University of Tennessee

Nashville, TN

Lawrence Ross

Center for Waste Reduction Technologies

American Institute of Chemical Engineering

New York, NY

Martyn Riddle

International Finance Corp.

Washington, DC

Paul Relis

California Integrated Waste Management Board

Sacramento, CA

Maxine Savitz

Garrett Processing Division

Allied-Signal Aerospace

Torrance, CA

Samuel A. Schulhof

General Electric Co.

Schenectady, NY

James Selover

Selover Associates

Menlo Park, CA

Peg Seminario

AFL-CIO

Washington, DC

John J. Sheehan

United Steelworkers of America

Washington, DC

Sally Shelton

Georgetown University

Washington, DC

NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members. The panel does

not, however, necessarily approve, disapprove, or endorse this background paper. OTA assumes full responsibility for the background paper

and the accuracy of its contents.

iv
Trade and Environment: Conflicts and Opportunities

OTA Project Staff

Lionel S. Johns, Assistant Director, OTA

Energy, Materials, and International Security Division

Audrey B. Buyrn, Program Manager

Industry, Technology, and Employment Program

Wendell Fletcher, Project Director

Robert Weissler, Senior Analyst

Robert Atkinson, Senior Analyst

Sebastian Remoy, Research Analyst

Rodney Sobin, Research Analyst

Susan Lusi, Intern

Administrative Staff

Carol A. Guntow, Office Administrator

Diane D. White, Administrative Secretary

Publishing Staff

Mary Lou Higgs, Manager, Publishing Services

Denise Felix

Cheryl Davis Dorinda Edmondson Bonnie Sparks

Chip Moore Christine Onrubia Susan Zimmerman

Contractors

Gary Stanley

Konrad von Moltke

Elizabeth Sheley

v
Contents

Page

Chapter 1: Overview and Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

SUMMARY AND FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Road Map to the Rest of This Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Chapter 2: Issues and Institutional Players . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

THE CONTEXT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Issues at GATT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

The North American Free Trade Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Competitiveness Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Other Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

INSTITUTIONAL PLAYERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

General Agreement on Tariffs and Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

Environmental Issues and the Dunkel Draft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

The Organisation for Economic Co-operation and Development . . . . . . . . . . . . . . . . . . . . . . . . . 25

United Nations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

U.S. Government Efforts To Address Trade and Environment Issues . . . . . . . . . . . . . . . . . . . . 27

Chapter 2 Annex: Some GATT Provisions and Principles Pertinent to

Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Environmental Regulations as Nontariff Barriers; National Treatment and

Most-Favored-Nation Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31

Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

“General Exceptions” (Article XX) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

Dispute Resolution Under GATT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Chapter 3: Role of Trade Measures in Environmental Policy . . . . . . . . . . . . . . . . . . . . . . . . . 37

ASSESSING THE EFFECTS OF TRADE ON THE ENVIRONMENT . . . . . . . . . . . . . . . . . . . . 38

USE OF TRADE MEASURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Trade Measures and GATT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

ENVIRONMENT/TRADE AND DEVELOPING COUNTRIES:

THE NORTH-SOUTH DEBATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52

Chapter 4: Effects of Environmental Regulations on Trade and Competitiveness . . . . . 59

ENVIRONMENTAL REGULATIONS AS TRADE BARRIERS . . . . . . . . . . . . . . . . . . . . . . . . . . 59

EFFECTS OF LAX FOREIGN REGULATIONS ON MANUFACTURING

TRADE AND COMPETITIVENESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

GOVERNMENT ENVIRONMENTAL ASSISTANCE TO

MANUFACTURC TURING FIRMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68

Chapter 5: Trade and Environment Decisionmaking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

GUIDELINES AND TRADE/ENVIRONMENT INTERACTIONS . . . . . . . . . . . . . . . . . . . . . . . . 73

ADDRESSING TRADE/ENVIRONMENT ISSUES IN GATT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Dispute Resolution Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77

U.S. INSTITUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

w“
Page

Appendix A: Some Trade Disputes Pertinent to Trade/Environment Interactions . . . . . . . . . . 81

Appendix B: Selected Bills on Trade/Environment Issues: 102d Congress . . . . . . . . . . . . . . . . 91

Appendix C: Selected Congressional Hearings Relating to Trade and Environment . . . . . . . . 93

Appendix D: Trade in Environmental Goods, Services, and Technologies . . . . . . . . . . . . . . . . 94

Appendix E: Assessing Trade and Competitiveness Impacts of Environmental

Regulations on U.S. Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

Boxes

Box Page

2-A. The European Community and Trade/Environment Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

2-B. United Nations Conference on Environment and Development:

Selected Agenda 21 Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

3-A. The Global-Local Continuum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

3-B. Financing Sustainable Development and Environmental Measures

in Developing Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

5-A. Trade/Environment and Sustainable Development: The UNCED Perspective . . . . . . . . . . . 74

Tables

Table Page

2-1. Multilateral Environmental Agreements by Subject, 1933-90 . . . . . . . . . . . . . . . . . . . . . . . . . . 16

2-2. Selected International Organizations Concerned With Trade, Development,

and Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

2-3. Key Federal Agencies With Responsibilities Pertinent to

Trade/Environment Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

E-1. Estimated Per Capita Expenditures on Environmental Goods and Services . . . . . . . . . . . . 102

vjj
Acronyms

CFC — chlorofluorocarbon

CITES — Convention on International Trade in Endangered Species of Wild Fauna and Flora

EC — European Community

ECJ — European Court of Justice

EGS — environmental goods and services

EPA — Environmental Protection Agency

Eximbank — Export-Import Bank of the United States

GAO — General Accounting Office

GATT — General Agreement on Tariffs and Trade

GEF — Global Environmental Facility

GHG — greenhouse gas

GNP — gross national product

ITO — International Trade Organization

MTO — Multilateral Trade Organization

NACEPT — National Advisory Council for Environmental Policy and Technology

NAFTA — North American Free Trade Agreement

NGO — nongovernmental organization

NIC — newly industrialized country

ODA — official development assistance

OECD — Organisation of Economic Co-operation and Development

OPIC — Overseas Private Investment Corporation

PCB — polychlorinated biphenyl

UNCED

UNCTAD

UNDP

UNEP

UNIDO

US AID

US TDP

USTR

— United Nations

— United Nations Conference on Environment and Development

— United Nations Conference on Trade and Development

— United Nations Development Program

— United Nations Environment Program

— United Nations Industrial Development Office

— United States Agency for International Development

— United States Trade and Development Program

— United States Trade Representative

. . . WI
Chapter 1

Overview and Summary
Chapter 1

Overview and Summary

The potential for conflict between environmental

concerns and international trade is increasing. The

past two decades have seen a proliferation of

national environmental laws and international environmental agreements along with a rapid expansion

of international trade and investment. For the most

part, the two regimes-environmental protection

and international trade-have developed independently. Many of the rules for trade were put in place

before the environment was widely viewed as a

matter for global concern. A number of environmental laws and agreements, including some of the

most far-reaching, might conflict with current trade

rules.

As environmental problems have mounted, so

have demands for action at both the international and

national levels. When the General Agreement on

Tariffs and Trade (GATT)-the major international

agreement governing trade-was formed in the late

1940s, few countries had significant environmental

laws and comparatively few global, bilateral, or

regional environmental agreements were in force.

Today, Federal and State environmental laws and

regulations in the United States alone could fill

several bookshelves; several other advanced economies also have strong environmental protection

laws. By 1990, the number of international environmental agreements had mushroomed to over 150.

Nearly half were adopted after 1979.1

There is also an increased volume of trade and

investment flows among nations, along with concern

about environmental impacts from these flows.

Since 1950, according to one estimate, trade in

manufactured goods has increased nearly twentyfold, or two-and-one-half times faster than world

output as a whole.2 This increase happened alongside successive rounds of trade negotiations aimed

at liberalizing international trade. The current Uruguay Round of GATT discussions has not focused

on environmental issues. Yet many of the key areas

for negotiations-e.g., agriculture and dispute resolution-have environmental ramifications.

The environmental implications of efforts to

liberalize trade are poorly understood, and efforts by

governments and international bodies to determine

how different trade patterns and policies affect the

environment are still in their infancy. Generalizations about whether the net environmental effects

from liberalizing trade will be positive or negative

are usually too simplistic to be much use for

policymaking. The actual effects depend on the

Specific context, including different nations’ capabilities to implement effective environmental protection regimes. Countries vary greatly in this

regard.

The trade community is concerned about the trade

impacts of measures taken in the name of the

environment. These measures include both domestic

environmental regulations, which can have side

effects on trade, and explicit trade restrictions taken

in the name of environmental concerns. Whether

intentionally or not, some such measures have the

potential to restrict trade more than is necessary to

achieve environmental goals. In some cases, the

disruption of trade also might be out of proportion to

the environmental benefit.

Competitiveness also enters into the equation.

Countries with strong environmental standards might

view the absence of comparable regulations in other

countries as a de facto subsidy, since less-regulated

firms may bear fewer compliance costs. The United

States, Japan, and several European countries have

strong environmental standards compared with most

of the rest of the world. Some assert that lack of

comparable standards might warrant trade measures

such as countervailing duties. Several bills and

resolutions introduced in the 102d Congress aim to

address these competitive impacts.

1 U.S. Congress, GeneraJ Accounting OffIce, International Environment: International Agreements Are Not Well Monitored, GAOIRCED-92~3

(Gaithersburg, MD: U.S. General Accounting 0ff3ce, January 1S92). The GAO analysis was based on data ftom the U.S. International Trade

Commission.

2 As cited ~ ~~r.~dus~ co~ition for ~tm~tio~Trade, The u~gq Round: WillItBe u @OdDealfOr Us. Murf@&Xwi?lg? @hShillgtOQ

DC: June 1990).

–3–
4 ● Trade and Environment: Conflicts and Opportunities

Until recently, institutions dealing with international trade and with the environment have acted

mostly in isolation and ignorance of each other. The

growing potential for trade/environment conflicts

suggests that this isolation is no longer appropriate.

But policymakers are only now grappling with what

it would mean to more closely coordinate trade and

environmental policies.

Some environmentalists fear that U.S. trade officials are not sufficiently attuned to environmental

issues to safeguard U.S. environmental standards

and objectives in trade negotiations. There is also

concern that the trade provisions in some widely

accepted international environmental agreements

might be found inconsistent with GATT if challenged. Such agreements address problems as diverse as depletion of the stratospheric ozone layer,

extinction of plant and animal species, and transportation of hazardous wastes. The number of international agreements and the pace of national actions

can be expected to grow. For example, the United

Nations Conference on Environment and Development (UNCED) in Rio de Janeiro in June 1992 may

consider framework agreements for biodiversity and

climate change. It could also result in nonbinding

measures on topics as diverse as forest management,

ocean pollution, and toxic and hazardous chemicals.

Some of these could be the basis for further

negotiations for possible conventions that might

have trade provisions.

Some in the trade community fear that environmental activists, along with other interest groups,

could combine to make completion of the Uruguay

Round GATT negotiations problematic, as well as

threaten the adoption of a North American Free

Trade Agreement (NAFTA) now under negotiation

with Mexico and Canada.3 Environmental issues

emerged as a congressional concern soon after the

Administration announced that it would seek fast

track authority to negotiate NAFTA. In return for

this authority, the Administration made a commitment to deal with environmental issues, mostly in

separate (’‘parallel track”) discussions with Mexico. The extent of progress made in addressing

environmental issues continues to be a major congressional concern about the negotiations.4

So far, GATT has only been asked to resolve a few

disputes about whether particular environmental

measures (or closely related measures) violate its

norms of liberal trade. (See app. A for details of these

disputes.) But this number might increase as more

environmental actions are implemented. As discussed in chapters 3 to 5, GATT is not now

well-equipped to weigh the broader issues that

sometimes underlie such trade disputes. Making

GATT more sensitive to environmental concerns,

while retaining its ability to prevent nations from

erecting trade barriers in the name of environment,

will be an important challenge for policymakers.

The principles of liberal trade remain important in

today’s world. If the Uruguay Round fails, with

GATT’s members unable to agree on a set of

amendments, GATT would be weakened, possibly

severely. 5 Other trading arrangements (such as

regional trading blocks) might become the dominant

norm. Even so, international institutions (even if

perhaps regionally based) would still be needed to

facilitate trade. These institutions would face trade/

environment issues similar to those now involving

GATT.

6 Thus, although this paper focuses on

GATT, the issues will remain relevant whatever the

outcome of the Uruguay Round. There will be a

continued need to address environmental issues as

they relate to trade, and many of the responses will

have the potential for trade/environment conflicts of

the sort discussed in this paper.

3 In this regard, a recent report on trade and environment by the GATT Secretariat pointed to a “serious risk of environmental issues and concerns

being exploited by protectionists for their own benefit” and expressed concern about “efforts of protectionist groups to draw environmental groups into

implicit or explicit alliances.’ GATT Secretarial “Trade and the Environment” (advance copy, released Feb. 12, 1992), p. 5. This analysis will be

published by the GATT Secretariat as part of its annual report. (The GATT Secretariat cannot speak for its members, so this report is not an ofiicial

statement of GATI’ policy.)

4 Steps taken by the Administration include appointment of environmental representatives to several trade advisory committees, preparation of a

review of U.S.-Mexico environmental issues, and cooperation with Mexico on border environmental problems, including a proposed doubling of U.S.

funds for border projects in Fiscal year 1993.

5 As this report went to press, GATI’parties were still considering draft final negotiating text for completing the Uruguay Round. Initial expectations

for conclusion of the Round by mid-April 1992 were not realized, in part because of disagreement over agriculture.

6 Indeed, the same types of conflicts have already surfaced for trade among members of the European Community (EC) (box 2-A). The EC has a

regional trading regime that supplants GA~ for trade among EC members.

7 See app. B. See also Susan Fletcher and Mary Tiemaw “Environment and Trade, ” 1B92006, Congressional Research Service Issue Brief (updated

regularly).
Chapter 1-Overview and Summary ● 5

SUMMARY AND FINDINGS

Many bills and resolutions introduced in the 102d

Congress deal with the interactions between trade

policy and environmental policy in one way or

another.7 Trade/environment interactions are now

being addressed by the executive branch as well.

This paper provides background information and

analysis that may be useful as Congress begins to

consider trade and environmental questions; it

focuses primarily on multilateral issues pertinent to

GATT, although some treatment is given to NAFTArelated questions. The questions and issues considered here comprise only some of the complex

interactions between trade and the environment.8

Certain distinctions that recur in various places in

this paper are worth keeping in mind. These include

distinctions between processes and products; between regulating conduct at home and seeking to

influence conduct abroad; between pollution (or

other environmental degradation) that stays within

the polluting country, and pollution (or degradation)

of a transborder or global nature; between unilateral

and multilateral action; between the perspectives

of developed countries and developing ones (the

“North-South” split); and between use of positive

inducements such as financial and technical assistance and increased market access, and negative

inducements such as trade sanctions.

Several themes also recur. First, relatively little is

known about some important topics, including the

effect of trade on environment, and the effect of

environmental measures on trade and on competitiveness. Second, addressing problems arising from

interaction of trade and environment will require

more cooperation between developed and developing nations, between advocates and policymakers

for trade and those for environment, and between

international institutions with trade, development

and environmental responsibilities. Third, for environmental problems not directly caused by trade,

trade restrictions alone are seldom the preferred

solution, though if carefully crafted they can at times

play a useful role in a broader strategy. Finally,

while interactions between environment and trade

now receive more attention, environmental issues

and regulations comprise only a portion of the trade

and competitiveness picture in which U.S. companies operate; other areas are of equal or greater

importance, as discussed in detail in several other

OTA reports.9

OTA has assumed in this paper that the United

States, as a matter of policy, will continue to

maintain strong policies to protect the domestic

environment and will be concerned about many

global environmental issues. It also assumes that the

United States will continue its historically strong

commitment to the goal of liberal trade (trade that is

as free as possible), and will seek to avoid competitive disadvantage for U.S. industry. Achieving all of

these goals, which at times may appear to conflict,

will be a challenge. The paper also assumes that

GATT or its objectives will continue to be seen as

relevant to the contemporary trading system. Findings from the paper are summarized below, with

references to chapters and appendices for further

discussion.

1. International Environmental Agreements and

the Trading System (see ch. 3):

At least 17 international environmental agreements have trade provisions, according to GATT.10

There soon may be more international environmental agreements, due to UNCED and other

discussions, although these will not necessarily have

trade provisions. It is possible that trade restrictions

imposed by an individual country pursuant to an

international environmental agreement might some8 Issues not addressed in much detail in this paper include, among others, intermtional trade in bazardous wastes, tropical timber, endangered species,

and domestically banned or hazardous substances; ecolabeling and certification of a product’s environmental characteristics orhistoxy; and requirements

for product packaging and disposal. While this paper at times discusses such issues for purposes of illustratio~ in depth discussion of specific issues,

environmental agreements or mtional laws with trade provisions is beyond this paper’s scope.

g See, e.g., U.S. Congress, Office of Technology Assessment, Competing Economies: America, Europe and the Pacifi-c Rim, OTA-ITE-498

(Washington DC: U.S. Government Printing Office, October 1991), and Making Things Better: Competing in Manufacturing, OTA-ITE-444

(?Vashingtou DC: U.S. Government Printing Office, February 1990).

10 GAn secretariat, op. cit. As used in this paper, the tem ‘‘trade measure’ and ‘trade provision’ are used interchangeably to denote any explicit

restriction on trade. @s does not include trade effects of domestic regulations.) ‘‘Trade sanction“ is a punitive trade measure designed to coerce a

change in another country’s behavior.
6 ● Trade and Environment: Conflicts and Opportunities

day be found to violate GATT.ll Also, fear of GATT

conflict might induce nations to leave potentially

useful trade provisions out of agreements. More

broadly, independently of whether they violate

GATT’s particular rules, trade provisions of environmental agreements have the potential not only to

protect the environment but also to hinder trade.

Thus, there is a need to consider how best to

accommodate both environmental interests and the

interest of promoting liberal trade that GATT

represents.

GATT’s Secretariat has urged countries to pursue

multilateral agreements on the environment and to

resist the urge to employ unilateral trade measures.12

The Secretariat maintains that “GATT’ rules could

never block adoption of environmental policies

which have broad support in the world community. ”13 The reason: GATT members could grant a

waiver or exception to GATT rules in the event of a

conflict. Even so, GATT does not give special status

to such international agreements, and such a waiver

could be far from automatic.

The potential for conflict with GATT could

depend in part on the type of trade restrictions. Two

types of trade restrictions should be distinguished.

The first is restrictions based on the nature of a

product itself, such as restrictions on refrigerators

that contain chlorofluorocarbons (CFCs) that when

released deplete the ozone layer. GATT tends to

permit such import restrictions when matched by the

same restrictions on domestic goods (e.g., a ban on

all imported and domestic refrigerators containing

CFCs). The second type of restriction is based on

how a product is made, such as restrictions on

computer chips made using CFCs as a solvent. One

of the more prominent international agreements—

the Montreal Protocol on Substances That Deplete

the Ozone Layer-alls for a determination by

January 1994 of the feasibility of using this latter

type of restriction. If a challenge were brought,

GATT would be less likely to accept such process

related import restrictions, even if matched by a

similar restriction on domestic production processes

(e.g., a ban on the use of all domestic and imported

computer chips made using CFCs as a solvent). For

some environmental purposes, both types of restriction can be important.

Given the potential for conflict, it would be

desirable to review current and proposed environmental agreements with an eye toward GATT

problems. This is one of the tasks to be taken up by

the recently convened GATT Group on Environmental Measures and International Trade. Potential

problems might be avoided by modifications in

agreements’ trade provisions or by GATT waivers or

amendments. 14 Such changes could be agreed on by

consultations between GATT and the parties to an

agreement. Similar consultations between negotiators of upcoming international agreements and

GATT might help to stave off future conflicts. To aid

consultations concerning existing and future trade

measures in international agreements, it could help

to develop some guidelines for the use of trade

measures for environmental purposes.15 While each

case would have unique considerations, such guidelines could provide a useful frame of reference.

2. Use of Unilateral Trade Provisions in National

Environmental Policies (see ch. 3):

Some countries, including the United States,

occasionally have employed trade provisions in

environmental laws to encourage other countries to

adopt similar practices, and/or to ameliorate the

negative environmental effect if other countries do

not adopt similar policies (e.g., the U.S. Maxine

Mammal Protection Act—see below). Such provisions may be seen as attempts to apply domestic law

‘ ‘extraterritorially,“ in that they seek to protect the

11 Such a m~g cotid come tier one GAIT rn~bm challenged a trade restriction used by a second GATT member pursuant to tie env~onmen~

agreement. If the first country were not a party to the environmental agreement then it would not apply between the two countries, leaving GA~ as

the operative law. If the first country were a party to the environmental agreement, then there would be a question as to which law-GAT’I’ or the

environmental agreement-prevailed. While the general rule is that the agreement made later in time would take precedence, the decision as to which

law governs can be complex.

The effect of a ruling against a country imposing the trade restrictions would be hard to predict. Undercurrent GATT procedures, countries would

be asked to adjust their national laws or, if they refused, to compensate the complainant but counties cannot be forced to comply. Current GA’IT dispute

resolution procedures and proposed amendments are discussed in the annex to ch. 2; ways to change GATT to give intermtional agreements special status

are discussed in ch. 5.

12 Ibid., p. 4.

13 Ibid., p. 6.

14 me proced~es for GATT waivers and amendments are diSCUSSed in Ch. 5.

15 Possible fiti~tio~~~gementsfor negotiation on p~c~~cases ~d gener~ guidelines are discussed inch. 5.
Chapter 1-Overview and Summary . 7

environment, or to impose domestic norms on or

otherwise influence conduct, beyond the national

borders (either in other countries or in international

territory).

Whatever their desirability from an environmental viewpoint, these measures can come into

conflict with GATT This is partly because, as noted

in finding 1 above, import restrictions based on the

process for making a product seem problematic

under GATT.

An example is a dispute between the United States

and Mexico over U.S. tuna imports. To protect

dolphin, the Marine Mammal Protection Act called

for banning certain tuna imports when the incidental

killing of dolphin by a country’s tuna fleet exceeded

certain limits. After Mexico complained, a GATT

dispute resolution panel reported that the U.S. ban

violated GATT.l6 Subsequently, the GATT Secretariat made a strong statement against unilateralism:

“In principle, it is not possible under GATT’s rules

to make access to one’s own market dependent on

the domestic environmental policies or practices of

the exporting country.”17 However, there may be

times in which a country believes unilateral trade

measures are justified for environmental reasons.

(The possible need to modify GATT’s procedures

for deciding trade disputes involving environmental

concerns is discussed in item 6 below.)

Whether the U.S. Government should use trade

measures or discussions to influence environmental

behavior abroad has become a controversial issue in

Congress. Several bills and resolutions have been

introduced proposing negotiations to make GATT

compatible with U.S. laws designed to protect the

environment (or to influence environmental behavior) outside U.S. borders. (See app. B.) It would be

possible to change GATT’s rules (ch. 5) to be more

accommodating to trade provisions in national

environmental policies. However, such changes

could open the door for more restrictions on trade

than warranted by environmental objectives alone.

To achieve a balance of interests, changes might

include general guidelines for the use of unilateral

trade measures for environmental purposes; while

each dispute would still be resolved individually on

its own merits, the guidelines could be given some

weight. Unilateral trade measures, if permitted by

GATT, might be used against as well as by the

United States. One example might be limits on

greenhouse gas emissions. Several countries have

quantitative goals to reduce greenhouse gas emissions; the United States does not.

3. Trade Barriers Arising From Domestic Regulations (see ch. 4):

Domestically oriented regulations, seeking to

affect what happens only within the national borders, can act as barriers to trade. (A well-known

example is a Danish beer and soft drink container

law with return-for-reuse requirements that appear

to favor domestic companies. See app. A.) These

barriers can be reduced if different countries’

regulations can be made similar, or ‘‘harmonized. ’

However, while harmonization is often a worthwhile

goal, countries’ differing needs can sometimes make

harmonization infeasible or undesirable (see box

2-A and ch. 3).

Some nonbinding suggestions to help countries

address the international economic aspects of environmental policies have been available since 1972,

through the Organisation for Economic Cooperation and Development. Among other things,

the guidelines encourage OECD members (which

consist of 24 industrial countries and the EC) to

apply environmental measures to products in ways

consistent with GATT’s principles of national treatment and nondiscrimination (see ch. 2 and annex to

ch. 2). As part of a broader examination of trade and

environment interactions, OECD members are currently reviewing these principles for possible updating or revision.

The previously mentioned GATT working group

on environmental measures and trade is examining

the transparency of environmental regulations that

are likely to have trade effects, and is also examining

the trade effects of environmentally motivated

regulations regarding packaging and labeling. To

date, domestically oriented regulations have received only modest scrutiny in GATT. Certain

changes proposed in the Uruguay Round could alter

16 me ~anel~s repo~ ~5not been &en up @ tie full GAn COunCil for adoption as an offIcid GA” decision. Even if adopted, he GATT d~ision

would not supersede U.S. law. The case is discussed further in chs. 2 and 3; the GATT dispute resolution process and its relation to U.S. law is discussed

in the annex to ch. 2.

17 GA~swre~atop. Cit,, p. 10. me ~A~secre~at does not ~ve tie au~ori~ to intqretGA~ law Or to &krmine (MIT’s policies; that

can be done only by GATT’*s member countries acting together.
8 ● Trade and Environment: Conflicts and Opportunities

that, raising a new potential for conflict between

GATT and national environmental laws. As in

finding 2 above, GATT’s procedures for resolving

disputes over particular regulations might need

adjustment. (See finding 6 below.)

4. The Question of Competitive Impacts (see ch.

4 and app. E):

Concern about competitive effects has been a

recurring issue in debates about strengthening U.S.

environmental laws. One concern is that countries

with weaker standards might gain a competitive

advantage. The perception of competitive impacts

can also lead to domestic pressures to go slow in

implementing laws. Competitiveness concerns partly

underlie some recent proposals in Congress calling

on U.S. trade officials to negotiate with other

countries to raise their standards, or to treat lower

environmental standards as a form of subsidy

against which countervailing duties might be used.

A review of past research suggests that environmental regulation has not contributed in a major way

to relocation of U.S. industry overseas or to significant deterioration of the U.S. trade posture. (The

analysis of competitiveness effects in this paper is

restricted to implications for U.S. manufacturing;

the effects for agriculture, commercial fishing, or

mining are not examined.) Market access and lower

labor costs generally have been the most important

factors in relocation. In the special case of Mexico,

the border area, with its low labor costs, proximity

to the United States, and duty-free export processing

zones, has attracted many U.S. firms over the years.

Some of these firms relocated in part because of

weaker Mexican environmental regulations. If Mexico succeeds in its efforts to implement tougher

standards, U.S. firms in the future will have less

environmental rationale for relocation. In the meantime, environment, combined with other factors,

continues as one of several location criteria.18

Most studies have found that environmental

regulations generally have a small effect on U.S.

manufacturing competitiveness; however, they can

have a larger effect in particular sectors with high

environmental compliance costs. Moreover, caution

should be exercised in applying past studies to the

present competitive climate. Much of this research

uses data from the 1970s, when fewer U.S. industrial

sectors were under great competitive challenge from

abroad. What were modest impacts 10 or 15 years

ago might well be more troubling today when

international competition as a whole is more intense. Also, U.S. environmental regulations are

more strict now than they were. So are regulations in

some other countries. These changes leave open the

possibility that environmental regulations could be

more of a competitive disadvantage than before.

Some “leading edge” U.S. firms have turned

environmental regulations from a competitive drag

into an advantage, however.

To the extent that U.S. environmental standards

put U.S. manufacturers at a disadvantage, different

responses are possible. Trade measures such as

countervailing duties could be used, but they would

entail administrative problems and their effectiveness would not be guaranteed. Moreover, countervailing duties to adjust for the absence of environmental regulation in another country probably would

be deemed a GATT violation if challenged. Other

steps, such as support for environmental research

and development or technical assistance to help

manufacturers comply with regulations, might also

be considered in a strategy to deal with competitive

impacts.

Because of concern about competitiveness, the

Congress, in its 1990 revisions to the U.S. Clean Air

Act, instructed the President to report to Congress

with an evaluation of competitive impacts and a

strategy for addressing impacts through trade consultations and negotiations. Examples of such options included harmonization of standards and trade

adjustment measures.19

5. The Case of Developing Nations (see ch. 3):

Some trade/environmental conflicts reflect the

sharp differences between developed and developing countries over trade and responsibilities toward

the global environment. While there are a growing

number of exceptions, many developing countries

see environmental protection as having to take a

back seat to their plans for economic development.

Although no country wishes to be seen as a pollution

haven, some developing countries may be reluctant

to take the lead in raising their environmental

18 hcation issues will be discussed in greater detail in an O’E4 study on U.S.-Mexican trade, technology, and investment to be Completti lat~ in

1992.

W Section 811 of Public Law 101-549. The report is due On Mi3y 15, 1992.
Chapter 1-Overview and Summary ● 9

standards for fear of jeopardizing what in some cases

might provide a comparative advantage or an

attraction for new investment.

However, there is growing recognition in developing nations that environmental and development

objectives must become more compatible if a

sustainable future is to be forged. But many developing countries argue that they do not have the

resources to act on their environmental problems,

given more immediate problems like poverty and

debt; they maintain that they need help from the

developed world to finance much of their environmental activities. This question of who pays is

highly controversial, and will be a central issue

addressed at the United Nations Conference on

Environment and Development. A number of options for assistance could be considered in addition

to direct foreign aid. (See box 3-A.)

It is sometimes argued that liberalized trade and

investment will produce the financial resources that

developing countries might use for environmental

improvements. However, this will not happen unless

a country has requirements or incentives in place for

effective environmental management. Active citizen

interest, in a receptive political system, can also be

crucial for effective environmental policies; this

element is lacking in many developing countries.

When countries do upgrade their environmental

standards, change is likely to be slow. It takes more

than a law to make environmental standards comparable; institutions and resources for enforcement

must be in place. Even those countries, like the

United States, with the most environmental policy

experience find it can take many years before

standards called for in a law are implemented.

As the United States reassesses its trade positions

with respect to developing countries, environmental

issues (with their associated competitiveness dimension) will enter increasingly into the debate. One

issue will be how to encourage developing countries

to improve standards-whether through technical

and financial assistance, for example, or through

threats of countervailing duties and other trade

measures. Another issue is whether environmental

objectives should be pursued independently, or

handled in parallel track discussions (as is mostly the

case with NAFTA), or as part of future trade

negotiations (as called for in several resolutions

introduced in the 102d Congress).

It should be noted that environmental reform in

Mexico began before the current NAFTA debate.

But it might not have proceeded at its present pace

were it not for a perception that inadequate performance on the environment could imperil a free trade

agreement with the United States. There has been an

acceleration of cooperative measures taken by both

the U.S. and Mexican Governments on border

environmental problems, as well as increased commitments of financial resources. Some border area

organizations, however, maintain that a much greater

investment than currently envisioned will be needed

to meet border area environmental and public health

needs.

The United States is beginning to consider

possible broadening of free trade discussions to

other developing countries within the hemisphere, as

envisioned in President Bush’s Enterprise for the

America’s Initiative. As preparations for such discussions, more steps might be taken to assist

Caribbean, Central and South American countries to

develop and enforce effective environmental management measures. The relationship of such measures to other issues of greater hemispheric economic

integration, such as debt and investment, would also

need to be addressed. In this regard, it is worth

noting that European Community economic integration, involving countries far more similar in economic characteristics, has taken many years of effort

and substantial use of adjustment mechanisms to

address competitive impacts (see box 2-A).

6. Trade/Environment Decisionmaking (see chs.

2 and 5):

Several international institutions could play roles

in addressing trade/environment interactions. Besides GATT, these include the Organisation for

Economic Co-operation and Development and various United Nations bodies. Each has its strong and

weak points.

GATT as an institution has responded slowly to

the unfolding dilemmas posed by the increasing

convergence of trade and environmental issues.

Although a working group on environmental measures and trade has existed for 20 years, it met for the

frost time in the fall of 1991. Environmental issues

have not been directly addressed in the Uruguay

Round, even though changes under consideration

could have environmental implications (see ch. 2).

While the thinking of the GATT Secretariat on trade

and environment matters was suggested by a report
10 ● Trade and Environment: Conflicts and Opportunities

released in February 1992, this report was not based

on a consensus of the member countries.20 Several

options exist for addressing environmental/trade

issues within GATT; some, including GATT’s

Director General, have argued for inclusion of

environmental matters in a post-Uruguay Round

trade discussion. Others have proposed a GATT

code on the environment, or perhaps a moratorium

on rulings adverse to environmental concerns pending adoption of new procedures to handle those

disputes.

To date, OECD has made the most active effort to

grapple with the complex interactions between trade

21 Even though it has and environmental objectives.

very limited capacity to set and enforce policy

among its members, OECD can bring a level of

integration to trade/environment questions that few

other bodies can. OECD’s efforts are jointly supported by its environment directorate and its trade

directorate, and its members’ trade and environmental agencies are meeting to develop national

positions. OECD has issued useful guidelines and

principles on related questions in the past. But it

does not have developing countries as members.

Even though OECD is attempting to consider their

concerns, any guidelines it issued might not be

acceptable to developing countries.

There is currently no institution equivalent to

GATT with respect to international environmental

agreements. Nor is a single, comprehensive international agreement covering all global environmental

problems likely. Yet a more coordinated approach

for developing and monitoring international environmental agreements would be beneficial. According to the U.S. General Accounting Office, the

administering bodies for international environmental

agreements generally do not have the authority or

the resources to monitor compliance.22 Thus, these

bodies tend to serve as information clearinghouses

rather than enforcers of agreements. Some have

proposed stronger coordination mechanisms or even

anew international institution to give more visibility

to environmental concerns.

Indeed, the GATT working group on environmental measures and trade will look to UNCED for

authoritative guidance on environmental standard

setting and on environmental policy making.23

Institutional questions will be debated at UNCED; in

addition, broader reorganization of the UN is under

consideration. Out of this may emerge a stronger

mechanism for addressing international environmental issues.

Some efforts are underway within the U.S.

Government to develop information and formulate

U.S. positions on these matters with respect to

GATT and OECD discussions. An interagency

group, coordinated by the Office of the U.S. Trade

Representative (USTR), has been meeting since

1991. Some environmental representatives have

been appointed to USTR’s advisory committees, and

the U.S. Environmental Protection Agency has its

own advisory group working on these issues.

While such activities have generated much useful

information, there is a possibility that U.S. positions

will emerge from a largely hidden and informal

interagency process with little congressional input.

Congress might undertake oversight of interagency

progress in identifying possible U.S. objectives as a

step toward determining whether to provide specific

legislative guidance. It also might consider oversight on international environmental negotiations

that have trade components.

Whether undertaken at the international or national level, there is clearly a need for better

information and analysis of the environmental

effects of different trade patterns and policies. There

have been few efforts to analyze such impacts in the

past. There is also a need for continuing evaluation

of the trade and competitiveness impacts of environmental regulations; such evaluations could be helpful not only in identifying appropriate and inappropriate use of trade measures, but also competitive

disadvantages arising from differences in national

standards.

As has been mentioned, abetter method to resolve

trade disputes involving environmental issues is

needed. Currently, a GATT dispute resolution panel

20 GATT secretariat, op. Cit.

21 OECD discussions on these questions began in mly 1991.

22 U.S. General Accounting OffIce, Op. Cit., p. A.

23 ~c~d Eg~ s~te~e~t t. tie &ne~ &S~nlblY on tie GIOb~ ~gislators @ga~atiOn for B~anc~ Enviromnen~ w&sh@oQ DC, February

1992.
Chapter 1-Overview and Summary . 11

hears the case and writes a report, which is then

submitted to the GATT Council for adoption as an

official GATT decision (see ch. 2 annex). However,

effective resolution of environmental disputes may

require not only judgments about the application of

GATT rules and disciplines, but also broader societal judgments (e.g., how to weigh the best available

scientific evidence with other factors such as economic cost). Changes such as permitting testimony

and argument by nongovernmental organizations

and requiring environmental expertise on panels

might broaden the perspective, but the judgments

required could be difficult for any panel to make on

its own. If (as some have proposed) new international coordinating mechanisms are set up to deal

with environmental matters, the coordinating body

might be authorized to work with GATT on guidelines helpful in dispute resolution; another possibility would be for GATT to work more closely with

existing international scientific and environmental

organizations.

GATT could also consult with such other international organizations to consider trade/environment

issues before they ripen into disputes. In particular,

trade provisions of proposed international environmental agreements could be discussed. Potential

conflicts could be avoided by changing trade provisions, changing (or making exceptions to) GATT’s

rules, or both, depending on what tradeoffs seem

reasonable among the environmental, economic, and

other interests at stake.

Road Map to the Rest of This Paper

Chapter 2 highlights several controversies, and

discusses the roles of several international bodies

and the effort by the U.S. executive branch to

develop positions on trade/environment issues. Chapter 3 discusses the limited state of knowledge about

the positive and negative environmental effects of

liberalizing trade. It also examines situations in

which governments have used trade measures to

achieve environmental ends. The chapter further

reviews the debate about the respective environmental responsibilities of the developed countries

(often referred to as the “North”) and the developing countries (the “South”).

Chapter 4 examines the effects of environmental

regulations on trade, including trade as it relates to

U.S. manufacturing competitiveness. First, national

environmental measures in some cases can act as

trade barriers, raising the question about the appropriate limits of national regulations. The chapter

discusses GATT’s current approach, as well as

proposed GATT amendments. Second, if one country has stricter environmental standards than a

second, the first country’s manufacturing firms

might suffer a competitive disadvantage due to

higher environmental compliance costs. It is hard to

determine the extent to which U.S. firms suffer such

a disadvantage; the issue is discussed briefly in

chapter 4 and somewhat more fully in appendix E.

On the assumption that a substantial disadvantage

might exist in at least some cases, the chapter

discusses the effectiveness of trade measures as a

response. The appropriateness of trade measures

depends in part on what alternative domestic means

exist to help U.S. firms meet environmental requirements, so as to ameliorate any competitive disadvantage. This will be addressed more fully in the final

report of this assessment. Chapter 5 discusses

possible international and U.S. government approaches for coordinating trade and environmental

policies. %

24 ~~backpomdpaperd~ ~~ ~~de in environmen~y re~at~ products, and how environm~~ regulation cm liffeCt bt trade.

Environmental regulation also affects another kind of trade: trade in environmental goods and services (EGS), that is, technologies and services to protect

the environment. Indeed, environmental regulation creates demand for EGS. Appendix D discusses the world EGS market and the U.S. industry’s place

in it. The final report of this assessment will examine trade in EGS in more detail.
Chapter 2

Issues and Institutional Players
Chapter 2

Issues and Institutional Players

Several recent developments, highlighted briefly

below, suggest the broad range of trade/environrnent

issues now arising. Some involve the General

Agreement on Tariffs and Trade (GATT), which

provides a framework of rules for most of the

world’s trade. Environment/trade issues also have

emerged in debate about a possible North American

Free Trade Agreement (NAFTA), now under negotiation between the United States and Canada, which

already have a free trade agreement, and Mexico.

Similar environmental issues might emerge if U.S.

efforts to liberalize trade are extended to other

developing countries in the Western Hemisphere.

The chapter also discusses policy formulation efforts in this country and in international forums,

including GATT, the Organisation for Economic

Co-operation and Development (OECD), and the

United Nations. (Chapter 5 further discusses institutional issues).

THE CONTEXT

Issues at GATT

In September 1991, a three-member GATT dispute resolution panel stated that a U.S. ban on

imports of tuna violated GATT’s rules of international trade.l (The panel’s reasoning is analyzed in

ch. 3.) The dispute arose when Mexico contested the

ban, which was imposed under the U.S. Marine

Mammal Protection Act. This law seeks (among

other things) to limit incidental killing or serious

injury to dolphins and other marine mammals due to

commercial fishing operations.2 The U.S. Government had put the ban into effect only after it was

compelled to do so by a court order. Mexico and the

United States have asked the GATT Council to

postpone its consideration of the panel’s report-a

necessary step before the report can be adopted as an

official GATT decision—while the two countries

work to settle the dispute themselves.

The issue is not settled, however. In January 1992,

again under court order, the U.S. Government

imposed a ban on tuna from several ‘intermediary’

nations that do not engage in the objected-to fishing

practice themselves but might be reselling tuna

caught by a nation that does.3 This has resulted in

political pressure for the GAIT Council to adopt the

panel’s report despite the request of Mexico and the

United States.4 Also, any of the intermediary nations

could file its own complaint. In mid-March, the

European Community (EC), whose member nations

France and Italy were affected by the intermediary

ban, requested consultations with the United States.

This is the first step toward filing a formal complaint

to invoke GATT’s dispute resolution process.

The United States could, under GATT’s current

practice, block the GATT Council’s adoption of the

panel’s report in the Mexican case and of panel

reports in any subsequent cases; it also could refuse

to change its law if adverse rulings were adopted by

the Council and could block the imposition of any

retaliatory penalties proposed to the GATT Council

by the aggrieved country or countries. However, the

United States would face political pressure not to

resist in these ways. Amendments to GATT under

consideration would remove the right to block

adverse rulings, and would make ignoring a ruling

potentially more costly. (See the annex to this

chapter.)

Following announcement of the GATT panel’s

report in the tuna/dolphin case, Congress held

hearings on the report’s implications and on possible

environmental reforms in GATT. (See app. C.) In

March 1992, the Administration proposed that

Congress temporarily lift the ban on a nation’s tuna

1 “united States_Restrictiom on bports of ‘Ihna,” Report of the Panel, GATI’Doc. No. DS21m Sept. 3, 1991. ne P~el’s reportw~ submitt~

to the contesting parties on Aug. 16, 1991. The report was submitted to GATT member countries on Sept. 3, 1991 and was made public on Sept. 16,

1991 (though part of the report was published in the Sept. 6, 1991 issue of Znside U.S. Trude).

2 The Marine Mammal Protection Act of 1972, Public Law 92-522, as amended, notably by Public Laws 10G711 and 101-627. The law is codified

in part at 16 U.S.C. 1361ff. Implementing regulations are found at 50 C.F.R. Part 216; regulations on commercial ftig appear at 50 C.F.R. 216.24.

s AS discussed in “U.S. District Court Places Secondary Ban on Imports of ‘hna, Ma produc~, “ Inside U.S. Trude, vol. 10, No. 5, Jan. 31, 1992,

pp. 13-14. This article includes text of court orders, dated Jan. 9 and Jan. 27, 1991, in the case of Earth ZslandZnstitute v. Mosbacher, Secre@y of

Cmznzerce, in the U.S. District Court for the Northern District of California.

LI See, e.g., “EC Will push for Adoption of GA’IT Panel RePort on m-DoIPhin Dispute, “ Inside U.S. Trade, vol. 10, No. 6, Feb. 7, 1992, p. 21;

Johu Maggs, “EC Will Protest US llma Embargo Against 20 Nations,” The Journal of Commerce, Feb. 4, 1992, p. 3A.

–15–
16 ● Trade and Environment: Conflicts and opportunities

if it committed to a 5-year moratorium starting

March 1, 1994 on any dolphin kills, and to reduction

in the absolute number of dolphin kills in the interim

(though no reduction targets would be set). The

Administration reported that Mexico and Venezuela

were prepared to make such commitments.5

The potential for conflict between trade measures

used in national environmental policies and GATT

might increase soon. Wide-ranging changes to many

aspects of GATT are being debated in the Uruguay

Round. 6 Proposed changes include more attention to

nontariff barriers, as well as expansion of GATT

discipline for agriculture and introduction of GATT

rules into areas not previously covered (such as

intellectual property and services).7 These discussions, which began in 1986, have stalled several

times and a successful conclusion is not a certainty.

However, environment was not a substantial consideration in drafting proposed changes, and the effect

of some changes under discussion in early 1992

could be to increase the conflicts between GATT

and environmental measures (see discussion later in

this chapter and chs. 3 and 4).

The relationship between GATT and international

environmental agreements is another concern. According to GATT, trade measures are included in 17

multilateral environmental agreements. These agreements deal with such problems as stratospheric

ozone depletion, endangered species, and hazardous

waste. (As shown in table 2-1, the greatest number

have to do with conservation of plant and animal

species.) There is the likelihood of more multilateral

environmental agreements in the future, although

these will not necessarily have trade provisions. For

example, there has been speculation that trade

measures might eventually be made part of a future

international agreement to limit greenhouse gas

emissions that may contribute to global warming.

Such an agreement might contain provisions that tax

imports of products based on greenhouse gas emissions accompanying their manufacture, or altogether

ban imports of some products from nonsignatories;

Table 2-l—Multilateral Environmental Agreements by

Subject, 1933-90 (number of agreements)

With trade

Total provisions

Marine pollution . . . . . . . . . . . . . . . . . . . 41

Marine fishing and whaling . . . . . . . . . 25

Protection of fauna and flora . . . . . . . 19

Nuclear and air pollution . . . . . . . . . . . 13

Antarctica . . . . . . . . . . . . . . . . . . . . . . . . . 6

Phytosanitary regulation.. . . . . . . . . . 5

Locust control . . . . . . . . . . . . . . . . . . . . . 4

Boundary waters . . . . . . . . . . . . . . . . . . 4

Animal cruelty . . . . . . . . . . . . . . . . . . . . . 3

Hazardous wastes . . . . . . . . . . . . . . . . . 1

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Total . . . . . . . . . . . . . . . . . . . . . . . . . . 127

0

0

10

1

0

4

0

0

1

1

0

17

SOURCE: General Agreement on Tariffs and Trade, 1992.

if such provisions were adopted, they too might be

challenged under GATT. At present, however,

discussions about a possible framework agreement

for global warming stop short of such measures.

Several issues have emerged concerning the use

of trade provisions in multilateral environmental

agreements. One is their consistency with GATT.

Although various GATT statements seem to favor

multilateral action with respect to the environment,

the trade provisions in international environmental

agreements have no special status in GATT. There

is thus a possibility that someday a GATT member

will successfully challenge a trade measure taken by

another GATT member pursuant to a multilateral

agreement. Also, the possibility of GAIT’ conflicts

might discourage inclusion of trade provisions that

could make environmental agreements more effective or enforceable. From both an environmental

viewpoint and from a trade viewpoint, there is a need

to find ways to minimize frictions between these two

concerns, both of which are important for world

welfare. (Chapter 3 discusses some factors that

might be considered, using as illustration the Montreal Protocol on Substances That Deplete the Ozone

Layer.8 The Protocol commits signatories to phase

out the use of substances, such as certain chlo5 Statement of Curtis Bohle~ Assistant Secretary of State for Oceans, International Environmental, and Scientific Affairs, testimony at hearings

before the House Committee on Merchant Marine and Fisheries, Mar. 18, 1992.

G Revisions to G4’IT’s gened rules and specific schedules are considered in negotiating ‘‘rounds.” The Uruguay Round, named for the site of its

initial meeting, started in 1986 and is ongoing.

7 GATI”S rules and the concepts of nontariff barriers are discussed in the GATT section below and in the annex to this chapter.

8 The Montreal Protocol was signed in September 1987 and was amended by the Imndon Revisions in June 1990. The Montreal Protocol is based

on the March 1985 Vienna Convention for the Protection of the Ozone Layer. The Protocol, discussed in greater detail inch. 3, entered into force on

Jan. 9, 1989. As of mid-March 1992, the London revisions were not yet in force as only 19 of the needed 20 countries had ratiiled it. The revisions will

be in force 90 days after the notification of the 20th ratification.
Chapter 2-Issues and Institutional Players ● 17

rofluorocarbons and halons, that deplete the Earth’s

ozone layer. Measures are in effect to limit trade in

such substances. Also, Protocol signatories are

studying the feasibility of a ban applied to nonmember countries against imports of products made with

a process using such chemicals.)9

The North American Free Trade Agreement

Another contentious trade/environment interaction is the negotiating process underway for a North

American Free Trade Agreement among Mexico,

Canada, and the United States. Free trade would

likely increase economic activity in Mexico and in

the border area of the United States; unless adequate

environmental safeguards are put in place, the

additional growth could exacerbate the border region’s already serious environmental problems.

Concern also exists that U.S. trade negotiators might

agree to provisions that would weaken U.S. environmental standards.

These concerns led Congress to caution the

Administration that it needed to address environmental issues (as well as labor issues) while

negotiating a NAFTA. The Administration, in seeking a congressional extension of “fast “track negotiating authority” in May 1991, pledged to maintain

the integrity of the U.S. regulatory process and to

work cooperatively with Mexico to promote environmental improvements.10 Under this arrangement,

most environmental issues are under discussion on

a ‘‘parallel’ track separate from the trade negotiation itself. Some in Congress remain concerned

whether the environment is receiving enough priority, however, and there have been hearings and

further cautionary communications to the Administration about the need to adequately address U. S.-

Mexico environmental issues.ll

The Administration’s view is that freer trade and

investment will generate the resources Mexico

needs for environmental protection. Since 1988,

Mexico has had a law that promises relatively strong

environmental protection. However, the country has

limited resources for enforcement, and only recently

began to take much action against violators. In

February 1992, the U.S. Environmental Protection

Agency (EPA) and its Mexican counterpart, SEDUE,

together issued a border environmental plan,12 and

the White House released an interagency review of

U.S.-Mexico environmental issues coordinated by

the U.S. Trade Representative (USTR).13 Mexico

has indicated plans to spend $466 million to improve

the border environment in the next 3 years; President

Bush’s proposed border cleanup effort for fiscal year

1993 is $201 million. These sums far exceed what

was previously available, although the U.S. contribution, relative to gross national product (GNP), is

proportionately much less than Mexico’s.14

Competitiveness Concerns

Questions about Mexico’s commitment to environmental protection have taken on added importance because of the possibility that freer trade

between the United States and Mexico might prompt

some U.S. firms in industries with high environmental compliance costs to move operations to

Mexico, directly costing U.S. jobs. Over the years,

Mexico’s border area has attracted many U.S. firms,

drawn by duty-free export processing zones, low

labor costs, and close proximity to U.S markets.

Some of these so called “maquiladora” factories

may have relocated partly to escape higher U.S.

environmental regulations. (See app. E.) Another

concern is that firms manufacturing in the United

States could suffer a competitive disadvantage from

imports manufactured by firms in Mexico facing

lower environmental costs. Environmental regulations as a factor in location decisions and trade and

competitiveness in general (not limited to the

U.S.-Mexico context) are discussed in appendix E;

9 mid., ~cle 4, paragraph 4 bis. The first determina tion of feasibility of such a ban (for substances listed in the Montreal Protocol prior to its

amendment by the London Convention) is to be made by Jan. 1, 1994.

10 “ReSpOnse of tie Atihation t. Issues Raised in Connection With the Negotiation of a North American Free Trade Agreement,” transmitt~

to the Congress by the President on May 1, 1991, table 4, pp. 9-10.

11 me House Codttee on Sdl Business, Sukommittm on ReWlatio~ Business opportunities, and fi~gy held hearings on Sept. 30, 1991.

12 ~te9atedEnv~omen~Pkn for tie Mexi~o.u.S. Border Area (First Stage, 1992-1994), February 1992. A draft versior.1 of this phln WZIS iSSUed

Aug. 1, 1991, followed by joint hearings held by EPA and SEDUE on both sides of the border.

13 Usn~oordinated ~fitem~ency@Sk force review of UoS.-Mexico environmen~ issues. A dr~ review was issued october 1991; afhld I’eVieW

was released by the White House on Feb. 25, 1992.

14 one souce su=ests tit U.S. ~~g on tie level of,$400 fi~on per yew might be ne~~o See U.S. ~~ic~ Free l“rtie Reporter, Jan. 27, 1992,

p. 7; some border area organizations reportedly seek a U.S. contribution several times this size. See “Down Mexico Way,” The Economz”st, Apr. 18,

1992, p. 4.

321-520 0 - 92 - 4
18 . Trade and Environment: Conflicts and Opportunities

factors affecting location of U.S. firms in Mexico

will be discussed in greater detail in another OTA

study, expected to be issued in thesummer of 1992,

on U.S. trade, technology, and investment with

Mexico.

The NAFTA discussions are unusual in that free

trade is being proposed between a developed country

and a developing country that share a common

border. The United States and Mexico have only

limited adjustment mechanisms in place to address

problems arising from their different environmental,

labor, and social policies and commitments. This

contrasts strongly with the European Community

(EC), where full economic integration between the

very wealthy nations of northern Europe and the less

wealthy EC member states has been preceded by

years of efforts to adjust for differences among

national policies. EC-wide rules aim to require all

members to meet certain minimum environmental

standards, although implementation has been spotty.

(See box 2-A.) While NAFTA’s goals stop well

short of economic integration, the differences between U.S. and Mexican policies are generally more

pronounced than those between the wealthy and less

wealthy countries of the European Community.

Such adjustment issues and concerns also apply to

U.S. trade with other developing nations, particularly as framework agreements for further trade

discussions are signed between the United States

and the developing countries of Latin America.15 In

general, there is concern that weaker environmental

regimes abroad can give firms manufacturing abroad

a cost advantage over firms manufacturing in the

United States. Past studies, many conducted with

data from the 1970s, do not provide definitive

conclusions, in part because the costs and benefits of

environmental regulation are difficult to accurately

measure. On the whole, these studies suggest that

U.S. environmental regulation has not contributed in

a major way to relocation of U.S. industry overseas

or to the deterioration of the U.S. trade posture.

However, for a few sectors with high environmental

compliance costs, the effects may be greater and

contribute to worsened trade and investment performance. Few if any of these studies assumed free

trade agreements between the United States and

other nations. Moreover, U.S. environmental standards are in many cases higher today than they were

a decade or more ago, and the competitive climate is

tougher. (See ch. 4 and app. E for a discussion of the

impact of environmental regulations on trade and

competitiveness.)

Some bills introduced in the 102d Congress

propose to negate any competitive advantage from

other countries’ weaker standards by levying countervailing duties or other taxes on products imported

in these circumstances.l6

Competitiveness concerns also surfaced in the

1990 amendments to the Clean Air Act. Congress

directed the President, by May 15, 1992, to:

identify and evaluat[e] the economic effects of

[the differences between U.S. and foreign] air quality

standards and controls, [and to propose a] strategy for

addressing such economic effects through trade

consultations and negotiations. [The strategy] shall

include recommended options (such as the harmonization of standards and trade adjustment measures)

for reducing or eliminating competitive disadvantages caused by differences in standards and controls. 17

Other Issues

Still other trade/environment or closely related

issues have come to the fore. Domestic health,

safety, and environmental regulations are sometimes

challenged as unduly impeding trade. Examples

(described in ch. 4 and app. A) are a Danish

requirement for return of beer and soft drink bottles

that appears to put foreign vendors at a disadvantage,

and a ban by the EC on imports of U.S. beef from

cattle given certain hormones (see app A). Also,

domestic laws regarding “ecolabeling,” or labeling

of products with information on how much their

production, use, and/or disposal affects the environment, are sometimes challenged as unduly impeding

imports. In the GATT tuna/dolphin case, Mexico

15 B&@~~rm~~ater~aweaents havebeensi~edwith 14 Centi Or south ~eric~co~triesby the end of 1991, in conjunction with President

Bush’s Enterprise for the America’s Initiative. The Initiative proposes a U.S. strategy for helping Latin American countries deal with their economic

problems through measures for debt reductiow trade liberalization and investment incentives. Part of the proposal seeks authorization from Congress

to permit interest payments on reduced debt obligations to be used for environmental and natural resource purposes.

16 S. 984 ~o~d ~Mt lessm forei~ pollution con~ls on ~n~ac~ers as a subsidy, so tit the U.S. ~WS on co~tervailirlg duties wotid apply. S.

1965 would impose import fees on goods made abroad by processes that do not meet U.S. water pollution control standards. See app. B for more

discussion.

17 ~blic ~w 101.549, Sec. 81 l(b)+ As discuss~ ~ app+ E, the 1972 Fe&~ water pollution control Act Amendmentshad Silllih RqUklIldS.
Chapter 2-Issues and Institutional Players ● 19

also challenged the United States’ Dolphin Protection Consumer Information Act,18 which regulates

the use of the term “dolphin-safe” on tuna fish cans.

In this instance, GATT’s dispute resolution panel

reported that it found the law to be consistent with

GATT.19

Although not addressed in detail in this background paper, there are many other important trade

and environment issues under discussion in various

contexts. Some international environmental agreements are themselves trade agreements. For example, the Basel Convention on the Control of the

Transboundary Movement of Hazardous Wastes and

Their Disposal, signed in March 1989 and expected

to come into effect in mid-1992, would require

informed consent from destination and transit countries. Although the United States has signed the

convention, formal consent by the U.S. Senate has

yet to occur. This has led to concern that U.S.

negotiators will not be at the table when rules for

implementing the agreement are worked out. Another example of an environmental trade agreement

is the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES),

which entered into force in 1975. There is continuing

discussion about what species should be covered by

the convention, as well as what protected status

should be given.

INSTITUTIONAL PLAYERS

There appears to be growing recognition that trade

and environmental policy, which until recently had

been made in isolation of each other, must to some

extent be made together, or at least coordinated. In

the United States, the EC, and some other countries,

trade/environment disputes and issues are now

receiving more attention. Interaction between the

U.S. trade community (trade officials and the private

sector) and the environmental community (environmental officials and environmental advocacy organizations) is more common than before. However,

progress has been slow, partly because the issues are

complex, and many viewpoints exist. At least a

dozen Federal departments and agencies have responsibilities relevant to trade and environmental

policies.

At the international level (see table 2-2), the

Organisation for Economic Co-operation and Development so far has made the most systematic effort to

address interactions between trade and environmental issues, beginning with the 1972 publication

of guiding principles concerning trade and environment (discussed below). Its present discussions are

aimed at producing a new set of guiding principles,

if possible in time for approval at OECD’s June 1993

Ministerial meeting. OECD’s process has involved

both the trade agencies and the environment agencies of its member states to a degree unmatched by

other international bodies. However, it has limited

capacity to set and enforce policy among its

members, which consist of 24 countries from the

developed world, and the EC. Moreover, the developing world has no representation in OECD (although Mexico and three Eastern European countries have been observing the trade and environment

meetings). Still, new OECD principles, if judged

sound by developing countries, could be used as a

basis for amending GATT and for new institutional

approaches to reconcile trade and environment

concerns. (Developing country issues are discussed

further inch. 3.)

GATT, which has both developing and developed

countries as members, has been slow to take up

environmental questions. Not surprisingly, GATT’s

perspective on trade/environment questions tends to

focus on the effects of environmental regulations on

trade. Developing countries are wary that disguised

protectionism (protectionism justified on environmental grounds) could be the end result if some

environmental issues are taken up at GATT. GATT

officials have alluded to the upcoming United

Nations Conference on Environment and Development (UNCED) as an appropriate venue for addressing environmental priorities. Trade/environment interactions are pertinent to several issues on the

agenda for UNCED.

Several other international agencies, including the

World Bank and the United Nations Conference on

Trade and Development, have been examining

environment and trade interactions. A number of

nongovernmental organizations (NGOs) including

environmental organizations and business groups

are actively addressing trade/environrnent issues.

Among business organizations, the International

18 ~blic bw 101-627, SW. 901, codifkd in part at 16 U.S.C. 1685.

19 ~~ufit~s~tes—Rw~CtiO~ on I.IXIpOfiS of ‘llm&” Report of the panel, op. cit., paragraphs 5.41-5.44.
20 . Trade and Environment: Conflicts and opportunities

Box 2-A—The European Community and TradelEnvironment Issues

The European Community (EC) so far has needed to address trade/environment interactions more directly than

the rest of the world. For trade among EC member countries, the EC’s Treaty of Rome and subsequent legislation

and regulation supplant and go further than GATT in promoting liberal trade. The EC, as a customs union, has a

common external tariff, has eliminated tariffs among its members, and has reduced nontariff barriers. To complete

unification of its internal market, the EC is harmonizing health, safety, and environmental regulations so as to reduce

competitive imbalances among EC countries and to keep regulations from acting as trade barriers. One result has

been more EC-wide environmental regulation.

While the EC has been an innovator in resolving conflicts in trade, industry, and environmental policy, its

approaches often are not easy to transfer to groups of nations that act more independently, or where the differences

in development and national wealth are much greater. However, the EC’s progress suggests that other countries

might benefit from more coordinated efforts and a stronger institutional framework to deal with trade/environment

interactions.

The Development of EC Environmental Regulation

In the early 1970s, the EC launched an “environmental action programme” that paved the way for future

environmental initiatives. Since 1973, four environmental action plans have been adopted; the fifth is being drafted.

The EC attempts to regulate water, air, chemicals, site safety, environmental assessments, waste, and wildlife.l

The 1987 Single European Act marked another milestone in the evolution of the EC’s role in environmental

protection. 2 The EC now works to harmonize regulations to meet environmental objectives as well as to eliminate

technical barriers to trade. The act states that the EC has the power to make environmental laws when environmental

protection can be achieved better through EC-wide action than through individual country action. Although the EC

Council of Ministers agreed in 1990 to create a European Environment Agency (EEA), the agency has yet to be set

up.3 Initially EEA will collect data and may assist in the monitoring of compliance.

A major environmental achievement of the Maastricht Summit (a December 1991 meeting aimed at promoting

close political union within the EC) was agreement for a Cohesion Fund. Other EC funds are slated to provide $1.44

billion between 1989 and 1993 for environmental projects in less developed regions.4 The Cohesion Fund, which

is supposed to be established before the end of 1993, will provide more help to the EC’s poorer members (Ireland,

Greece, Portugal, and Spain) for environmental and infrastructural improvements. Details of the fund still have to

be negotiated. The Maastricht Summit also made it harder for countries to veto EC-wide environmental regulation

in some cases, but not in as many as the Environmental Commissioner had hoped for.5

General EC Environmental Regulation

The EC has adopted nearly 300 directives and regulations specifically concerned with the environment.6 The

EC has also taken the lead in considering measures to reduce greenhouse gas emissions. The EC Commission

informally proposed to the Council of Ministers that legislation be drafted to limit carbon dioxide emissions by

various means, including an energy tax worth the equivalent of $10 per barrel of oil by the year 2000. 7 Half of the

tax would be a general levy on energy generation; the other half would be a tax on fuel’s carbon content. Such a

tax could put energy-intensive EC industries at a substantial disadvantage relative to foreign competitors. To address

this problem, the Commission proposed to partially or totally exempt energy-intensive industries from the tax; so

far, it has not proposed levying an equivalent tax on imports as an alternative. The Council of Ministers has asked

the Commission to prepare draft legislation.

EC environmental regulation has tended to be harmonized at relatively stringent levels.8 Also, members may

regulate at a more stringent level than is established at the EC level, but not lower.9 Higher levels of regulation in

individual nations are permitted as long as they are taken for noneconomic, environmental reasons. For regulation

of polluting processes (rather than of products), the regulation’s motivation is usually not an issue. Countries with

weak regulations have been given time to adjust their standards upward to the harmonized level and are provided

with technical assistance. The Council will grant some nations temporary exceptions or financial support from the

Cohesion Fund.
Chapter 2-Issues and Institutional Players . 21

Even with assistance it has been difficult to implement EC-wide regulations. EC members have been slow to

implement, or have even ignored, EC directiveslO. Part of the explanation may be the limited experience some EC

members have with environmental regulation. Also, it can be difficult to change existing national laws to conform

with EC requirements. The EC! has limited enforcement mechanisms other than public pressure. The Commission

tries to persuade transgressors to comply. It can bring a case to European Court of Justice (ECJ). But these

mechanisms are not always adequate.

Harmonization of Product Regulations and Standards

The EC has focused much attention on the harmonization of product standards, many of them related to

environmental protection. One reason for this is that product regulations can be abused to create barriers to imports.

Prior to 1985, the EC attempted to harmonize technical regulations for products at a very specific and detailed

level. It sometimes took several years to work out disagreements between countries about a single product

regulation. By the time a regulation was passed, it could be obsolete. The EC now focuses on broader performance

standards. This approach ensures a certain level of environmental protection, imposes similar costs on all

manufacturers within the EC, and prevents different national requirements from impeding trade.

Where national regulations still differ, the EC is grappling with the question of how to handle regulations with

more adverse effect on trade than is justified (see ch. 3). If a member country suspects that environmental policies

are a guise for protectionism, it can ask the Commission to investigate. If the Commission cannot negotiate a

solution, the dispute can be brought to the European Court of Justice.

ECJ may decide that the country is imposing an unjustified technical barrier to trade, and require the country

to permit foreign imports. However, the Court may decide in a given case that the burden put on trade is justified

by the national regulation’s contribution to environmental goals. In this case the country could reject nonconforming

products. This happened with the Danish bottle bill, where the Court upheld the requirement under Danish law that

beer and soft drinks be sold in returnable containers, even though that requirement restricted trade (see app. A). ECJ

will likely see more such cases.

In cases where different regulations produce a trade dispute, the EC may decide to regulate the product at the

EC level and take action to harmonize regulations. In some cases the EC appears to be trying to adopt the stronger

standard EC-wide. For example, after Germany promulgated national laws regarding packaging that raised concerns

over possible barriers to trade, the EC is now drafting EC-wide packaging rules.ll

1 FOr arl overview of EC environmental policy formulatio~ adoptiow and implementation see Cameron Keyes, The EuroPean

Community undEnvironmental Policy: An Introduction for Americans (Baltimore, MD: World Wildlife Fund Publications, 1991].

2 Nigel H~@~dKomadvon Mol&e, ‘~eE~ope~ Community: /environmental Force,” EPA JournaZ, vO1. 16*NO. 4, J@Y/Au~4

1990.

3 ~eunited~gdom, whose ~nit ~be @ assume Presidency of theEC in the later half of 199’2, As Promised to *e~‘mc~

of the new agencya priority. International Environment Reporter, “(!reationof EC Environment Agency Given ‘lbp Priority byU.K. Minister,”

Jan. 29, 1992, p. 32.

4 ~lce for Offilci@ publications of the Ewow@ COmm@tieS, ‘‘Environmental Policy in the European Community,” 4th Ed., March

1990, p. 25. These fimds are primarily channeled through the EC’s structural funds: the European Social Fund, the European Agricultural Fund,

and the European Regional Development Fund.

5 “Ec Codssioner Says ‘Stichts ummit Fell Short in Environmental Policy Areas,” Internatiorud Environment Reporter, Dec.

18, 1991, p. 670.

6 Keyes, The E~opean commni~nvironmental policy, oP. cit.

7 ~$A comu~~ Stite= t. L~t c~bon Dioxide Emissions and To Improve Energy Efficiency,” se@91) 1744~,rel~d Oct

14, 1991.

8 C&@m S. Pearson and Robert Repetto, “Reconciling Trade and the Environment: The Next Steps,” paper prepared for the Trade and

Environment Committee of the Environmental Protection Agency’s National Advisory Council on Environmental Policy and Technology,

December 1991, pp. 11-12.

9 me Cowcil of~e E~op~ncomm~tieS,me Sfigle EUOpe~ At, op. cit., Tifle VII, Article 130 ~ 1986.

10 AS of early 1990 the European COmmiS sion had identified 303 cases in which member mtions had incorrectly or incompletely

implementedl?C environmental directives. Hilary F. French “The 13C: Environmental Proving Ground,” World Watch, November/D*mber,

1991, pp. 26-33. See also Environmental Commissioner Ripa di Meana in 1990, as quoted in Keyes, The European Community and

Environmental Policy, op. cit., p. 7.

11 ~~F~Dr~BeingRm&~ of Phulto Curb Packaging Waste, Offictis Say. “ International Environmental Reporter, vol. 15, No. 3.,

Feb. 12,1992, p. 73.
22 ● Trade and Environment: Conflicts and Opportunities

Table 2-2 -Selected International Organizations Concerned With Trade, Development, and Environmental Matters

General Agreement on Tariffs and Trade (GATT

Uruguay Round negotiations

Working Group on Environmental Measures and International Trade

Working Group on the Export of Domestically Prohibited Goods and Other Hazardous Substances

GAIT Secretariat

Organisation for Economic Co-operation and Development (OECD)

Joint sessions of Trade and Environment Committees

Joint work by Trade and Environment Directorates

United Nations (UN)

United Nations Environment Program (UNEP)

United Nations Development Program (UNDP)

United Nations Industrial Development Organization (UNIDO)

United Nations Conference on Trade and Development (UNCTAD)

United Nations Conference on Environment and Development (UNCED)

World Bank

SOURCE: Office of Technology Assessment, 1992.

Chamber of Commerce has articulated eight policy

principles for addressing trade and environment

questions. 20 Another organization, the Business

Council for Sustainable Development, is working to

articulate industry perspectives as a contribution to

UNCED.

The following pages describe the status of trade

and environment activities at GATT, OECD, and the

United Nations. U.S. executive branch efforts to

formulate policy on trade and environmental issues

are also highlighted. (The EC’s experience and

perspective are discussed in box 2-A.)

General Agreement on Tariffs and Trade 21

Established in 1947, GATT provides a framework

of rules for international trade among over 100

member nations that account for the great majority

of world trade. GATT’s purpose is to promote liberal

trade (trade as free as possible) as a means to

promote economic growth. According to the theory

of comparative advantage, trade benefits all participating nations because it permits each nation to

specialize in what it can do better relative to its

neighbors. While this theory has many qualifications

in practice, its basic message is considered sound,

and trade is credited partly for the world’s economic

growth since World War 11.22

The acronym “GATT” denotes both an international agreement and an international institution. As

an institution, GATT is weak. For example, its

dispute resolution powers are limited (see the annex

to this chapter). Also, GATT’s text did not explicitly

create an international organization. Instead of

providing for a general assembly or standing committees, it merely refers to the ‘contracting parties’

acting in concert. A stronger institution, called the

International Trade Organization (ITO), was proposed under United Nations auspices in 1946. But

Congress did not approve the proposal, and other

countries declined to form an ITO without the

United States. Instead, the weaker, less inclusive

GATT, initially intended as a temporary transition to

an ITO, has been in effect for 45 years.23 Nevertheless, GATT has achieved a great deal.

m me Commission on International Trade Policy, Policy and Progmmme Dep*ent, ‘‘International Trade and the Environment: Principles for

Policy and Implementation” Document No. 103/160 Rev., Oct. 3, 1991 (adopted by the 67th Session of the Intermtional Chamber of Commerce

Executive Committee, Oct. 1, 1991). The proposed guidelines call for basing environmental regulations on “sound science” and “adequate

understanding of environmental conditions, ” use of performance standards, and use of market-oriented measures to encourage innovation. Among other

things, the guidelines also call fornondiscriminatorynational enforcement of regulations, and mechanisms to resolve disputes arising from environmental

regulations.

21 GA~$ss~c~e~d Opention~e &SCn&din Jo~ H. Jackso~ The World Trading system: hW and policy of International Relations

(Cambridge, MA: MIT Press, 1989).

Z? For~erdis~ussion of tie theov of com~~ative adv~~ge, qfications and refinements to tit theory, md implications for public pOh2y, See

U.S. Congress, OffIce of Technology Assessment, Competing Economies: America, Europe, and the Pacific Rim, OTA-I’ITM98 (Washington, DC: U.S.

Government Printing Office, October 1991), pp. 118-124.

23 GA’’f’_f’~shisto~ is desc~bed in Jacksoq op. cit., pp. 27-57. GA’”s ~stitutio~ w~esses and approaches for f- thelll me diSCUSSd in John

H. Jacksou Restructuring the GAi’TSystem (New York, NY: Council on Foreign Relations Press, 1990).
Chapter 2-Issues and Institutional Players ● 23

Under GATT'S discipline,24 import tariffs (or

taxes levied on imports) have been lowered through

several rounds of tariff reductions.25 Use of quotas

(restrictions on the amount of a particular good that

could be imported or exported) has been curtailed in

principle, although there are some exceptions. Other

kinds of “nontariff barriers” have been harder to

address, in part because they often involve regulations that serve legitimate nontrade functions such as

environmental protection, health, and safety.26

Many Uruguay Round participants realize that

GATT needs to address its effect on environment as

well as the impact of environmental policy for trade.

In particular, the tuna/dolphin case resulting from

the MarineMammal Protection Act has highlighted

the fact that certain GATT provisions could conflict

with measures taken for environmental protection.

Some GATT provisions pertinent to environmental

concerns are described in the annex to this chapter.

Some who believe it impractical or unwise to inject

environmental discussions into the heavily burdened

Uruguay Round have stated that environment should

be a top priority of a post-Uruguay GATT.

GATT has taken some steps, however. The GATT

Council (the body of member countries’ permanent

representatives) debated trade/environment issues in

May 1991. According to the GATT Secretariat’s

description of the debate,27 the members agreed on

several points (e.g., GATT’s proper role was to

promote liberal trade and not to set environmental

policy or standards; international environmental

agreements were the best way to address international environmental problems; trade measures

should be used only as necessary and not as a

substitute for direct environmental policies; and

“trade measures will not, in general, pose practical

difficulties under the GATT as long as they reflect

the necessary degree28 of multilateral consensus’ ‘).

The GATT Secretariat also reported disagreement

over such questions as whether GATT should adopt

a policy (such as the Polluter Pays Principle29) that

environmental costs should be internalized; how

GATT should treat issues concerning processes and

production methods; how GATT should address

possible conflicts with trade measures in environmental agreements; and whether GATT’s rules

properly balance trade and environmental interests.

GATT has activated its Group on Environmental

Measures and International Trade, at the instigation

of the European Free Trade Association. This

working group was created in 1971, shortly before

the first United Nations conference on the environment in Stockholm, but was never convened until the

fall of 1991. It is considering:

trade provisions contained in existing multilateral environmental agreements (e.g., the Montreal Protocol, CITES, and the Basel Convention) vis-a-vis GATT principles and provisions;

multilateral transparency (i.e., openness and

predictability) of national environmental regulations likely to have trade effects; and

trade effects of new packaging and labeling

requirements aimed at protecting the environment.30

Another GATT group has been working on the

export of domestically prohibited goods and other

hazardous substances.31The chairman of the group

has presented the proposed text of a draft Decision

on Products Banned or Severely Restricted in the

~ GATT provides an impo~t check on ti~vid~ Mtiom’ behavior. Sometimes a nation could benefit itself at Other XMiOm’ expeme by erec~

trade barriers, especially barriers to the importation of goods. Barriers erected by one mtion could provoke retaliatory barriers by other mtions, making

all nations worse off than they would be without the barriers. (GATT does not now cover services, but amendments under consideration in the Uruguay

Round would change that.)

~ JacksoU The World Trading System, Op. CiL, p. 53.

26 E-pies of non- b~em ~ Othm com~es, and U,S, attempts to remove ~e~ we @ven h competing &OrlO~”eS, op. Cit., pp. 125-138.

27 GA1’T Secretfiat, “GATT Activity on Trade and the Environment” mi.meo, n.d., n.p.

28 ~s ~o~d refer t. GA~$s waver process, w~ch Mows w~vem of GA~ rqufiements if approved by a m@r@ of GA~ members and

two-thirds of those voting.

29 me pollUter Pays ~ciple is &S~~~ed ~ tie Section of fis c~pter on the org~sation for fionofic Co-operation and Development.

30 fic~dEgl~ Couselor, Tm~c~ B~ers to Tmde ~d Envfionment Divisiop GA~ secre~~ personal COllUIllllliCdO~ ~. 2, 1992; SC%

also Focus (GAIT Newsletter), No. 85, October 1991, p. 1.

31 ~s ~oup was setup fiJ~y 1989, following sever~ years of discussions in GATT’s regular workprognum Efforts by seve~ develop~gco~~es

to include the subject in the Uruguay Round discussions did not carry. For a description, see General Agreement on Tariffs and Trade, Trade and the

Environment: Factual Note by the GA7T Secretariat (Geneva: General Agreement on Tariffs and Trade, February 1992).
24 . Trade and Environment: Conflicts and opportunities

Domestic Market.32 The proposed text would establish notification procedures for export of all products

domestically banned or severely restricted because

of a determin ation that the product would have a

serious, direct danger to human, animal or plant life

or the environment in its territory. While the text has

been generally accepted by most members, the

working group has yet to complete its task, as one

member, the United States, has suggested modifications to the draft text. The United States wants to put

certain products outside the scope of the decision,

and also wants the instrument to be a code (to be

acceded to by individual countries, see the annex to

this chapter) rather than a decision applying to all

contracting parties.33

In February, 1992, the GATT Secretariat (which

cannot speak for GATT’s membership) released a

trade and environment analysis put forth for consideration by UNCED.34

The report offers several suggestions for making

environmental policy consistent with GATT. It

suggests that it is ‘‘no longer possible for a country

to create an appropriate environmental policy entirely on its own.” It calls for “multilateral rules to

guide countries in formulating their own environmental policies and in responding to domestic

complaints about the impact of their own and other

countries’ policies on international competitiveness . It also indicates that a dispute settlement

procedure is needed to back up the rules (if current

procedures are not adequate). However, the report

stops short of suggesting a specific institution to

perform this function.

The GATT report also strongly decried unilateral

use of trade sanctions by individual countries to

‘‘dictate changes in environmental policies of other

nations. Instead, it says, a multilateral solution

should be sought. The GATT report has less to say

about the possibility that trade provisions of an

international environmental agreement like the Montreal Protocol might be found inconsistent with

GATT. It does note, however:

[F]rom an institutional standpoint, there is a need

for a careful examination of existing rules to be

certain they do not hinder multilateral efforts to deal

with environmental problems.

The report also notes that broad-based multilateral

agreements could have enough support to get a

GATT waiver (requiring two-thirds of those voting

and a majority of the total GATT membership).

Environmental Issues and the Dunkel Draft

Although environment has not been a focus, the

Uruguay Round contains measures that could affect

the environment. In the years since the Round began,

major changes to GATT were proposed and debated,

but by late 1991 negotiations were at an impasse. To

break this impasse, GATT’s Director General Arthur

Dunkel submitted a‘ ‘draft final’ set of amendments

for consideration (called the Dunkel draft) in December 1991.35 In January, 1992 GATT’s members

agreed to use the Dunkel draft as a framework for

negotiations.

The Dunkel draft, if adopted, would address some

patterns of production and trade in ways that could

be environmentally preferable to the current regime.

For example, the draft would limit the use of

agricultural subsidies, which contribute to overuse

of pesticides and other activities that tend to cause

environmental problems in some developed countries (see ch. 3).36 The draft would also exempt

certain subsidies for land conservation and agricultural R&D (including environmental R&D related to

agriculture). 37 

32 (4 Nigefia ~St. B~~& Deadlock in Domestically-prohibited ~oducts ‘“* Znside U.S. Trude, Aug. 16, 1991. This article contains the

ch- ’ s report, dated July 2, 1991, which includes the proposed text and the United States’ proposed modifications.

33 mid.

34 GA~ seme~~ ~$Trade ad fiv~omen~” advance copy, releas~ Feb. 12, 1992. The ~ysis will be published as part of the GATT

Secretariat’s annual report International Trude.

35 GA~Trade Negotiatio~ committee, ‘‘DraftFinal Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations,” GA~

Document MTN.TNC/W/FA, Dec. 20, 1991 @ereiMft% “Dunkel draft”]. The name “Dunkel draft” is somewhat a misnomer because the draft’s

provisions had to a very large extent been negotiated and agreed to by GATT parties before the impasse.

36 See D~el &~t, p. L. zo (paragraph 8). However, as disc~s~~Ch< ‘3, it is dfilc~tto gener~~e about be environmental tieCtS Of pdCUkW

trade flows, and particular changes in trade rules; in the case mentioned above, one

would also have to take into account practices of developing countries.

37 D~el &~, pp. L. z() (yagraph 8), L. 28, L. 13 (paragraphs 1, z(i), L. 17 (paragraph 10).
Chapter 2-Issues and Institutional Players ● 25

Other aspects of the Dunkel draft have prompted

38 For example, concern in environmental quarters.

the draft does not attempt to address GATT’s

potential to prohibit trade restrictions based on

processes used abroad; such trade restrictions might

at times be necessary or desirable to achieve

environmental goals (see ch. 3), but, if challenged,

might be found to violate the current GATT. Nor

would the draft establish routine channels for

communication and participation by environmental

groups and other NGOs (see ch. 5 and the annex to

this chapter). Also, some of the draft’s provisions

might be interpreted at times to require a heavy

burden of proof in order to justify a country’s

technical regulations, including health, safety, and

environmental regulations (see ch. 4).

GATT’s dispute resolution process would be

strengthened. This would substantially enhance

GATT’s ability to achieve its goals of liberal trade.

However, it might magnify the problems mentioned

above by making it harder for nations to stave off

adverse GATT rulings if their environmental laws

are challenged and potentially more costly to disregard such rulings once made (see the annex to this

chapter).

The Dunkel draft would transform GATT into a

Multilateral Trading Organization (MTO), giving it

an institutional presence more comparable to the

International Trade Organization proposed in 1946.

This would not necessarily have any particular effect

on the environment. However, some environmental

groups feel that environmental concerns ought to be

addressed when sweeping changes, an expanded

agenda, and a stronger institutional footing for

GATT are proposed. Some environmental groups

object that the preamble to the agreement establishing an MTO does not clearly state the goal of

sustainable development,39 and that the agreement

mentions the need for GATT to cooperate with the

International Monetary Fund and the World Bank

but not specifically with any international environmental organizations.40

It does not appear that these various provisions or

omissions were intended or expected to exacerbate

existing environmental concerns. However, for reasons such as those given above, U.S. environmental

groups have mounted opposition to the Dunkel

text. 41 GATT’s apparent inattention to environmental issues since 1972 may have added to the

difficulty of successfully concluding the Uruguay

Round.

The Organisation for Economic

Co-operation and Development

OECD does not have the authority to change

GATT or other trade and environmental agreements,

but it does offer a forum for industrialized countries

to discuss the issues. The 24 industrialized countries

that comprise OECD together account for threefourths of world trade.

In 1991, OECD initiated a series of member state

discussions on trade and environmental issues.

These discussions are unusual as they are jointly

supported by two OECD directorates, the Trade

Directorate and the Environment Directorate, and

member country trade and environmental agencies

are meeting to develop national positions. This

process, in theory, could produce guidelines for

38 TMS papa does not &ScuSS all pe~ent Dunkel draft’s provisions in this regard. Additional provisions are discussed in Steve charnoviti, “Trade

Negotiations and the Environment,” Internutiona2 Environmental Reporter, vol. 15, No. 5, Mar. 11, 1992, pp. 144-148 (Bureau of National Affairs,

Washington DC).

w me pre~lerefers to fougom. Thr=rehte to economic growth with no mention of the environment: “raising standards of living,” “e~d

full employment and a large and steadily growing volume of real income and effective deman~” and “expanding the production and trade in goods

and services.” The four@ which might be inteqxeted to imply a goal of sustainable development is “developing the optimal use of the resources of

the world at sustainable levels.” Dunkel draft Annex IV, p. 91. The concept of sustainable development is discussed inch. 3.

40 D~el~~~ex IV, p. 93, ~cle ~, para~aph6.ArticleIv ~o~dpermit the MT() to ~~~tand cooperatewi~“intergovelTUneIltdbdieS

and agencies [with] related responsibilities” and with “non-governmental organizations concerned with matters within the scope of the M’10.”

AI ~~~v~men~@oUps Urge Congess, Administration To Reject Draft GAn Text,” Znside U.S. Trade, vol. 10, No. 3, Jan. 17,1992, pp. 11-13

(contains full text of a letter signed by 28 environmental and consumer groups); Jay D. Hair, Presiden~ National Wildlife Federatio~ letter to Carla A.

HiUs, U.S. Trade Representative, Jan. 8, 1992; Justin Ward, Senior Resource Specialis~ and Al Meyerhoff, Senior Attorney, Natural Resources Defense

Council, letter to Carla A. Hills, U.S. Trade Representative, Jan. 13, 1992; Community Nutrition Institute, “MemorandumonHealth and Environmental

Protection Standards Incorporated in the Dunkel Text of the Uruguay Round Negotiations To Revise the General Agreement on Tariffs and Trade,”

Feb. 19, 1992; lori Wallac& Staff Attorney, Public Citizen, memorandum to “Environmental, Health and Consumer Advocates” titled “The Dec. 20,

1991 Uruguay Round ‘Final Act’ Text Is Worse Than Expected on Environmental, Health and Consumer Issues,” dated Dec. 26, 1991. Consumers

Union, in discussing several provisions of the Dunkel draf~ stated that it did not believe the draft would be interpreted in certain ways feared by the

environmental groups; nevertheless, it stated that c~lcation of the text would be desirable. Mark Silbergeld, Director, Washington Office, Consumers

Union, letter to Carla A. Hills, U.S. Trade Representative, Jan. 31, 1992.

321-520 0 - 92 - 5
26 ● Trade and Environment: Conflicts and Opportunities

application by OECD members which address both

trade and environmental policy concerns. OECD is

attempting to consider developing country concerns

in its discussions. The absence of developing

countries from OECD membership, however, is a

major limitation that is unlikely to be overcome by

the observer status given to Mexico and a few

Eastern European countries.

OECD has periodically addressed environmental

questions related to sector-specific trade (such as

chemicals). In 1972, OECD published a set of

“Guiding Principles Concerning the International

Economic Aspects of Environmental Policies. ”42

OECD put forward four principles:

1.

2.

3.

Polluter Pays Principle: If national authorities

consider a regulation necessary to protect the

environment, then polluters should bear the

costs of satisfying that regulation. (The polluter may pass those costs on to customers.)

The guideline allows exceptions, particularly

for transitions, that do not greatly distort

international trade and investment. As subsequently interpreted,43 the departures might

include government help (in exceptional circumstances) to address socio-economic problems arising from rapid implementation of

stringent pollution controls. Aid to stimulate

experimentation with new pollution-control

technologies and development of new pollutionabatement equipment would not necessarily be

incompatible with the polluter-pays principle.

Harmonization Principle: Governments

should seek to harmonize environmental policies (i.e., make their regulations similar),

unless valid reasons for differences exist.

(Valid reasons would include differences from

country to country of the environment’s capacity to absorb pollution, social priorities, degrees of industrialization, and population density.)

National Treatment and Nondiscrimination

Principle: Environmental measures should follow GATT's principles of national treatment

and nondiscrimination, meaning that they

should apply alike to domestic and foreign

4.

products, and should not discriminate between

imports from different countries, respectively.

Compensating Import Levies and Export Rebates Principle: Countries should not try to

neutralize the economic effect of differences in

environmental policies by means of import

duties and export rebates, or equivalent measures. In other words, if producers in one

country have higher costs of environmental

compliance than producers in a second country, the first country’s government should not

try to neutralize that advantage by extra taxes

on imports or by tax rebates or other subsidies

on exports. (OECD stated that if the first three

principles are followed, there should be no

need for import levies or export rebates.)

The ongoing joint discussions supported by the

Trade Directorate and Environment Directorate aim

at further examination of trade/environment interactions. While it would appear that the four guiding

principles are still relevant, some new areas of

concern are being addressed at the meetings with the

possibility that guidelines will be developed in time.

Among the subjects under consideration:

●

●

●

Trade Measures in International Environmental

Agreements: Rules could be needed to guide

the effective and least trade-distorting use of

trade measures in the context of environmental

accords made at the international level.

Effects of Trade Policies on the Environment:

Recommendations could be needed for increasing the environmental sensitivity of trade

policies and trade agreements, and for ensuring

that their environmental effects are adequately

taken into account.

Application to the Developing Countries: The

extent to which the OECD Guiding Principles

might be applied to help internalize environmental costs and mitigate potential trade problems in developing countries may need to be

reviewed.

At one time, the United States hoped that recommended guidelines might be developed in time for

consideration at OECD’s May 1992 Ministerial

meeting. While a progress report will be made at this

42 Rw~mm~~&ti~~~@tCd ~yz(j, 1972, C(72)12g. ~ese pficiples were repfit~ ~ddiscussd inorganisationf orfiOnOmiC Co-operation and

Development, The Polluter Pays Principle: D@”nition, Analysis, Implementation (Paris, France: 1975).

43 ‘t~e ~plemen~tion of the Polluter-Pays principle, ” recommendation adopted Nov. 14, 1974, C(74)223, reported in OECD, The Polluter Pays

Principle, op. cit.
Chapter 2-Issues and Institutional Players ● 27

meeting, any specific guidelines will likely be

delayed at least until the June 1993 Ministerial.

United Nations

The United Nations is broadly concerned with

both environment and economic development. The

United Nations Environment Program, United Nations Development Program, the United Nations

Industrial Development Organization and the United

Nations Conference on Trade and Development are

major focal points for these issues; many specialized

UN agencies also address specific environmental

and/or development concerns. These agencies and

functions maybe reorganized or restructured in the

near future. Possible UN restructuring in general is

under consideration by the new UN Secretary

General. Institutional arrangements are also expected to be a key issue at the United Nations

Conference on Environment and Development, which

will take place in Rio de Janeiro in June 1992.44

UNCED is intended to provide an agenda for

cooperation between the developed and developing

world for addressing environmental needs within a

development context. The conference will examine

ways to strengthen international cooperation for

environmental management and protection. A large

number of issues are under consideration (see box

2-B for a partial list of topics included in UNCED’s

wide ranging agenda, called Agenda 21).

Trade and environment interactions are considered cross-cutting concerns, and are addressed in

some individual agenda items. Delegates to the final

preparatory meeting for UNCED agreed on several

objectives and activities intended to make trade and

environment mutually supportive.45 The findings drew

in part on a February 1992 session of UNCTAD

which reviewed environment/trade interactions

within the context of sustainable development. (See

ch. 5 and box 5-A for further discussion.)

Much of the preparatory debate for UNCED has

focused on what role the developed world should

play in helping the developing countries meet their

development needs in an environmentally acceptable fashion. A particularly contentious question has

been whether and how the developed countries

should pay additional costs arising from environmental actions agreed to in principle at UNCED.

Financial resources will continue to be the crux of

key issues and discussions at the Rio de Janeiro

meeting. At the third preparatory meeting in the fall

of 1991, a group of developing countries, known as

the Group of 77, proposed a negotiating text calling

for greatly expanded aid from developed countries,

through “new and additional resources” in a separate “green fund’ (see box 3-B). The United States

opposes this approach and favors a process in which

donor countries and multilateral lenders will consider funding for projects and activities identified by

individual countries. At the final preparatory meeting in March 1992, the United States appeared to

soften its previous stance and stated its acceptance

that “new and additional resources” would be

needed for implementing UNCED agenda items.

U.S. Government Efforts To Address Trade

and Environment Issues

A large number of agencies have responsibilities

that touch on environment and trade interactions.

(See table 2-3.) Key agencies include the Office of

the U.S. Trade Representative (USTR), the Environmental Protection Agency (EPA), various agencies

of the Department of Commerce, and the State

Department, which is responsible for negotiating

international environmental agreements. To date,

however, the effort appears to be a “bottom-up”

effort, with little visible guidance from Congress

about the potential goals and objectives of U.S.

policy. Thus, there is a possibility that U.S. positions

will gel out of a largely informal and hidden

interagency process.

Interagency Task Force-Since 1990, an executive branch working group has been developing

information to help formulate U.S. policy, particularly for the OECD discussions.% The USTR chairs

this group. A partial list of other agencies include

44 ~~~a~es~bli~~ by ~G~~~r~ &~~mbly R~ol~tion 4.+228, adopt~ Dec. 22, 1989. Dubbed the ‘ ‘EiWh S-$“ UNCED is timed

to occur on the 20th anniversmy of the 1972 Stockholm Conference on the Human Environment. For discussion, see Susan R. Fletcher, “Earth Summit

Summary: United Nations Conference on Environment and Development (UNCED), Brazil 1992,” Congressional Research Service Repo@ No. 92-374,

April 1992.

45 me ~ener~ fmd@s on envhoment and @ade were includ~ in S=tion 1, c~pter 1, of Agen& 21. See Repmatory COmmitt& for the united

Nations Conference on Environment and Development International Cooperafi”on to Accelerate Sustainable Development in Developing Countries,

andRelated Domestic Policies, A/Conf.151/PC/L.71, New York NY: United Nations General Assembly, March 31, 1992.

46 ~ addition, some ag~cies &ve responsibilities for specific trade ~d environmental ~tters.
28 e Trade a&Environment: Conflicts and opportunities

Box 2-B—United Nations Conference on Environment and Development: Selected Agenda 21 Issues

The United Nations Conference on Environment and Development (UNCED) will take up a wide range of

issues concerned with environment and sustainable development when it meets in Rio de Janeiro in June 1992. Most

of these are part of Agenda 21. Specific action plans in some 29 areas that have been worked out in UNCED

preparatory meetings, some of which are listed below. Separately negotiated conventions on global climate change

and biological diversity may be completed in time for signature, as well.

Social and economic dimensions

● Relationship of international economic policy to sustainable development in developing countries

● Poverty, consumption patterns, demographic dynamics and sustainability

● Health issues

● Human settlements

Conservation and management of resources for development

● Protecting the atmosphere

. Land-resource use

● Forest conservation and use

● Halting the spread of deserts

● Protecting mountain ecosystems

. Meeting agricultural needs with less environmental impact

● Sustaining biological diversity

● Environmentally sound management of biotechnology

. Safeguarding the ocean’s resources

• Protecting and managing freshwater resources

● Safe use of toxic chemicals

● Reducing and controlling toxic wastes

. Solid waste and sewage

● Safe handling and disposal of radioactive waste

Means of implementation

● Making environmentally sound technology available

● Role of science in sustainable development

● Promoting environmental awareness

● Building national capacity for sustainable development

● Regional cooperation on environment and development

Items to be integrated into agenda 21

● Financial resources and mechanisms

. Strengthening institutions for sustainable development

. Survey of international agreements and instruments

SOURCE: Adapted from United Nations information.

EPA (which previously cochaired the group), the

State Department, the Department of Commerce, the

Department of Agriculture, and the Treasury Department. 47 The USTR and EPA cochair the U.S.

delegation to OECD meetings. Recently, two NGO

representatives (one from business and one from

environmental groups) have accompanied the U.S.

delegation to some of the OECD meetings.

In 1991, the task force circulated drafts of a

concept paper on the link between trade and

environmental policy. The paper considered the

relationship between trade policy goals and environmental goals, the effect of environmental regulations

on trade and competitiveness, the impact of trade

rules and trade patterns on the environment, the use

of trade measures for environmental purposes, and

GATT provisions regarding such use of trade

measures. In addition, several draft background

papers on key issues are under preparation as U.S.

contributions to the OECD discussions. These have

47 sti~ o~er ~gencie~ inClu& tie Justice D~p~me@ tie Dep~ment of ~bor, tie Energy Dep~ment, tie Food ~d Dmg Administratio~ ~d me

International Trade Commission.
Chapter 2-Issues and Institutional Players . 29

Table 2-3-Key Federal Agencies With Responsibilities Pertinent to Trade/Environment Policy

U.S. Trade Representative (USTR)

Leads interagency task force on trade/environment

Represents United States at GATT

Cochairs (with EPA) U.S. delegation to trade/environment discussions at OECD

Leads negotiations on North American Free Trade Agreement (NAFTA)

Environmental Protection Agency (EPA)

Participates in interagency trade/environment task force

Cochairs (with USTR) U.S. delegation to trade/environment discussions at OECD

Coordinates with Mexico on U.S.-Mexico border environmental matters

Participates in NAFTA working groups

Receives recommendations from the Trade and Environment Committee of the National Advisory Council for Environmental Policy and

Technology

State Department

Leads U.S. delegation at most international environmental negotiations

Participates in interagency trade/environment task force

Commerce Department

Participates in interagency trade/environment task force

Has administrative units with specialized responsibility, including:

International Trade Administration -

National Oceanic and Atmospheric Administration

Other departments and agencies with specific missions

Agriculture Department

Treasury Department

Justice Department

Labor Department

Interior Department

Energy Department

Food and Drug Administration

U.S. International Trade Commission

as relevant:

Specialized export promotion and foreign assistance agencies:

U.S. Agency for International Development (US AID)

Export-import Bank of the United States (Eximbank)

Overseas Private Investment Corporation (OPIC)

U.S. Trade and Development Program (US TDP)

SOURCE: Office of Technology Assessment, 1992.

been circulated among the task force, although only EPA also has some input into the NAFTA

two had been released as of March 20, 1992.48 negotiations process, through its participation in the

interagency work groups set up for NAFTA. The

Activities Related to the North American Free

Trade Agreement—The USTR has appointed an

agency monitors meetings in all work groups, but is

especially active in seven (standards, dispute resoluenvironmentalist to serve on the top-level Advisory tion, investments, automotive, agriculture, energy,

Committee on Trade Policy and Negotiations as well and land transportation).

as a total of five environmentalists to serve on five

sectoral trade policy committees.49 These commit- As mentioned, U.S.-Mexican environmental istees have broader responsibility than NAFTA. sues for the most part are being addressed on a

USTR also coordinated the previously mentioned “parallel” track with the NAFTA negotiations.

review of U.S.-Mexican environmental issues. EPA is the lead agency for most parallel track

4S ~~ ~0 ~~l~~~~d ~~P~r~ ~~ ~~~d “T~& ~ovisiom ~ ~te~tio~ Environment@ &eernents,” dated Feb. 7, 1992, ~d “HllMIO*tiO~”

dated Mar. 9, 1992. The dates indicated are those of submission to OECD. Each paper contains a disclaimer that it “does not neeessarilyrepresent the

views of the United States Government and is subjeet to further review. ’ The papers were submitted to OECD with little public debate, except that the

second paper was released shortly before submittal for comment by some environmental and business groups. Nine other background papers are under

preparation. They dealwithsuchtopics as “guidingprinciples to increase the environmental sensitivity of trade policies,’ ‘guiding principles to increase

the trade sensitivity of environmental policies,” “ effects of environmental policies on competitiveness, ” and “criteria for using trade measures to

achieve environmental objectives. ”

49 ~ese me tie advi~ow co~~ees on ~tergovemen~ policy, se~i~s policy, investment pcIfiq, industry policjI, and agricultural pOliCy. SOme

environmentalists see this as slender representation given the far more extensive industry representation.
30 ● Trade and Environment: Conflicts and Opportunities

activities on the environment. It was responsible for

preparation of the integrated border environmental

plan in conjunction with the Mexican environment

agency, SEDUE, and also played an important role

in the environmental review coordinated by USTR.

Other Relevant Federal Activities—The EPA

Administrator has asked the National Advisory

Council for Environmental Policy and Technology

(NACEPT) to make recommendations concerning

the interaction of trade and environment. (Members

of the Council include representatives from industry,

environmental groups, and academia.) NACEPT has

a Committee on Trade and Environment, with

working groups on GATT, Industrialized Countries/

OECD, and Western Hemisphere. The GATT group

is considering worldwide issues and whether and

how GATT should be amended. The Industrialized

Country/OECD group is examining such issues as

“sound science” as the basis for standards and the

effects of environmental regulations on industrial

competitiveness —issues of special concern to developed countries. The Western Hemisphere group

is considering NAFTA and the possible free trade

negotiations that might follow from the Enterprise

for the Americas Initiative, and is particularly

concerned with developing country issues. The

NACEPT meetings are open to the public, thus

contributing to broader public debate about these

issues .50

Several agencies provide environmental assistance of different kinds to developing countries. The

Agency for International Development (AID), the

primary U.S. foreign assistance agency, provides

substantial financial and technical support related to

the environment. It is the lead agency of the

Administration’s recently announced U.S.-Asia Environmental Partnership (US-AEP). US-AEP involves over 20 Federal agencies and seeks to

promote the use of U.S. expertise and technology for

solving environmental problems in Asia. AID also

supports energy efficiency projects. Several other

agencies, including the Environmental Protection

Agency (EPA) and the Department of Energy (DOE)

provide technical and project assistance to developing and restructuring economies. DOE leads the

interagency Committee on Renewable Energy Commerce and Trade while EPA is assembling a

directory of U.S. environmental firms. EPA also

supports the recently inaugurated U.S. Environmental Training Institute which will bring developing country business executives and officials to the

United States for professional and technical training

by the private sector.

Other federal programs facilitate U.S. exports of

environmental technologies and services. (See app.

D.) The Trade and Development Program funds

project feasibility studies. The Department of Commerce provides export assistance and organizes

trade shows, sometimes in cooperation with EPA

and AID. The Overseas Private Investment Corporation (OPIC), the Export-Import Bank, and the Small

Business Administration provide support for U.S.

exporters and investors that can involve environmental projects. OPIC provides information, investment missions, project financing, and insurance

programs for U.S. investors in developing, Eastern

European, and former Soviet countries. In addition

to its general and regional funds, a new Environment

Investment Fund has been started. The ExportImport Bank provides credit and insurance for

exporters of U.S. goods, including environmental

goods.

some ~de ad ~nvfioment ~o~ttee ~lam t. tie its fit~ rmommendations to tie Administrator in Apfl 1992, followd by timstidy

leading to more detailed recommendations.
Chapter 2 Annex

Some GATT Provisions and Principles

Pertinent to Environmental Matters

This annex discusses some GATT provisions and

principles relevant to environmental issues. It assumes a knowledge of the background material

about GATT in the body of this chapter.

Environmental Regulations as Nontariff

Barriers; National Treatment and

Most-Favored-Nation Rules

GATT addresses both tariff and nontariff barriers.

Nontariff barriers include any domestic laws, customs, or practices that hinder imports from competing with domestic products.l This can include

health, safety, and environmental regulations concerning goods (e.g., automobile safety, suitability of

beverage bottles for reuse, food and drug safety). At

the least, it is a burden for a foreign manufacturer to

inform itself about local standards, to comply, and to

prove to the local authorities’ satisfaction that it has

complied. At worst, the laws could be deliberately

slanted to make it difficult for foreign manufacturers

to comply. For example, a country could demand

certain technical approaches while aware that other

approaches, already in use by foreign manufacturers,

would do the job as well; and a country could refuse

to accept the results of tests in a foreign laboratory

even though it believed those results to be reliable.

International disputes can arise when one nation’s

regulations strike another nation as unduly restricting trade.

From its beginning in 1947, GATT’ contained

provisions designed to reduce nontariff barriers.

These include the ‘‘national treatment” rule in

Article III that once goods have been imported from

another member country, they must be treated by the

law no less favorably than like goods produced

domestically. (This means, for example, that taxes

could not be higher for imported goods, nor regulations sticter.) Another provision is the ‘most-favorednation’ rule in Article I, by which goods imported

from or exported to one member country must be

treated no worse than like goods imported from or

exported to another member country. A third provision is Article XI, which (with certain exceptions)

prohibits any bans or restrictions on imports or

exports other than tariffs. These provisions prevent

explicit discrimination against foreign goods, but

domestic regulations could still impede imports in

more subtle ways. These subtle barriers have increased in importance and attracted more scrutiny as

tariffs have been reduced and quotas mostly eliminated.

Such subtle barriers were addressed in 1979 in

GATT’s Agreement on Technical Barriers to Trade,

popularly called the Standards Code.2The Standards

Code sets out procedures and principles to avoid

undue trade effects of technical regulations. For

example, nations are to consult with each other as

they formulate technical standards; to follow international standards when possible; to accept foreign

test results when possible; and to favor standards

that merely mandate ultimate performance over

standards requiring that such performance be achieved

by certain technical means. The Standards Code also

requires a member country to notify other members,

give a justification, and (except in emergencies)

allow time for other countries to raise questions

before adopting a technical standard not agreed to

internationally. The Code recognizes that one justifi

cation for such standards could be ‘‘protection for

human health or safety, animal or plant life or health,

or the environment.‘‘3 From 1980 through 1990,211

notifications under the code explicitly listed environmental protection as a justification for the

standard; another 167 appear to concern environmental issues, but the justification was framed in

terms such as public heath, human safety, and

1 E-@ of rlon~b~erS ~ ~~er ~m~eS, and U.S. attempts to remove ~e~ are given in competing JZCOnOrn@ op. Cit., pp. 125-138.

2 Several GA~ ~ode~ ~me negotiat~ d@ tie Tokyo Ro~d, which conclud~ in 19790 A code is an optioti supplementary agreement effeCtiVe

onlyamongcountries that have signed it. The two codes discussed in this chapter, the Standards Code and Subsidies Code, have been signed by the United

States and its major trading partners.

s Standards Code, paragraph 2.2.

-31–
32 ● Trade and Environment: Conflicts and Opportunities

consumer information.4 The Standards Code provides for resolution of disputes concerning standards. While no cases have been formally resolved

under the Standards Code, the United States did try

to challenge an EC regulation concerning beef from

cattle fed certain hormones (see app. A).

While it provides helpful procedures and principles, the Standards Code leaves considerable play

for nations to erect trade barriers under the guise of

health, safety, and environmental regulations. Provisions proposed in the Uruguay Round could go

further toward reducing the potential for trade

barriers, though some provisions could also potentially impede legitimate environmental regulations.

How to permit legitimate domestic regulations but

avoid trade barriers is a difficult problem. This

problem is discussed in chapter 4.

Subsidies

Subsidies, which are benefits a government confers on particular firms or industries, are another

form of trade barrier. Subsidies can enable companies to undersell foreign goods in both the home

market and export markets. (In the latter case

subsidies are not a trade barrier, since they induce

rather than inhibit trade. However, they can distort

trade patterns from what they would be without

government intervention.) When countries import

subsidized goods, GATT permits them under certain

circumstances to levy special additional tariffs,

called countervailing duties, to compensate for the

subsidies. 5

Subsidies to help firms comply with environmental regulations or otherwise to improve environmental performance might include support for environmental research and development (R&D), tax

incentives for purchase of pollution control equipment, and technical assistance for manufacturers.

Amendments proposed in the Uruguay Round would

exempt certain R&D support from the application of

countervailing duties.6 (The amendments deal with

R&D generally and are not aimed specifically at

environmental R&D.) Some have suggested that lax

environmental standards are a form of subsidy and

should therefore be subject to countervailing duties;

this is discussed in chapter 4.

“General Exceptions” (Article XX)

GATT’s Article XX, titled “General Exceptions,” permits measures that would otherwise

violate GATT if done for one of 10 enumerated

reasons, provided that the measures ‘are not applied

in a reamer which would constitute a means of

arbitrary or unjustifiable discrimination between

countries where the same conditions prevail, or a

disguised restriction on international trade.’ Article

XX might be invoked in cases, such as the tuna/

dolphin case, in which a nation restricts imports of

goods based on the process used in producing the

good. Such restrictions might be deemed to violate

GATT unless Article XX applies.7 While Article XX

does not explicitly mention the environment, it does

include measures:

A GA” secre~~ ‘Trade arid Env~onme@’ op. cit., p. 22. This source breaks these notiilcations down by the environmental areas covered, which

include air pollutio~ noise, water pollutio~ several categories of hazardous substances, waste recycling and disposal, transport of dangerous products,

radiation, conservation of endangered species, and energy conservation.

5 GATT Article VI. In addition to permitting countervailing duties as a response to subsidies, GA~ normally prohibits export subsidies (i.e.,

subsidies paid only when goods are exported) on manufactured goods. Amendments under consideration would prohibit subsidies in some additional

circumstances. GA’IT Trade Negotiations Committee, ‘‘Draft Final Act Embodying the Results of the Uruguay Round of Multilateral Trade

Negotiations,” GATT Document MTN.TNC/W/FA, Dec. 20, 1991 @hereinafter, “Dunkel draft”], pp. 1.3-1.8.

s D@el draft pp. 1.9-1.10.

7 It is dfiic~t t. tefl how GA~ would be ~tewreted ~ p~wlw ~ses. myp~inentissues have yet to be ad&essedin decided cases. However,

some possible GATT problems can be identiiled. Import restrictions based on the process used could be deemed to violate Article XI, which generally

prohibita import restrictions other than tariffs (which under Article II may not exceed agreed levels). Under GATT’s Note to Article Ill, import

restrictions, when matched by identical restrictions on domestic products, maybe treated as internal regulations not subject to Article XI. However, the

panel’s report in the tuna/dolphin case raises doubt as to whether this Note applies to restrictions based on the process by which a product was made,

rather tban the mture of the product itself. See “United States: Restrictions on Imports of llma,” op. cit., paragraph 5.15. (While not yet adopted by

the GATT Council, this report is an indication of how future panels might reason.)

Even if the Note to Article III were found to apply to process-based restrictions, so that Article XI would not apply when the same process-based

restrictions were used for domestic and imported products, the restrictions might be deemed to violate the mtional treatment rule of Article III. That

rule requires that imported products “be accorded treatment no less favorable than that accorded to like products of national origin” by all internal

regulations (emphasis added). It could be argued that products that are physically indistinguishable, even though they were made differently, are “like

products.” In this case, to restrict certain foreign items made by one process more than the same domestic products made by another process would appear

to violate the national treatment rule. Similarly, to restrict products from one foreign country made under one process more than products from another

foreign country made under a different process would appear to violate the ‘ ‘most-favored-mtion” rule of Article I.
Chapter 2 Annex-Some GATT Provisions and Principles Pertinent to Environmental Matters ● 33

(b) necessary to protect human, animal or plant life

or health;

. . . .

(g) relating to the conservation of exhaustible natural

resources if such measures are made effective in

conjunction with restrictions on domestic production or consumption.

These two provisions would appear to include many

environmental concerns. Members may act on their

own based on these exceptions; if another country

complains and Article XX is raised in defense, a

GATT panel will hear arguments on whether the

exceptions apply.

Dispute Resolution Under GATT

GATT provides for resolution of disputes arising

under its rules.8 Normally, disputes that cannot be

solved by consultation and mediation are heard by a

three-member panel of experts appointed by the

GATT Council. From GATT’s inception in 1947

through part of 1990, 79 disputes progressed to the

point of a decision made by a GATT panel and

adopted by the GATT Council.9 Of these, several

concerned environmental or closely related health

and safety issues (see app. A). The frequency of

environment-related disputes could increase as environmental concerns become more pressing.

A panel normally does its work in 6 months, and

the GATT Council normally considers the panel’s

recommendation within about 10 months after the

dispute was first brought to GATT. Under current

practice, any country, including the losing party, can

delay indefinitely the GATT Council’s adoption of

the panel’s report as an official GATT decision.

While this permits countries to escape the legal

effect of adverse panel reports, the pressure of

international opinion often induces countries to

eventually allow their adoption by the Council.

Changes being considered in the Uruguay Round

would remove a country’s power to block unfavorable panel reports. The Dunkel draft provides for

appellate review of a panel decision; but the

appellate decision, or the panel’s decision if no

appeal is filed, would become an official GATT

decision unless there were unanimous consent to

reject the decision.10

If the Council adopts a decision finding a GATT

violation, the offending country is supposed to

change its practice according to the panel’s recommendations. However, GATT cannot force any

changes in a country’s domestic laws. If the

offending country does not change its practice, it is

supposed to negotiate satisfactory compensation to

give to the countries adversely affected by the

violation (normally, reduced tariffs on some goods).

However, GATT cannot compel this either. If the

offending country neither changes its practice nor

offers acceptable compensation, the GATT Council

can authorize the affected countries to retaliate,

normally by levying punitive tariffs on some of the

offending country’s goods. However, the Council’s

authorization of retaliation could be vetoed by the

offending country. As with adoption of panel

reports, it is political pressure, rather than legal

compulsion, that currently enforces GATT rulings.

The Dunkel draft now under consideration would

make it easier to retaliate, allowing retaliation as a

matter of right. Also, the retaliating country could

choose to retaliate by suspending any type of

obligation under GATT; for example, if the offending country erected a barrier to the import of goods,

the retaliating country might restrict imports from

the offending country of goods or services, or might

refuse to honor that country’s citizens’ intellectual

property rights. This would make retaliation a more

versatile tool for ultimately inducing a country to

comply with GATT rules. The original panel or an

arbitrator appointed by the Director-General would

be assigned if needed to set the authorized retaliation

at a level commensurate with the magnitude of the

offense. ll

Dispute resolution under GATT is conducted in

secret and with restricted participation. The panel

normally receives oral and written submissions from

governments only; nongovernmental organizations

8 Some GATT Codes, including those for Standards and Subsidies, provide separate dispute resolution procedures.

$’ These cases are reported in Pierre Pescatore et al., Handbook of GA1’T Dispute Settlement (Ardsley-on-Hudso% NY: Transitional Juris

Publications, 1991).

10 D~el draft, pp. S.12-S.14, &tiCles 14-15.

11 D~el &-fi, p. s.17, &&-..e 20. Trade fi go@ and s~ices, and intellec~ property, are W Wvered in the Dunkel draft. See Dunkel dl%tf~

“Agreement Establishing the Multilateral Trade Organization (Annex IV),’ spedfically: p. 92, Article II, paragraph 1, and p. 100, Annexes 1-3 to

Annex IV.

321-520 0 - 92 - 6
34 ● Trade and Environment: Conflicts and Opportunities

(NGOs) cannot directly participate. A government, involving their interests. Also, the governments’

if it so chooses, can consult with NGOs in preparing submissions are normally kept secret, as is the

its case and can present material supplied by NGOs. panel’s recommendation, unless and until it is

However, the current rules give no guarantee that adopted by GAIT Council.12 This secrecy is a point

environmental groups or other NGOs can present of contention with U.S. environmentalists, who

their views, even indirectly, on trade disputes strongly favor public debate.
Chapter 3

Role of Trade Measures

in Environmental Policy
Chapter 3

Role of Trade Measures in Environmental Policy

Perceived conflicts between efforts to liberalize

trade and to protect the environment are driving

discussion of trade/environment issues. Liberalization of trade is not a goal in and of itself but rather

a means to promote prosperity through improved

economic efficiency and development. As this

chapter makes clear, the degree of compatibility

between economic development or growth and

environmental protection depends on the specific

context. Partly for this reason, it is no simple matter

to unravel the many factors that account for the

environmental effects of different trade patterns or

policies. Generalizations implying a necessary relationship between environment and freer trade—

whether positive or negative-are often oversimplifications that policymakers should view with caution.

Economic development and environmental protection are both needed for improved human wellbeing. Ultimately, neglect of either goal-development or environmental protection-could impair

the other. Environmental degradation diminishes the

capacity of the planet to sustain economic development; securing a livable environment for a human

population that could double by the mid-21st

century requires economic development, including

growth and technological change.l The twin aspirations for long-term economic and environmental

improvement are encompassed in the term sustainable development. Although given various definitions, it has been described as development that:

. . . meets the needs and aspirations of the present

without compromising the ability of future generations to meet their own needs.2

While the concept of sustainable development

now receives much attention, it is difficult to

translate into clear courses of action. However, if

sustainable development is to be achieved-if it can

be achieved-economic growth and development

need to be channeled in environmentally responsible

directions. By setting environmental requirements

and imposing costs on polluters, governments can

guide development so as to diminish environmental

degradation. Under these circumstances, growth can

produce resources to support development and use

of environmentally preferable technologies that can

move society closer to sustainability.

The concerns of environmentalists and liberal

trade advocates intersect in their attitudes toward

externalities. Pollution and environmental degradation are negative externalities-costs not borne by

their creators but placed on third parties and society

as a whole. Because polluters do not generally bear

these environmental costs, they have little incentive

to minimize them. Therefore, from an environmental

perspective, it is desirable to require or encourage

polluters to internalize these costs—through regulations, economic incentives, or legal and social action

aimed at preventing, repairing, or compensating for

environmental damage.3

From the trade perspective, externalities are one

of a number of market failures or distortions that

diminish the welfare-maximizing force that free

markets and free trade theoretically can deliver.

Although it is unlikely that the General Agreement

on Tariffs and Trade (GATT) would regard weak

environmental regulation as a form of subsidy,

environmental costs not reflected in the price of

traded goods are, in principle, similar to explicit

subsidies as distorters of trade. In the cases of both

explicit subsidy and implicit subsidy for environmental and social costs, society bears some of the

cost of production that the producing company

would bear had it paid the full cost in a perfect

market. In each case, that company might accrue

cost advantages over rivals that do pay the full cost.

1 George Heatom Robert Repetto, and Rodney Sob@ Transjlorming Technology: An Agenalz for Environmentally Sustainable Growth in the 21st

Century (Washington DC: World Resources Institute, April 1991).

Zworld Cotission on Env~nment ad Development, Our common Future @Jew York ~: Ofiord universi~ Ress, 1987), p. 43. The EpO~

commonly called the Bnmdtland Repo~ includes what it calls two key concepts within the term: 1) “the concept of ‘needs,’ in particular the essential

needs of the world’s poor, to which overriding priority should be give~” and 2) “the idea of limitations imposed by the state of technology and social

organization on the environment’s ability to meet present and future needs.’

s As generally used in this paper, the term “regulation” encompasses not only traditional “command and control” types of regulations but also

“market-based” instruments. The use of market mechanisms and other eeonomic incentives in environmental regulations in some cases has the potential

to achieve comparable or better environmental results in a more economically efficient manner than traditional regulation alone.

–37–
38 . Trade and Environment: Conflicts and Opportunities

Advocates of freer trade therefore would favor

eliminating both types of subsidies; in the case of the

environment, this could encourage internalizing the

costs of pollution.

But steps to internalize the costs of pollution are

not always easily taken, as subsequent sections of

this chapter demonstrate. There is a wide range in

environmental capabilities and commitments among

different nations. While freer trade and investment

sometimes produce resources that might be used for

environmental protection, it cannot be assumed that

this will happen in the absence of regulations or

incentives for improved environmental management. If the goals of environmental protection and

economic development are to be made compatible,

economic activity will need to be conducted in ways

that diminish environmental degradation.

At times, trade restrictions may be needed to

achieve environmental ends. However, their usefulness is limited. Usually, the root cause of environmental problems is domestic conduct. While trade

can magnify the effects of such conduct, and trade

restrictions can limit those effects, it is usually

preferable, when possible, to employ other means

(e.g., technical assistance or help with technology

transfer) to encourage countries to adopt domestic

regulations or incentives to effect the needed changes.

Still, there may be circumstances when trade measures are a needed recourse.

This chapter discusses the compatibility of trade

and environmental objectives, the pros and cons of

using trade measures for achieving environmental

objectives, and the special trade/environment challenges that arise with respect to developing nations.

For the purpose of illustration, the chapter draws

upon examples from specific environmental agreements that have trade provisions. Full analysis of

such agreements is beyond the score of this background paper. (The impact of environmental regulations on trade and manufacturing competitiveness is

discussed in chapter 4.)

ASSESSING THE EFFECTS OF

TRADE ON THE ENVIRONMENT

There has been little systematic assessment of the

environmental impacts of different trade patterns or

policies. The formal environmental impact statement process set up under the U.S. National Environmental Policy Act of 1969 has not been used to

evaluate draft trade agreements and potential alternative actions. Most studies tend to be either highly

theoretical or narrowly focused on particular cases.

Generalizations made on the basis of such studies

are risky. More authoritative information about the

environmental impacts of trade may soon become

available through the Organisation of Economic

Co-operation and Development (OECD), which is

analyzing trade-related environment effects in several areas (agriculture, forestry, fisheries, transportation, and endangered species).4

One of the few efforts to examine the environmental effects of a proposed trade regime is the U.S.

interagency ‘Review of U.S.-Mexico Environmental

Issues” produced in connection with the ongoing

North American Free Trade Agreement (NAFTA)

negotiations (ch. 2).5 The U.S. document (which is

not a formal environmental impact statement) illuminates the possible environmental effects of alternative growth and policy scenarios under NAFTA

and no-NAFTA options. However, because of methodological limitations, quantitative estimates are

incomplete and imprecise. The document naturally

emphasizes U.S. border area effects, with very

modest treatment of continent-wide or global environmental implications. Moreover, the review was

undertaken before a draft NAFTA was developed;

its relevance to whatever specific NAFTA text is

eventually proposed remains to be determined.

In general, data and methodologies to determine

unambiguously if NAFTA, GATT, or other regimes

are net contributors to or detractors from environmental quality are lacking. Liberalized trade might

offer benefits and harm simultaneously, and tradeoffs are likely. There can be circumstances in which

freer trade and environmental improvement are

4 me ~eS~tS of ~e~e ~y~e~ ~d not be~ ~l~sed when ~report went to p~ss, ~. 2 discusses OE~’S @tie/environment aCtivil’ieS h mOre

detail.

5 Interagency Task Force coordinated by the OffIce of the U.S. Trade Representative, “Review of U.S.-Mexico Environmental Issues,” Washington

DC, February 1992. Reportedly, the Mexican and Canadian Governments are engaged in similar exercises, but these had not been released as of

mid-March 1992.
Chapter 3-Role of Trade Measures in Environmental Policy .39

complementary. There can also be circumstances in

which trade hastens environmental degradation.

Insofar as it helps make societies wealthier, liberal

trade might encourage steps for environmental

protection. As wealth increases, societies may give

more priority to environmental improvements. For

example, a study comparing sulfur dioxide and

smoke levels in several cities with differing income

levels found levels of these pollutants rising as per

capita income rose to $5,000; then, the pollutant

levels declined as per capita income rose, up until

about $15,000 per year, after which per capita

emissions began to rise.6 Such a result may occur

from increased demands for environmental protection leading to passage and enforcement of environmental protection laws and increased environmental

investment. Another possible explanation is that

more prosperous countries may prefer less pollutionintensive industries; whether this would be a net

environmental benefit would depend on the extent to

which polluting processes were diverted elsewhere.

Liberalizing trade and investment might speed

international diffision of environmentally preferable production technologies. Such cleaner technologies not only reduce the pollution associated with

production, they often offer improved energy and

materials efficiency,accruing further environmental

and productivity gains. There is some limited

empirical evidence suggesting that in Latin America, relatively open economies are more likely to

adopt cleaner production technologies than are more

closed economies.7 Such a result may be due to the

need of export-oriented industries in developing

countries to meet more stringent product standards

and customer demand in developed country markets

(e.g., dioxin-he paper). Open economies may be

more receptive to imports of innovative foreign

technologies that are cleaner and more efficient than

older production processes. In some cases, multinational firms might bring technologies that meet

corporate or home country standards which are more

stringent than local requirements.

But it is not inherently true that economic improvements arising from freer trade will translate

automatically into environmental improvements. As

the scale and rate of economic growth increases,

environmental degradation may outpace environmental gains made through the use of environmentally preferable technology.g After all, the industrialized nations (those that have experienced the greatest growth and that account for most of the world’s

trade) are the largest contributors to many environmental problems. The United States, for example,

contains 5 percent of the world’s population but

accounts for 20 percent of global warming potential

and 20 to 30 percent of emissions of major ozonedegrading compounds CFC-11 and -12.9 Larger and

more open markets for tropical timber products may

hasten harvesting of tropical forests in developing

countries-whether or not adequate safeguards are

in place to encourage reforestation or other environmentally preferable practices.

The activity of increasing trade itself varies in its

environmental effects. For example, truck traffic

across the U.S.-Mexico border may expand from 1.8

million commercial vehicle crossings in 1990 to 8

million in 2000, with concomitant increases in air

pollution, noise, and congestion, even in the absence

of NAFTA.10 However, elimination of regulations

that ban U.S. trucks in Mexico and restrict Mexican

trucks in the United States might avoid some of these

impacts by obviating return trips by empty trucks

and removing the environmental risks associated

with transfers of hazardous cargo.ll

A frequently aired concern is that industries may

relocate from countries with strict environmental

regulation (e.g., many developed nations) to countries with weaker regulation or enforcement in order

15 G~e M. GrOSSmaII and Alan B. KnEger, “Environmental Impacts of a North American Free Trade Agreement,” paper presented at a conference

on U.S.-Mexico Free Trade Agreemen~ sponsored by the Mexican Secretarial de Comercio y Fomento Industrial, Oct. 8, 1991.

7 Nmcy Birdsall and David Wheeler, ‘‘Openness Reduces Industrial Pollution in Latin America: The Missing Pollution Haven Effect,’ prepared

for the World Bank symposium “International Trade and the Environment” Washington, DC, Nov. 21-22, 1991.

8 H-m E. Day and Job Be Cobb, Jr., For the Comn Good: Redirecting the Economy Towardcommunity, the Environment, anda Sustainable

Future (Boston, MA: Beacon Press, 1989).

9 U*S, Conwess,Office of Tec~olo~ Assmsment, changing by ~egree~: steps To J/educe Greenhouse Gases, OTA-@482 (Washington, DC: U.S.

Government Printing Office, February 1991), p. 3.

10 interagency Task Force, “Review of U.S.-Mexico Environmental Issues,” op. cit., pp. 174, 177-78.

11 Ibid.
40 ● Trade and Environment: Conflicts and Opportunities

to avoid costs associated with environmental compliance. 12 This is called the ‘‘pollution haven”

effect. For instance, differences in environmental

regulations may have been a factor leading to

decreased employment in California and increased

Mexican activity in the wood product coatings

industry .13 But, in general, there is little evidence

that large-scale shifts in industrial investment and

relocation to pollution havens have occurred.14 (See

ch. 4 and app. E for more extensive discussion.)

Debate also exists about the most effective

approaches to apply trade measures for environmental purposes. For instance, the 1973 Convention

on International Trade in Endangered Species of

Wild Fauna and Flora (CITES) restricts trade in

endangered and threatened species, and in products

derived from them (such as elephant ivory). CITES

bans trade in species threatened with extinction

(those listed under app. I of CITES) on the premise

that trade prohibitions will destroy markets for

endangered species and thus their commercial appeal. It is further argued that blanket bans prevent the

problem of illicit wildlife trade from being disguised

as legal trade. Others have argued that such bans can

be ineffective and may even hasten species extinction by raising the price and profitability of banned

products in the underground market while removing

economic incentives for long-term sustainable management of species. 15 Advocates of this latter view

argue that well-managed exploitation of threatened

and endangered species (e.g., controlled elephant

hunting) is more likely to promote species preservation and sustainable development because it offers

long-term financial and material benefits to the

governments, communities, and people controlling

the species’ fate. In the case of elephant ivory, there

is evidence that trade bans are effective. Since 1989,

when CITES enacted the ivory trade moratorium,

elephant tusk prices have decreased from about $100

per kilogram to between $2 and $3 per kilogram.l6

Poaching has been reduced greatly and elephants

have been observed to return to areas where poaching had previously occured.17 The March 1992

meeting of CITES members in Kyoto, Japan reaffirmed the ivory trade moratorium, rejecting requests by several southern African countries to

reinstate limited ivory trade. Some trade controls

would seem to be needed to protect species. Improved monitoring, reporting, and data might help

clear up some uncertainties about compliance with

agreements.

As discussed later in this chapter, GATT trade

rules, as currently interpreted, have the potential to

affect both unilateral and multilateral environmental

policies. The tuna/dolphin dispute arising from the

tuna import ban imposed pursuant to the U.S.

Marine Mammal Protection Act suggests the potential for conflict between GATT and unilateral

environmental laws with trade provisions. Although

no challenge has yet been made, a country’s effort to

implement trade measures pursuant to a multilateral

environmental agreement might someday be challenged in GATT.

Significant environmental problems also occur in

activities not fully covered by GATT. Agriculture is

only partly covered by GATT’s discipline, although

Uruguay Round negotiations may change this.

GATT now allows domestic subsidies and, in the

case of agriculture, permits export subsidies (i.e.,

subsidies contingent on export) as well.18 This has

enabled the United States, Japan, and the European

Community to spend billions of dollars annually on

farm commodity supports while avoiding GATT

conflicts. A GATT waiver also allows U.S. import

restrictions to be imposed by the President in some

12 See, for ~~ce, D~y and Cobb, op. cit., pp. 209 and ff., cited ~ Stewti Hudson? “Trade, Environment, and the Pursuit of Sustainable

Development” prepared for the World Bank symposium “International Trade and the Environment” Washington, DC, NOV. 21-22, 1991.

13 U.S. Congess, Gene~ ~coutfig Office, U.S..Mexico Trade: Some U.S. Wood Furniture Fi~ Relocated From J%S Angeles Area to Mexico,

GAO/NSIAD-91-191 (Gaithersburg, MD: U.S. General Accounting OffIce, April 1991); Ann M. Lesperance, “Air Quality Regulat.iom and neir

Impacts on Industrial Growth in californi~ Based on Census Data: A Case Study of the South Coast Air Quality Management District Rule 1136 and

the Wood Products Coatings-hdustry,” master’s degree thesis, University of Californi~ Los Angeles, 1991.

14 H. Je&ey ~~d, pollution ad the s~uggze for the world product (New York NY: Cambridge %3SS, 1988); Lyuba =Sky,

“Trade-Environment Linkages and Sustainable Development” report to the Environment Planning Brancb Australian Department of Arts, Sport,

Environment, Tourism and Territories (Melbourne, Australia: Nautilius Pacific Research October 1991).

15 “Saving the Elephant: Nature’s Great Masterpiece,” The Econom”st, July 1, 1989, pp. 15-17.

16 Mark Pagel and Ruth WC% “Keeping the Ivory Trade Banned,” Nature, vol. 351, May 23, 1991, pp. 265-66.

IV Ibid.; Peter Aldous, “AfricanRift in Kyoto,”Nature, vol. 354, November 21, 1991, p. 175.

1S However, bo~ domestic subsidies and agric~~~ export subsidies cm be co~terv~~ by im@g COW&kS (see annex to ch. 2, discussion Of

subsidies).
Chapter 3-Role of Trade Measures in Environmental Policy .41

circumstances; import controls are in effect for

certain sugar, peanut, cotton, and dairy imports.

Some other practices that may appear to violate

GATT (e.g., Japan’s ban on rice imports) have not

been stopped.

Farm subsidies and trade protection can provide

strong incentives to intensify agricultural production

or to extend agriculture onto lands less suitable for

cultivation, often to the detriment of the environment. These incentives could encourage overapplication of fertilizers, pesticides, irrigation, and mechanical tillage; concentration of livestock leading

to overgrazing and improperly handled animal

waste; and cultivation of marginal lands. They may

also discourage crop rotations and other environmentally preferable practices. Environmental results

of overly intensive agriculture include water and air

pollution; degradation of soil resources; damage to

wildlife, fisheries, and natural ecosystems; and,

ironically, given reliance on pesticides, increased

vulnerability to pests and disease.19 On the other

hand, subsidies for conservation (e.g., conservation

reserve land set-asides) can have environmental

benefits when appropriately structured and implemented. Amendments under consideration in the

Uruguay Round at GATT, while calling for reductions in agricultural subsidies, would exempt some

conservation subsidies.20

Protection of agriculture by developed countries

can also have unintended effects for the environment

of developing countries. Despite some special preferences, many developing countries have limited

access to developed country agricultural markets.

They are also affected by developed country sales of

surplus agricultural goods at prices below unsubsidized production costs. Both depress world prices

for agricultural. commodities and reduce the foreign

exchange that developing countries can earn, preventing them from profiting from their comparative

advantage (cheap labor) in their labor-intensive

agricultural sector. To meet needs for investment

and debt service, developing countries might then

become more dependent on extractive activities like

mining and logging that, particularly in the absence

of effective regulation, can have large adverse

environmental impacts. Furthermore, less developed

countries often lack the means to conduct such

extractive activities with the environmental precautions that might be taken in some developed

countries.

But the net environmental effect of lifting the

current system of agricultural subsidies is difficult to

determine. Even if subsidies encourage practices

that produce adverse environmental impacts, removing the subsidies and opening markets would not

automatically be entirely positive from an environmental standpoint. Decreased environmental impacts from lower pesticide use in Europe or Japan,

for example, would need to be evaluated against the

possibility of greater pesticide use accompanying

more production in developing countries with weaker

regulations, weaker enforcement, and less applicator

training. Inappropriate application might lead to

more serious environmental or health impacts than

in countries with stricter standards, stronger enforcement, and more training.

As with agriculture, trade restrictions against

labor-intensive manufactures can have negative

environmental implications. Since less developed

countries often lack the resources to compete in

capital-intensive industries, they rely heavily on

labor-intensive industries and natural resource extraction activities (agriculture, logging, and mining).

By limiting earnings possibilities in labor-intensive

industries, restrictions on labor-intensive manufactures can increase developing country reliance on

extractive activities.

Other trade restrictions could have similar effects.

For instance, countries may charge higher tariffs on

semi-finished or finished goods than on raw materials to encourage domestic value-added activities.

This is called tariff escalation. GATT does not favor

or disfavor tariff escalation; it simply directs members to negotiate mutually agreeable tariff schedules,

subject to the most-favored-nation rule (see annex to

ch. 2). Tariff escalation on tropical forest products or

19 The diswssion above draws upon several sources, including: GA’IT Secretaria~ “Trade and Environment,” op. cit., PP. 32-34; T.T. phiPPs and

K. Reichelderfer, Agricuhural Policy and Environmental Quality (Washingto~ DC: Resources for the Future, 1988); T.T. Phipps and K. Reichelderfer,

“Farm Support and Environmental Quality at odds?” Resources, spring 1989, pp. 14-15; Paul Fae@ Robert Repetto, Kim Kroll, Qi Dai, and Glenn

Helmers, Paying the Farm Bill: U.S. Agricultural Policy and the Transition to Sustainable Agriculture (Washingto~ DC: World Resources Institute,

March 1991); National Research Council, Alternative Agriculture (Washington DC: National Academy Press, 1989).

m GATT Mtit~ter~ Trade Negotiations, The Uruguay Round, Trade Negotiations co~ttee, “Draft Final Act Embodying the Results of the

Uruguay Round of Multilateral Trade Negotiations,” GATT Dec. h4TN.TNC/W/FA, Dec. 20, 1991 [referred to as the “Dunkel draft”], pp. L.20

(pragraph 8), L.28, L.13 (paragraph 1), L.17 (paragraph 10).

321-520 0 - 92 - 7
42 ● Trade and Environment: Conflicts and Opportunities

metal goods may discourage establishment of downstream industries in developing countries and increase reliance on extractive activities. On the other

hand, badly conceived schemes for encouraging

domestic value added in developing countries can

exacerbate resource degradation through inefficiency.

21 And, in the absence of effective environmental management, increased earnings from downstream processing might spur even faster extraction

of raw materials without adding environmental

safeguards.

In sum, liberalized trade has the potential for both

positive and negative environmental impacts. Trade’s

effect on the environment depends on the context—

what regulatory and other restrictions apply to the

production and use of traded items, how stringently

regulations are enforced, and how trade-generated

revenues are used.

USE OF TRADE MEASURES

Just as there is disagreement on the effects of trade

on environment, there is also disagreement about

when trade measures (i.e., trade restrictions) are an

appropriate means of pursuing environmental goals.

This issue is under study in various forums (see ch.

2). The answer in any given case will depend on,

among other things, the expected environmental

benefit, the expected effect on trade, and whether

alternative, less trade-restrictive means are available

to reach the environmental goal.

Trade measures (especially import restrictions),

and the threat of such measures, can potentially

further environmental goals in various ways. They

can help convince a country to join an international

environmental agreement or to behave according to

certain environmental norms; deny a country economic gain from failing to follow such norms;

prevent a country’s actions from underminingg the

environmental effectiveness of other countries’ efforts; and remove the economic incentive for certain

environmentally undesirable economic activity. Often

the same measure has effects in two or more ways.22

An example is CITES, which as mentioned above

seeks to preserve certain listed endangered and

threatened species by prohibiting or restricting trade

in them. In this case it seems that trade restrictions

can be effective. When the demand for such species

comes from export markets, prohibiting trade will

reduce the commercial incentive to harvest listed

species. (To some extent demand is already reduced

by laws in many countries banning or restricting

domestic trade in such species.) Another example is

the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their

Disposal, expected to come into effect mid-1992.

The Convention seeks to prevent the environmentally improper disposal of hazardous wastes; to that

end, among other things, it bans export of hazardous

waste where improper disposal would appear to be

a likely result (e.g., wastes sent to countries lacking

adequate regulations or the technical capacity for

proper disposal) .23 Here too it seems that trade

restrictions could be effective as trade itself contributes to the environmental problem.

However, when trade is not an intrinsic part (or is

a minor part) of the initial problem, trade restrictions

designed to alter economic incentives could be an

inefficient and costly way to address environmental

problems. 24 While empirical evidence is limited,

trade restrictions that apply at a later point cannot

always be counted on to filter back to remedy the

conduct at issue; among various types of trade

restrictions, those aimed most closely at the offending conduct may be more effective.

The difficulty of determining how trade restrictions work in a given case and the possible advantage of targeting such restrictions closely to the

conduct at issue are both illustrated by the debate

surrounding proposals to restrict trade in tropical

timber. Some groups have called for bans on imports

21 RobertRepe~o, The Forest for the Trees.? Govern~ntPolicies and the Misuse ofForest Resowces (w-t%DC: WOrld ‘~omc~ ‘timte~

1988).

22 For ~OtherS~t~ent on the different ways in which trade restrictions can work sw tie United Stites ‘ “DiscussionPaperfor OECD Joint Session

of Trade and Environment Experts, ” dated Feb. 7, 1992. The U.S. interagency process that generated this paper is discussed inch. 2.

~ ‘rhe Basel Convention is discussed in Mary Tiemann, Library of Congress, Congressional Research Service, Waste Eqorts: U.S. andInternational

E#orts To Control Transbounhyil.lovement, IB89123, Feb. 26, 1992.

24 fionofic ~eow su=ests tit ~ would likely ~ the case. ~ economic terms, ex~ssive pouution is caused by a fti~ to intdk

environmental costs, which is a market distortion. It is normally more efficient to correct that distortion directly (e.g., by environmental regulations or

incentive mechanisms) than to try to correct its effect with another distortion (trade restrictions). For an analysis of the use of trade distortions to remedy

domestic market distortions, and a discussion of why trade distortions would often be inefilcient, see W.M. Cordeu Trade Policy andEconomic WeZfare

(Oxford: Clarendon Press, 1974).
Chapter 3-Role of Trade Measures in Environmental Policy . 43

or exports of commercially harvested tropical timber

products,25 especially raw logs. Those supporting a

ban believe it might help protect the vast genetic

diversity found in tropical ecosystems, maintain the

forests’ carbon fixing capacities, and safeguard the

land tenure of indigenous peoples. However, others

(including the GATT Secretariat) believe a general

ban on logs from tropical forests would have little

effect.26 Over 80 percent of tree cutting in developing countries is due to fuel wood harvesting and

land-clearing for agriculture and ranching.27 Tropical timber exports (either as logs or processed

timber) account for only 1 percent of trees felled in

developing countries, according to the GATT Secretariat.28 A total ban on trade in all products made

from tropical timber might reduce forest conservation incentives by depressing the market value of the

primary forest. A ban just on log exports would

increase processed wood exports; developing country sawmills using less efficient technologies and

practices could waste more timber than more efficient mills in importing countries. Rather than a ban,

opponents to trade restrictions suggest that a more

effective approach to reduce deforestation would be

to, in the words of the GATT Secretariat, “promote

employment and income growth for rural people in

those countries” by such measures as domestic

economic reforms and access to foreign markets.29

Proponents of tropical timber trade restrictions—

who are not all proponents of bans-counter by

noting that some countries are much more affected

by export timber demand than aggregate statistics

suggest (Malaysia and Indonesia account for over 75

percent of tropical timber exports30), certain landforms are more vulnerable to damage from logging

than others, and commercial logging operations

catalyze agricultural land-clearing by making new

forest areas accessible to settlement.31 One proposal

calls for importing countries to limit imports to

producers that can certify their use of sustainable

forest management techniques.32 It is argued that

this kind of restriction would increase the value of

sustainably harvested tropical timber and thus increase incentives for conservation. Replacing the

restriction with a labeling scheme, by which imports

would all be permitted but customers would be

informed of how the wood was harvested, would

lessen the chances of a conflict with GATT. The

effectiveness of such labeling would depend in part

on the environmental awareness and opinions of

customers.

It can also be hard to know when to apply trade

measures for environmental purposes. If trade measures are intended to counter specific conduct by

firms operating in other countries, it can be difficult

to determine whether that conduct actually occurred.

As the U.S. General Accounting Office recently

found, monitoring and reporting about compliance

with international environmental agreements generally is spotty .33

Under what circumstances are trade restrictions

appropriate? The answer is not simple, and many

factors could be considered, including some that

could be unique to the specific case. Several factors

are explored below, using for purposes of illustration

the Montreal Protocol on Substances That Deplete

z P. Anderso& “The Myth of Sustainable Logging: The Case for a Ban on Tropical Timber Imports,” The Ecologist, vol. 19, No. 5,

September/October 1989.

~ GATT Secretiat, “Trade and Environment” advance copy, February 1992, P. 28.

27 B. Jo~o% RePo&ing t. Tropical Deforestation: An Eruption of crisi~n Array of Solutions (washingto~ w: world Wtidlife F~d and

Conservation Foun&tio~ 1991).

2S GAn secretariat, Op. Cit.

29 ~ide

30 ~~,op. cit., ~ble 5, p. ~, d~ved from German B~des@g (A.), Protecting the TropicaZ Forests: A High priority Intermfi”oml Task, ~Pofi

of the Enquete Commission, “Preventive Measures to Protect the Earth’s Atmosphere,” BonrL Germany, 1990.

31 World ~orestMovement, RainforestDes~uction ~ Cause, E#ects &Fa/se Solutions (pemng, ~aysia: Jutaprint), p. 51, cit~iIICaIIOS ~bertO

Primo Brag% “Tropical Forests and Trade Policy: The Cases of Indonesia and Brazil,” draft prepared for the World Bank symposium “International

Trade and the Environment,” Washington, DC, Nov. 21-22, 1991, p. 8.

32 -*, op. cit., P. 70.

33 U.S. Gene~~cow~gOK1ce,zntern=tiomlEnVirownt: lnter~tio~lAgree~ntsAreNot WellMonitore~(Gti~msbwg,~: January 1992).
44 ● Trade and Environment: Conflicts and Opportunities

the Ozone Layer.34 The Montreal Protocol commits

signatories to gradually phase out the consumption

of certain ‘‘controlled substances. ’ These are certain chlorofluorocarbons (CFCs), halons, and other

chemicals that, when released into the atmosphere,

deplete the Earth’s ozone layer.35 In addition to this

underlying environmental measure, the Protocol has

various trade provisions. The agreement currently

commits signatories to ban the import of controlled

substances from nonparties. Starting in January

1993, signatories are expected to have banned the

export of controlled substances to nonparties. They

are also to ban imports from nonparties of certain

products containing controlled substances (such as

refrigerators containing CFCS).36 The agreement

also calls for consideration of the feasibility of what

could be called a process ban. Member countries are

to determine the feasibility of banning imports from

nonmembers of products that do not contain controlled substances but were produced using them

(e.g., computer chips produced using CFCs as a

cleaning solvent). For the first group of chemicals

(those in the Protocol’s Annex A), this determination is to be made by January 1994.37 In all of these

cases, trade would nevertheless be permitted if the

nonmember could show that it is following the same

phaseout schedules and trade restrictions that members are required to follow.38

The discussion below focuses on six factors that

might be helpful in evaluating the relative appropriateness of trade restrictions. (The following section

considers whether such trade measures might be

inconsistent with GATT.) One consideration only

touched on below is that countries have different

environmental priorities (which are often correlated

with differences in wealth and technical know-how),

without which there would be much less reason for

trade measures. The final section of this chapter will

explore how those differences can affect the desirability and effectiveness of trade measures, and what

alternative measures might be taken in light of those

differences to reach environmental goals.

1) The conduct at issue has global environmental effects. Use of controlled substances by

nonmember countries degrades the environment for

all. Member countries therefore have a stake in

trying to limit such use. The argument here is

particularly strong because the link between CFC

emissions and ozone depletion, with its potential for

health effects, is widely accepted by the international scientific community .39

2) The trade measures are matched (though

not completely) by domestic measures. As well as

restricting trade, the members are phasing out their

own use of controlled substances. Without the

domestic measures, the trade restrictions might seem

protectionist. Even as it is, the agreement might be

seen as containing a protectionist element. For

example, imports of CFC-containing refrigerators

from nonmembers could be totally prohibited while

some amount of domestic production is still allowed

until completion of the phaseout schedule.

3) The trade measures are multilateral, with

broad support. The Montreal Protocol now has 79

members. While membership is not universal (GATT

has over 100 members), it is large, and accounts for

the bulk of the production, consumption, and trade

of controlled substances. A unilateral trade restriction might strike other countries as less justified and

more susceptible of abuse (see ch. 5).40

~ me Mon@e~ protocol is breed on the March 1985 Vienna Convention for the Protection of the ozone hyer. me Montreal Motocol w* signed

in September 1987 and was amended by the London Revisio~ in June 1990. The amendments, which accelerated the phase out schedule, added new

substances for control, and set up a fund to help developing countries comply, were to go into force by January 1, 1992, provided they were rtiled by

20countries. As ofMarch27, 1992, only 19 ratifications had been received; the amendments will take effect90 &ys after the 20thratifk@ion is received.

(See London Revisions, Article 2). While the London Revisions were not in force as this report went to press, for convenience references to the Montreal

Protocol denote the text as amended by the London Revisions.

35 As the temisus~ here, ~$mmuption~ ~ ~- when acon~olled substan~ is ~covmted into a product or othe~se used. For ex~ple, plltting

chlorofluorocarbons (CFCS) into a refrigerator when it is manufactured would constitute consumption, while buying or disposing of such a refrigerator

would not.

36 See Mon~~ Protocol, Article 4, paragraphs 1 tiou@ 3 bis.

37 Mon@e~ protocol, Article 4, paragraphs 4, 4 bis.

38 mid., Article 4, paragraph 8.

39 s=, for e=ple, Scientific A~~e~~~nt of Ozone Depletion: 199], sponsored by & world Meteorolo@c~ ~tiatio~ United Nations

Environment Programtne, National Aeronautics and Space Administration National Oceanic and Atmospheric Administration@ United Kingdom

Department of Environmen~ preprin~ Dec. 17, 1991, n.p.

40 Some Yem ago the Ufitd Stites imposed a ~~ter~ b~ on impo~ of CFc-containing aerosol products. However, thd ban WM

nondiscriminatory because domestic production of those items was also prohibited.
Chapter Mole of Trade Measures in Environmental Policy ● 45

4) There are positive efforts and incentives to

encourage adherence by reluctant countries. Some

developing countries have been reluctant to sign the

Protocol because of the possibility it could interfere

with their development plans or cause economic

hardship. However, the Protocol grants developing

countries slower phaseout schedules.41 Also, a

multilateral fund was set up to help developing

countries comply, both by paying for technical

assistance and by reimbursing some incremental

costs.42 While these efforts might not be enough to

satisfy some developing countries, they are at least

a step toward encouraging their participation.

Also, formal membership in the Protocol is not

necessary to escape trade restrictions. It is enough if

a country shows that it is abiding by the Protocol’s

norms. So countries that did not join because of

political or other considerations can still be brought

under its wing.

5) The trade measures are related to the

conduct at issue. The trade measures concern the

very products that have undesired environmental

effects. At least on the surface, it seems reasonable

to restrict trade in products whose manufacture or

use cause the environmental harm at issue; even if

another country does not change its behavior, the

measures may do some good. (This possibility is

explored in item 6 below.) In contrast, trade sanctions in products unrelated to the environmental

problem would have value only if countries changed

their behavior as a result, and might be considered

unduly punitive.

6) How crucial are the trade restrictions to

achieving the environmental goal? This is a

fundamental question, since to the extent trade

measures are not needed to achieve the environmental goal, they would not seem justified on

environmental grounds (though they might still be

justified on economic or competitiveness grounds,

see ch. 4). However, in practice this question is

difficult to answer. To answer this question confidently, one would have to examine the patterns of

production, trade, and consumption in industries

involving controlled substances. This would be

beyond the scope of this background paper. The

analysis below is hypothetical, illustrative of the

kinds of considerations involved.

On one level, the trade measures could penalize

nonmembers to some extent, and therefore could be

an incentive to join. In this way, the restrictions

might further the goal of preventing ozone layer

depletion. However, trade restrictions tend to irritate

the target countries, and it is possible that other

measures more to their liking could also induce

membership. Because the agreement already has

two such measures to attract developing countries

(slower phaseout schedules and a fund for technical

and financial assistance), it could be argued that the

agreement does not rely excessively on trade sanctions.

Also, a restriction on imports of products containing controlled substances (which is not yet in effect),

and a restriction on imports of products made using

controlled substances (whose feasibility has not yet

been determined), could be needed in the future to

remove a disincentive to joining. Without such

restrictions, firms in nonmember countries might be

able to sell (for example) CFC-containing refrigerators, or computer chips made using CFCs as a

solvent, in member country markets while local

producers could not. If CFC use made refrigerators

or chips cheaper, the nonmember country would

have a competitive advantage. Thus, countries (or

their industries) could profit by refusing to join.

Moreover, these two trade restrictions could

contribute to the Protocol’s objective even when

they do not induce a country to join. If imports of

products containing or made with a process using

CFCs were to remain permitted, and if use of those

chemicals made the products cheaper, then manufacturers in nonmember countries might capture a large

share of the world market for the products in

question. Then, the world as a whole might continue

consuming CFCs at a high rate, despite the bans in

effect in member countries. On the other hand, under

some circumstances these two trade restrictions

might not be needed. If the ban on exports of

controlled substances is effective, and if it is hard for

nonmember countries to produce CFCs on their

own,43 then manufacturers in those countries might

41 M~n&e~ ~otocol, ~cle 5. ~ *eSpome t. new ~ientific evidenm, tie p~seout sch~ules for bo~ developing and developed COuIIhieS were

accelerated in the London Revisions. In the future, additional scientiilc evidence might induce the parties to accelerate the schedules further, and it is

possible that some or all of the developing country preferences could be removed.

42 hid., ~cle 10. An interim fund already has $200 million (see box 3-B).

43 me aWement ~so Pro~bits tie expo~ t. nonmembers of technology for - and using controlled substances. mid., ~cle 4* P~at?aPh 5“
46 ● Trade and Environment: Conflicts and Opportunities

not have access to CFCs in the first place, in which

case they could not make products containing CFCs

or use CFCs in manufacturing processes. Another

consideration is that the yet-to-be promulgated

process ban (the ban on imports of products made

using controlled substances) could be difficult to

enforce, because it would require determining at the

border the process by which goods were made,

which might leave no trace on the product itself.

This discussion of trade measures under the

Montreal Protocol is meant only to suggest the kinds

of considerations that might apply. While the

Montreal Protocol gives one paradigm for trade

measures, there are several others, including those of

CITES and the Basel Convention. The overall

question of when trade measures are appropriate to

reach environmental goals is only now being studied. One analysis tentatively suggests eight guiding

criteria for when trade measures are appropriate to

secure international environmental objectives. According to this analysis, trade measures should:44

1.

2.

3.

4.

5.

6.

7.

Only be used in situations involving international externalities (e.g., transnational pollution or degradation of international common

property resources);

Only be used when inducement or compensation type agreements are clearly unavailable or

not effective;

Only be used when market type responses are

clearly unavailable or not effective (i.e., product labeling or direct consumer action);

Only be used when there is strong evidence

that the trade measure will be effective at

accomplishing the environmental objective;

Only be used when there is clear evidence that

the environmental benefit exceeds the abatement cost;

Only be used when the countries imposing the

trade measures undertake appropriate protective measures themselves;

Be used with a presumption in favor of multilateral rather than unilateral application; and

8. Be used with a presumption that they are more

acceptable if an international norm for environmental protection exists.

The first factor (translational versus localized

pollution) is discussed in box 3-A. The second factor

(use of inducement- or compensation-type agreements) is discussed later in this chapter and in box

3-B. The seventh criterion (the favoring of multilateral over unilateral measures) is discussed further in

ch. 5.

More work would be needed in domestic, foreign

or international forums (see chs. 2 and 5) to

determine whether these or other specific criteria

sufficiently encompass both environmental and

trade concerns to make them suitable as guidelines. 45 Some such criteria or guidelines would help

narrow the potential for trade/environment conflicts.

But if, as seems plausible, trade measures likely will

be necessary or desirable in some cases, the question

arises of whether such measures are likely to conflict

with GATT.

Trade Measures and GATT

Whether particular trade measures would conflict

with GATT is hard to predict, in part because many

pertinent issues have not been addressed directly in

decided cases. However, analysts have identified at

least three GATT provisions that environmentally

oriented trade measures could violate: the mostfavored-nation and national treatment rules, and

Article XI, which generally prohibits import and

export restrictions other than tariffs (see the annex to

ch. 2).46 If any of those provisions are violated,

GATT consistency would then normally depend on

whether the trade measure falls within any of the

exceptions in Article XX (see the annex to ch. 2).

While several types of trade restrictions might be

contested at GATT, the discussion below will focus

on one type in particular: a “process restriction,” or

a restriction on imports of a product because of the

process used to make the product. How GATT might

44 Cmles S. Pearson and Robert Repetto, “Reconciling Trade and Environment: The Next Steps,” December 1991 (prepared for the Trade and

Environment Committee of the Environmental Protection Agency’s National Advisory Council on Environmental Policy and Technology).

45 These fo-~C1ude tie U.S. Government ~teragency ~k force, the Trade and Environment Committee of the Environmental protection

Agency’s National Advisory Council on Environmental Protection and Technology, OECD, and GA~’s Group on Environmental Measures and

International Trade (see table 2-B and discussion inch. 2).

46 These free provisions are identiiled in the United States ‘ “DiscussionPaperfor OECD Joint Session on Trade and Environment Experts,” dated

Feb. 7, 1992. Also, OECD has done some work identifying possible GA~ conflicts, though that work is not publicly available. One characteristic of

the Basel Convention and the Montreal Protocol that is problematic under GATT is that nonmember counties are subject to different trade rules than

member countries.
Chapter 3-Role of Trade Measures in Environmental Policy ● 47

Box 3-A—The Global-Local Continuum

One difficulty in addressing trade/environmental disputes is the wide range of opinions about the nature,

severity, and political responsibility for specific environmental problems. The rationale for using trade measures

to achieve environmental objectives depends in part on how such problems are viewed by different countries. The

breakdown below illustrates some of the possibilities.

Global and Transborder Environmental Problems

Some environmental problems (ozone depletion is perhaps the most conspicuous example) are global in

nature-activity in one location can affect the Earth’s environment as a whole. Some other problems, while not

necessarily global, have impacts that cross national borders (e.g., sulfur dioxide emissions in one country

contributing to acid rain in another).

On a common-sense level, other countries have a greater stake in a problem when it affects their own

environment or the global commons. If pollution (or some other form of environmental degradation) extends

beyond a country’s borders, the polluting country may have less incentive to minimize that degradation than if all

of the damage was contained domestically. Other countries may try to influence the polluting country to pollute less;

when they succeed, global welfare may benefit.

Sometimes, countries will adopt international environmental agreements with trade provisions, such as the 17

agreements referenced in table 2-1. Multilateral agreements can have extensive, but seldom universal, support

among trading partners; for example, while 79 countries have agreed to curb emissions of chemicals that deplete

the Earth’s ozone layer under the Montreal Protocol, there are over 100 members of GATT. There are also numerous

bilateral environmental agreements, some of which have trade implications, However, countries sometimes take

unilateral action to address a problem they think justifies trade measures, a step that can prompt resentment of others.

Localized Environmental Problems

The justification for influencing environmental conduct abroad is more difficult when the conduct appears to

have only local effect. In this case, one country’s lax environmental regulations might not pose an environmental

problem for other countries. The level of regulation that serves one country’s interest can differ markedly from what

serves other countries’ interests. Differences in industrial makeup can affect priorities in environmental regulations.

Geographic and climatic conditions can influence the way in which air pollution disperses. Some ecosystems are

more vulnerable to damage than others when exposed to similar kinds of pollution.

However, the line between local and nonlocal effects is inevitably arbitrary. Locally used toxic substances can

be transported far from their points of origin. For example, pesticides, polychlorinated biphenyls (PCBs), lead, and

dioxins are found in Arctic regions, including potentially hazardous levels of PCBs in the breast milk and blood

of Inuit people in northern Quebec.l

Changes in the State of Knowledge

Another complication for trade/environmental policy is that, as scientific knowledge grows, actions once

thought to have only local effect can become global problems in time, while other problems thought to be quite

serious may come to be seen as less so. Activities as diverse as driving a car, using an electrical appliance, raising

cattle, and cutting down trees are now widely viewed as contributing to global warming potential, a concern that

hardly existed two decades ago. At the same time, some policies taken on the basis of precaution may need

reevaluation as additional information is developed. For example, the U.S. Environmental Protection Agency is

reevaluating dioxin standards. Stringent standards to control human exposure to dioxin were established in the

mid-1980s. With increasing understanding of how dioxin works at the molecular level, some experts believe that

certain U.S. dioxin standards need reevaluation. Recent research also suggests to some scientists that dioxin is a less

potent carcinogen than suspected when initial standards were set. However, other adverse health effects may occur

from low levels of dioxin exposure, thus complicating the reevaluation effort.2 Risk analysis, to weigh risks against

economic costs, is often proposed as a way to balance the costs and benefits of environmental regulation; others

believe prudence dictates precaution.

1 Curtis C. Travis and Sheri T. Hester, “Global Chemical Pollutioq” Environmental Science& Technology, vol. 25, No. 5, May 1991,

pp. 814-819. Travis and Hester refer to E. Dewailly et al., Bu21etin ofEnvironmental Contamination and Toxico20gy, vol. 43, 1989, pp. 641-46.

2 David J. EMIISOU “Dioxin ‘Roxicity: New Studies Prompt Debate, Regulatory ACtiOn,” Chemical & Engineering News, vol. 69, No.

32, Aug. 12, 1991, pp. 7-14; Leslie Roberts, “Dioxin Risk Revisited,” Science, vol. 251, Feb. 8, 1991, pp. 624-626; “Year-Long Reassessment

Shows High Non-Cancer Threats of Diox@” SuperjimdReport, March 25, 1992, p. 16.

(wntinuedon next page)
48 ● Trade and Environment: Conflicts and Opportunities

Box 3-A—The Global-heal Continuum-Continued

Response to Risks

Governments vary in their response to environmental risks. Even affluent countries in recession find that

immediate economic needs often take precedence over longer term environmental objectives, so that, for example,

the employment and economic activity of a polluting industry is more readily viewed as outweighing environmental

costs. For poorer countries, struggling to meet the population’s basic human needs, the choices are often more stark.

In principle, a country’s preferred tradeoff of environmental and other goals would normally involve at least some

level of environmental regulation; yet in some cases pollution has not been effectively regulated at all.

The environmental degradation now apparent in Eastern Europe and the independent states of the former Soviet

Union provide some conspicuous examples of the latter. In some cases, well-known and readily available

technologies for abating gross pollutants were forgone by Communist decisionmakers in pursuit of increased

production. Despite official claims of environmental concern, the Ceaucescu regime in Rumania in some cases

sought to develop industries to produce hazardous chemicals with few safeguards for the environment or workers;

some of the chemicals were banned or highly regulated in the West.3 Also, in what is now the Czech and Slovak

Federal Republic, poor environmental regulation and enforcement have contributed to high levels of PCBs, lead,

and other toxic materials in human tissue; frequent occurrence of respiratory disease in children; and, it is claimed,

expected average lifespans that are low by Western standards (but similar to that of other Eastern European states).4

Industrial countries may neglect environmental and health concerns in the face of other national priorities. For

instance, throughout much of the Cold War, U.S. defense facilities, including the nuclear weapons complex,

operated with little environmental regulatory oversight. The result has been massive environmental contamination

and potentially serious threats to health and the environment.5 And industrial countries can also be shortsighted in

evaluating environmental risks: waste disposal regulations that seemed adequate at the time have left the United

States with a hazardous waste problem of massive proportions.6

q H. Jeffrey Leo~r~Po//ution and the Strugg2efor the WorldProduct (New Yorlq NY: Cambridge UniverSityfieSS, 1988), PP. 15@153.

4 BMch Mold~ and Jerald L. Schnoor, “Czechoslovaki& Ex*g a Critically Ill Environmen~” Environmental Science and

Technology, vol. 26, No. 1, January 1992, pp. 14-21.

5 U.S. Conmss, office of Technology Assessment Complex Cleanup: The Environmental Legacy of Nuclear Weapons production

OTA-O-484 (Washingto~ DC: U.S. Government Printing Office, February 1991).

6 U.S. Congress, office of Technology Assessment, Supe@zd Strategy, OTA-ITE252 (W%shi.ngtou W: U.S. Government ~~

Office, April 1985), pp. 5-17.

treat such restrictions is analyzed below, again using requires a majority of GATT’s members and twoan example from the Montreal Protocol. In the

future, the members of the Montreal Protocol might

decide to ban imports from nonmembers of products

made using certain substances that when released

deplete the ozone layer. By using this example, OTA

does not mean to suggest that a conflict between

GATT and the Montreal Protocol is imminent or

likely. Indeed, even the feasibility of such a ban is

not due to be determined until January 1, 1994 for

the first group of chemicals (those in the Protocol’s

Annex A); and for reasons mentioned earlier in the

chapter, the members may decide that such a ban is

either unnecessary or not feasible. Also, assuming

such a ban did go into effect, the Montreal Protocol

with the ban might at that time have enough support

to receive a waiver of GATT’s requirements, which

thirds of those voting.47

The Montreal Protocol example is used to represent not a current controversy, but a general type of

trade provision and GATT conflict that could be

important. The management of important global

environmental problems might require control over

widely used processes. As discussed in the annex to

chapter 2, trade restrictions based on those processes

would likely often be prohibited by GATT unless

they fit the Article XX exceptions.

While Article XX explicitly permits bans of

imports made with prison labor, it does not have a

similarly explicit exception based on the environment. Article XX has two paragraphs that might

apply to many environmental measures. Paragraph

(b) relates to measures ‘necessary to protect human,
Chapter 3-Role of Trade Measures in Environmental Policy . 49

animal or plant life or health,” and paragraph (g)

relates to measures for ‘the conservation of exhaustible natural resources if such measures are made

effective in conjunction with restrictions on domestic production or consumption. ’

At first glance, both of these provisions might

seem to apply to the Montreal Protocol’s process

ban. Restrictions on imports of products made by

using ozone-depleting chemicals could be necessary

to stop release of those substances. Use of such

substances in any country would deplete the ozone

layer as a whole; that in turn would increase

ultraviolet radiation exposure, resulting in harm to

human health (e.g., increased incidence of skin

cancer) and possible damage to animal or plant life

as well, as specified in Article XX(b). Also, the

ozone layer is a global resource that would be

severely compromised by release of these chemicals. Thus, trade measures would conserve an

exhaustible natural resource as specified in Article

XX(g). Further, the trade measures would be accompanied by domestic restrictions on consumption of

ozone-depleting chemicals, as referred to in Article

XX(g).

48

However, Article XX has been interpreted narrowly,

49 and it is questionable whether these Provisions would be interpreted so as to permit the

process-based trade restrictions envisioned in the

Montreal Protocol. The recent GATT panel report50

in the tuna/dolphin dispute arising from the ban on

tuna imports taken pursuant to the U.S. Marine

Mammal Protection Act (MMPA) is an example.51

While this report has not yet been adopted as an

official GATT decision (see ch. 2), it does suggest

how panels in future cases might reason. At issue

was the U.S. ban on imports of tuna caught on the

Eastern Tropical Pacific by foreign fishing fleets

found to have incidentally killed more dolphin than

permitted under MMPA. The United States argued

that this ban was justified under paragraphs (b) and

(g) of Article XX in order to protect dolphin.

However, the panel stated that those paragraphs

cannot be used to justify trade restrictions based on

another country’s internal regulations.52 Otherwise,

the panel wrote:

Each contracting party could unilaterally determine

the life or health protection policies [or conservation

policies] from which other contracting parties could

not deviate without jeopardizing their rights under

the General Agreement.53

This reasoning suggests that the process-based

trade restrictions envisioned under the Montreal

Protocol might not be covered by Articles XX(b) or

XX(g), because they, too, would be based on other

countries’ internal regulations. However, the panel’s

reference to unilateral action leaves open the

possibility that trade measures under agreements

with broad multilateral support (such as the Montreal Protocol or CITES) might be more acceptable.

The panel in the tuna/dolphin case had a second

reason for its decision. It stated that paragraph (b) of

Article XX applies only to life or health “within the

jurisdiction of the importing country,” and paragraph (g) applies only to production or consumption

of natural resources “within [the] jurisdiction” of

48 Itcou!dbe mgu~~t~e domestic “comuption” to be res@ictedunder Article XX(g) is the destructionof theozonelayer (the exhaustible natund

resource) not of the ozone-depleting substances. However, the restriction of domestic consumption of ozone-depleting substances also acts to restrict

domestic consumption (destruction) of the ozone layer.

49 pienepescatore et ~., Ha~book of G~Di~pute Settzewnt (&dsley-on-Hudsoq ~: Tra~Mtio~ Jfis ~bfi~tiom, 1991). ThiS Wdbook

indexes all dispute resolution panel reports that were adopted by the GATT Council from GAIT’s creation through part of 1990. It indexes nine cases

as involving or relating to kticle XX (see page marked “Index 2/2”). Of these, two cases (Nos. 20, 65) do not appear to contain a ruling on Alicle

XX’s applicability; of the rest, six (Nos. 50, 54,66, 67, 74, 79) found that Article XX did not apply, and only one (No. 52) found that it did. The case

finding that A_ticle XX applied concerned Article XX(d), which does not pertain to environmental matters. Article XX(b) was not ruled om in two cases

(Nos. 50, 66) Article XX(g) was found not to apply. Those two cases aresummarized in app. A; they are titled “United States-Prohibition of Imports

of lima” (a 1982 case not be confused with the tuna/dolpbin dispute arising from the U.S. Marine Mammal Protection Act) and ‘Canada-Measures

AffectingExports of Unprocessed Herring and Sahnon,” respectively. Some of these panel reports express the opinion that panels should interpret Article

xx narrowly.

One panel report adopted in 1990 is not included in this compilation. In tbat case, the decision found that Thailand’s restriction of cigarette imports

could not be justified under Article XX(b) (see app. A). Also of interest is the panel’s repo~ not yet considered by the Council for adoption, in the

huddolpw case, discussed below. The panel reported that Articles XX(b) and XX(g) did not apply to a U.S. import ban against Mexican tuna.

50 ~~ufit~ S~te~Res~ctio~ On rInpOlls of ~,” Report of the Panel, GATT Dec. No. DS21/R, Sept. 3, 1991. The case’s history and status is

discussed in the beginning of ch. 2; the panel’s reasoning is discussed in the text below.

51 ~blic hw 92-522, as wend~, notably by Public Laws 700-711 and 101-627.

52 Fis~g by a vessel in internatio~ waters is governed by the domestic lav/S of the veSSel’S flag mW@Y.

53 mid., paragraphs 5.27, 5.32.

321-520 0 - 92 - 8
50 ● Trade and Environment: Conflicts and Opportunities

the importing country .54 Since the dolphin to be protected were outside the United States, neither case

applied. Arguably, the import ban contemplated

under the Montreal Protocol would be judged to pass

both of these tests, at least when enforced by a nation

below a threatened part of the ozone layer, because

life and health in that country could be affected, and

ozone depletion could occur in the air space over that

country. However, given Article XX’s history of

narrow interpretation, and the reluctance of GATT

panels to change or extend the interpretation of

GATT law, it is not clear that a GATT panel would

consider paragraphs (b) and (g) to apply.

The panel had yet a third reason for its decision,

in the case of paragraph (b). The panel found that the

United States’ action was not ‘‘necessary” as

required by paragraph (b) because the United States

could have tried other approaches to protecting

dolphin, notably negotiating an international agreement to limit dolphin catches.55 It is not clear how

hard a country would have to try to negotiate an

agreement before trade restrictions could be justified

as necessary. A developing country might challenge

trade restrictions under the Montreal Protocol on the

ground that more incentives to join should have been

offered, although members of the Protocol could

respond that the incentives offered were sufficient to

attract many other developing countries. The panel

also found that the particular scheme for calculating

a foreign country’s number of permitted dolphin

kills-under which the foreign fleet could not know

its limit for a particular year until the year was

over—put a particular burden on trade, and that this

burdensome scheme was not ‘‘necessary” under

Article XX(b).56 That consideration would not apply

to the Montreal Protocol.

Article XX(b)’s necessity requirement had been

interpreted before. In a case involving Thailand’s

restriction of cigarette imports, the panel’s report,

adopted by the GATT Council, stated that the

requirement is satisfied only if “there were no

alternative measure consistent with the General

Agreement, or less inconsistent with it, which

Thailand could reasonably be expected to employ to

achieve its health policy objectives. ”57 While this

standard on the surface might seem reasonable, it

could be difficult to frame measures that could

withstand second-guessing in hindsight about what

alternative measures could have worked as well.58 I n

the case of the Montreal Protocol, a nonmember

country might for example argue that if a gradual

phaseout of domestic consumption of controlled

substances is sufficient to meet environmental goals,

than imports of products containing controlled

substances need not be totally banned at the outset;

a phaseout schedule should suffice for them too.

Apart from how it has been interpreted to date, the

plain meaning of the word “necessary” could be a

significant hurdle for measures to be justified under

Article XX(b). In the case of the Montreal Protocol,

one could argue as described above that certain trade

restrictions are needed to prevent use of controlled

substances from simply migrating to other countries

instead of decreasing. (In general, a case of necessity

might be more easily made the closer trade is to

being the cause of the environmental problem.)

In sum, it is possible but by no means certain that

another panel would distinguish trade measures

under the Montreal Protocol as sufficiently different

from the tuna/dolphin case to justify a different

result. It also bears noting that subsequent panels

could decide that the panel in the tuna/dolphin case

was mistaken. As mentioned, the panel report in the

tuna/dolphin case has not yet been adopted as an

official GATT decision (the case’s status is discussed in the beginning of ch. 2); even if it is, GATT

panels are not strictly bound to follow decisions in

previous cases. The tuna/dolphin panel’s reasoning

has been criticized. According to one analyst, the

historical derivation of the text in paragraphs (b) and

(g) of Article XX suggests that they were in fact

intended to cover import bans based on processes

used abroad—for example, bans on matches made

using phosphorous and on seals hunted in the

water .

5 9

~ “United States-Restrictions on Imports of ~“ Report of the Pane~ op. cit., paragraphs 26, 31.

55 6tU~t~ S@tes—Res~ctiom on ~pofis of m,” Report Of the panel, op. cit., p~a~aph 5“

28

”

56 mid.

57 ~s Cwe ~ discms~ ~app. A. me quoted lan~ge is from p~a~aph 75 of the panel’s report.

58 ~s ~~lat res~ctive mems” stan~d ~so comes up ~ ch. d ~ ~~ection ~~ proposed u~~y Round amendments regarding domestic

environmental regulations; the issues are further discussed there.

59 Steve c~ovi~‘~~plofig tie EnV~~nt~ E~Ceptio~ ~ GA~ ~cle ~“ Jour~z of world Tr~e, VO1. 25, No. 5, OCtObtX 191, pp.

37,39,44-45,52-53.
Chapter 3-Role of Trade Measures in Environmental Policy ● 51

However, dispute resolution panels are normally

reluctant to extend GATT law by interpretation to

accommodate new circumstances, preferring to leave

that task to GATT’s legislative process. The GATT

panel in the tuna/dolphin case voiced this reluctance,

noting that GATT’s legislative process could:

Address international environmental problems which

can only be resolved through measures in conflict

with the present rules of the General Agreement.60

Given this institutional conservatism and GATT’s

history of narrowly interpreting Article=, there is

significant doubt as to whether process-based trade

measures such as those contemplated under the

Montreal Protocol would pass muster under GATT

if challenged.

In the future, process-based import restrictions

could arise in other contexts, such as, for example,

greenhouse gas (GHG) emissions-whether applied

unilaterally or multilaterally .61 Since GHG emissions occur with all fossil fuel use, most industrial

production, and many activities associated with

agriculture and forestry, it is possible that regulation

of trade in a wide range of goods and services may

eventually be proposed to achieve reduction in GHG

emissions. Trade restrictions might arise in other

environmental contexts as well. Many environmental issues are now under discussion internationally. As mentioned in chapter 2, the UN Conference

on Environment and Development (UNCED) and

related discussions may address many different

questions, such as transboundary air pollution, forest

use and management, pollution of the oceans,

biodiversity, and waste management. It is possible

that some of these discussions will lead in time to

subsequent international agreements that contain

trade measures. These measures might be patterned

after those in the Montreal Protocol, CITES, or the

Basel Convention, or r-night be of a different type.

How will GATT judge when to permit trade

measures for environmental purposes? It seems

likely that some trade measures will be deemed to

violate some of GATT’s specific provisions.62 Then,

whether a measure violates GATT would depend on

whether any of Article XX’s exceptions apply.

While one cannot say with certainty, it appears likely

that Article XX will tend to be interpreted narrowly.

This could at times make it harder for nations to

achieve environmental goals; certain trade measures

necessary or desirable to that end might be hard to

maintain in the face of GATT opposition, and GATT

concerns might make it harder to adopt such

measures. Also, GATT concerns might induce

countries framing international environmental agreements to forego trade provisions that would help to

enforce the agreements or otherwise make them

more effective. Of course, Article XX might be

amended to apply broadly in environmental matters.

However, it might be difficult to enlarge Article

XX’s scope without also making it easier for nations

to erect protectionist barriers through trade measures

that they claim are needed for the environment.63 T o

satisfy both trade and environment goals, it could be

necessary to develop guidelines to help determine

when trade measures are appropriate for environmental purposes.

What might those guidelines be? What use should

be made of the six factors discussed above in

connection with the Montreal Protocol, or the eight

somewhat overlapping criteria listed thereafter?

Should the amount of trade disruption be somehow

weighed against the environmental risk, and if so

will a GATT dispute resolution panel be able to

perform such a task? Should trade restrictions be

permitted based on a country’s nonmembership in an

agreement (as opposed to a country’s actual environ-

@ ~~u~t~ S~te~Restrictiom on hw~ of ‘IIUM,S3 Report of the Panel, op. cit., paragraph 6.4. Similar sentiments have been voiced before. See

“United States-Taxes on Petroleum and Certain Imported Substances,” Report of the Panel adopted June 17,1987, paragraph 5.2.6 (case is discussed

in app. A); “EEC—Regulation of Imports of Parts and Components, ” Report of the Panel, adopted May 16, 1990, L/6657, paragraph 5.28.

61 me Eupea com~~ is plxle@~tion to reduce GHG efissiom, though it is not yet contemplating trade measures (See bOX 2-A).

62 one likely excqtion ~oncem made res~ctiom mirrored e~cfly by domestic re~tiom, such ~ a ban on importing products tit are prohibited

domestically. When such regulations concern only the product’s own characteristics, rather than the process by which the product was made, it is likely

that the import ban will be considered under GATT to be not a trade measure but an internal regulation, which normally would be permitted as long as

it was not discriminatory (see the annex to ch. 2). This situation is discussed further in ch. 4.

63 Somehthe trade policy com~ty ~so ~conmm~ tit, if imports ~ybe restricted due to the envhonmentipractices used hItheirprOdUCtiOm

it would be hard to prohibit import restrictions based onothercharacteristics of theproductionprocess (such as wages andhealthbenefits paid to workers).

These restrictions too could be used as a cover for protectionism. The possible abuse of trade restrictions in the name of environment is discussed further

in chs. 4 and 5.
52 ● Trade and Environment: Conflicts and Opportunities

mental conduct)?64 For a trade measure to be

‘‘necessary’ under Article XX(b), how hard must a

country first try to negotiate an environmental

agreement that would make trade measures unnecessary? While there is sometimes early warning about

environmental problems, it can take many years

before international consensus develops that a problem merits action. Sometimes a threat of trade

measures might be needed to prompt timely action.

How would a GATT panel decide whether that were

so in a given case? Questions such as these have

prompted the trade and environment policy communities to ask whether GATT should be amended to

provide clearer guidance, and whether GATT’ s

institutional structure will be adequate for making

the kinds of judgments that may be needed. These

questions are discussed in chapter 5.

ENVIRONMENT/TRADE AND

DEVELOPING COUNTRIES:

THE NORTH-SOUTH DEBATE65

The industrialized countries are the major contributors to many environmental problems, such as

stratospheric ozone depletion, and (despite their

often extensive environmental protection efforts)

have major domestic environmental problems. (See

discussion earlier in this chapter and box 3-A.)

Moreover, per capita pollution and resource use is

generally much higher in developed countries than

in developing countries. For several reasons, however, the countries of the North, along with growing

numbers of developing country citizens, are seeking

stricter environmental regulation by governments in

the South. Unless developing countries participate,

some global environmental problems (such as ozone

depletion or greenhouse gas emissions) will be very

difficult to remedy. For example, efforts to protect

the ozone layer would be jeopardized if developing

countries were to deploy CFC-containing refrigerators in their efforts to enhance living standards. In

other cases, the South’s own development efforts

can have global impacts-such as the biodiversity

loss that can accompany the destruction of tropical

forests or reefs. Developed countries also worry

about competitive impacts of lax environmental

standards in developing countries.

Many developing country governments see the

North’s environmental concerns as self-serving or

paternalistic and even a potential assault on sovereignty. From their perspective, the North, which has

prospered from a development path that has involved extensive environmental degradation, is

asking the South to divert resources needed for

development to environmental protection. Instead,

many developing countries, in the preparatory meetings for UNCED, have sought for the developed

countries to pick up most or even all of the added

costs for environmental protection, and for the

creation of a new “green fund” not administered

through current multilateral assistance agencies. The

South also has called for a “supportive international

economic environment” to promote developing

country growth and development through such

means as market access, terms of trade, and transfer

of technology on preferential and noncommercial

terms.66

There has been general agreement that developing

countries need financial help to achieve sustainable

development. But there is deep division about

specific levels and mechanisms. The developed

countries vary in their willingness to pick up the

costs, or to add to the current preferences given to

developing countries. However, the United States

and most other countries of the North generally

envision gradual or modest increases in assistance,

using current bilateral and multilateral funding

mechanisms. (See box 3-B.) These sensitivities and

issues, much in evidence at UNCED preparatory

meetings, form part of the context of North-South

environment/trade questions.

~ Discrimination against nonmembers could adversely affect the United States. The United States could face restrictions on exports of recyclable

hanxdous waste because of its delay in ratifying the Basel Convention. “lldks Aimed at Continuing U.S. Hazwaste Exports Stall, But Hope Remains,”

Inside EPA, Jan. 17, 1992, p. 14; “International Business Group urges Congress Tb Act on waste Export Treaty,” Znside EPA, Jan. 24, 1992, p. 15.

65 me tem $ $Nofi$$ and ~ ~Sou~* * we acomo~yus~ shofind fordevelop~ and developfigco~triese Use of tie terms is not intended tO imply

tht countries’ wealth or state of development follows geographic lines; neither is it meant to imply that developed and developing countries form

monolithic camps.

66 For exmple, at a Prepmatow meefig for ~C~ fi 1991, Cti ~d tie Group of 77 (a loosely orgatied group tit i.du(ks most developing

countries) proposed a negotiating text calling for an environmental fund to cover the “full incremental costs” of environmental measures without

reallocation of developing country reso~ces and “new and addi(ioti funding’ rather than use of existing bilateml or multilateral development

assistance. (As cited in UN General Assembly, Preparatory Committee for the United Nations Conference on Environment and Development Third

sessioq Geneva, Aug. 12-sept. 4, 19$)1, Aug. 28, 19$)1, china and Ghana draft decisions: Financial Resources. A/conf.151/PC/L.41.)
Chapter 3-Role of Trade Measures in Environmental Policy ● 53

Box 3-B—Financing Sustainable Development and Environmental Measures

in Developing Countries

No one really knows how much it will cost to address the environmental needs of the developing world. The

Secretariat for the UN Conference on Environment and Development (UNCED), in estimating total costs for

implementing the Conference’s multifaceted agenda, estimated that about $15 billion (possibly more if conventions

on climate change or biodiversity are adopted) would be needed for global environmental issues (defined to include

only ozone depletion, climate change, biodiversity and oceans). Another $750 million per year could be needed to

strengthen the capacities of international institutions. These figures pale against the Secretariat’s overall estimate

of the resources needed to implement UNCED’s agenda: between $500 billion and $625 billion a year through the

end of the century. Most of this appears to be for accelerated and sustainable development in developing countries.

The aggregate estimate is rough, and may be much overstated. The UNCED Secretariat, in releasing the

estimate, cautioned that there could be substantial overlap among categories. For example, a major effort to achieve

UNCED’s agenda item for sustainable livelihoods might require infrastructure investments also counted in other

agenda items (such as for human settlements, health, energy, reforestation, water systems and sanitation and

education). Some part of these investments (reforestation, for example) might be considered environmental.

The lion’s share of the total costs would be borne by the private sector or developing country governments as

part of their development plans. However, the Secretariat estimated that $125 billion per year in donor country aid

and confessional financing could be needed to catalyze developing country activities. This would be a substantial

increase over current levels of development assistance.

Official development assistance (ODA) for all purposes by countries that are members of the Organisation for

Economic Co-operation and Development averages around $50 billion per year. This amounts to about 0.35 percent

of those nations’ combined gross national product (GNP). An increase to 1 percent of GNP would produce $150

billion per year, according to the UNCED Secretariat, which notes that industrialized nation defense expenditures

(in some countries amounting to 5 or 6 percent of GNP) are decreasing.1 An increase to 1 percent would fall most

heavily on the United States, which spends roughly 0.20 percent of GNP on ODA. (Among OECD countries, the

United States ranks 13th in per capita aid; in absolute terms, Japan and the United States are the largest donors.)

Current Levels of Environmental Assistance

The amount of current assistance provided to developing countries for environmental projects is only a small

part of total development assistance. However, bilateral and multilateral development assistance programs

increasingly have environmental criteria and requirements—mostly to reduce the environmental impacts of

development within the country receiving the aid.2

Developed countries now provide some assistance to help developing countries deal with global environmental

problems through the Global Environment Facility (GEF).3 Set up in 1990, GEF is a 3-year pilot program

administered by the World Bank, the United Nations Environment program (UNEP) and the United Nations

Development Program (UNDP). Through two closely coordinated funds-the Montreal Protocol Interim

Multilateral Fund and the Global Environmental Trust Fund (GETF)-a total of $1.3 billion in technical assistance,

transfer of technologies and financial support will be provided to developing countries for qualified projects.

The Montreal Protocol fund is intended to help developing countries with low per capita emissions of

ozone-depleting substances phase out or avoid use of these materials. It now has $200 million for grants to such

countries, with projects implemented by UNEP, the World Bank, and UNDP.

1 Rqort of the Secretary General of the Conference, “Financial Resources and Mechanisms,” Preparatory Committee for the United

Nations Conference on Environment and Development Fourth Sessions, New York NY, March 2 to April 3, 1992, Plenary SessioQ

A/COnf.151/PC/101 United Nations General Assembly.

2 As ~it~ ~ Fi~~~ing New I~ter~tio~l En~i~~nm~nt~l co~itment$, Rqofl p~pared for the Committee on Foreign AffdlX Of the

U.S. House of Representatives and the Committee on Foreign Relations of the U.S. Senate by the Congressional Research Service, Joint

Committee Print (Washington DC: U.S. Government Printing OffIce, 1992).

3 G= ~omtion is from tie UN Development proWW tie UN Environment Program and the Worki Ba& Global EnVi~on~enf

Faci2i,;, Report of the Chairman to the December 1991 Participant’s Meeting, Part I: Main RepoIz November 1991, and “Global Environmental

Facility” (brochure, n.d., n.p.); and GEF Administrator’s Office, “Future Evolution of the Global Environmental Facility: Issues and Options,”

fiist draft dated Jan. 24, 1992.

(conthuedon next page)
54 ● Trade and Environment: Conflicts and Opportunities

Box 3-B—Financing Sustainable Development and Environmental Measures

in Developing Countries-Continued

GETF is the larger activity, with $1.1 billion committed to help developing countries participate in solutions

to global environmental problems. Projects will fall in four areas: global warming, protecting international waters,

preserving biological diversity, and ozone depletion. GETF can be used to help Eastern European and other needy

countries that do not meet the per capita emissions requirement of the Montreal Protocol Interim Fund to phase out

their use of ozone-depleting substances. By the end of 1991, 24 countries had contributed $800 million to a core

fund. (This included contributions from several developing countries totaling $100 million.) In addition, five

countries had agreed to cofinance about $250 million of support for related projects.

The Bush Administration, during climate change negotiations in February 1992, announced that it would

commit $75 million in new funds for developing world environmental assistance. A total of $50 million of this

would be for GEF; the remainder would be for bilateral aid for greenhouse gas inventories in the developing

countries.

The decision to make a direct contribution to GEF was a change in policy by the Administration, which

previously had only committed to what it called “parallel financing.” This entailed counting of relevant

environmental projects funded by U.S. Agency for International Development (AID) as the U.S. contribution. It

plans $150 million of AID projects for such parallel financing during the 3-year GEF pilot project. Although they

do not administer the U.S. projects, GEF administrators have agreed to include U.S. “parallel financing” in its

estimate of country contributions to the funds.

In addition to AID, several Federal agencies that are primarily domestic in focus, such as the Environmental

Protection Agency (EPA), the U.S. Forest Service, and the U.S. Fish and Wildlife Service, provide technical

assistance to developing countries for environmental purposes, generally on a reimbursable basis.

The Administration has identified some special initiatives with environmental components. As has been

mentioned, President Bush’s Enterprise for the America’s Initiative, which aims to promote Latin American

economic growth through trade liberalization, investment, and debt reduction, has an environmental component.

Other activities include environmental assistance to Eastern Europe and the U.S.-Asia Environmental Partnership,

launched in early 1992. Several agencies are also cooperating in an a public/private Environmental Training

Institute, to provide training to developing country officials and executives about environmental issues and

technologies.

The Administration’s proposed fiscal year 1993 budget also calls for a near doubling of funds for the

U.S.-Mexican border environmental plan (from $103 to $203 million). These funds are not development assistance,

as they will address environmental problems that affect both Mexico and the United States; Mexico plans to commit

$460 million to border area environmental problems over a 3-year period. (U.S.-Mexico environmental issues are

discussed inch. 2.)

Countries vary considerably in their ability and their environmental problems, but have few rewillingness to adopt domestic measures to protect sources to address them.

the environment, and in the commitment they give

to specific environmental priorities. Even the highly

developed and generally affluent countries of OECD

vary quite a bit in the priority they give to the

environment. Some newly industrialized countries,

while possessing the financial resources, have been

short on political commitment and perhaps also

technical know-how for environmental protection,

although there are exceptions (Singapore, for example, has strong environmental policies). The countries of Eastern Europe and the Commonwealth of

Independent States may recognize the severity of

The developing countries that comprise most of

the rest of the world generally have limited means to -

deal with their serious environmental problems; they

also vary in their interest and commitment. Many

developing country governments believe the health

and well-being of their citizens will be better served

by an intense drive for economic development than

by efforts to protect the environment. To these

governments, the environment/development issue

may still seem to be an either/or choice rather than
Chapter 3-Role of Trade Measures in Environmental Policy ● 55

an effort to achieve complementary goals.67 Some

elements of government and society in many developing countries are aware that long-term economic

prosperity will require improved management of

environmental resources. The question is whether

and how soon their views will be translated into

effective policies and priorities.

Increased official aid is not the only mechanism

for encouraging other countries to give more emphasis to environmental policy: several other options

exist, some of which involve trade and trade

measures. Some of the options that would be more

palatable politically to developing countries would

be less desirable from the viewpoint of developed

countries, and vice versa.

As has been mentioned, trade measures are

sometimes used to induce countries to change their

behavior. The way in which trade measures are

crafted could have important implications for their

effectiveness. Such measures may be more acceptable when they are part of an international agreement.

The Montreal Protocol, with its special provisions

for financial assistance and support for technology

transfer, is one model for encouraging developing

country participation. Of course, trade measures

taken under a multilateral agreement do not always

have wide support; multilateral agreements can have

few or many members.

In the absence of an international agreement,

unilateral measures may seem justified in some

cases. However, such measures are more likely to

spark resentment, and might more easily run afoul of

GATT, than an international agreement. (In the

tuna/dolphin case, many nations made submissions

criticizing the United States’ unilateral trade measures). 68

Innovative financing possibilities involving the

trading system have also been proposed. For example, as a step toward internalization of environmental costs, countries might agree to a system of

export levies (or import levies on products from

noncomplying countries) on commodities like timber. The revenues raised might then be paid into a

developing world environmental fund, or used by

the developing world exporters for application of

improved forest management practices or other

environmentally preferable activities.

Another possibility would be to make achievement of environmental objectives a goal in bilateral

or multilateral trade negotiations. As discussed in

chapter 2, some contend that U.S.-Mexico environmental questions will not get the attention they

deserve unless they are addressed in NAFTA itself,

rather than in a track parallel to the main discussions.

More generally, several bills or resolutions introduced in the 102d Congress propose to add environmental concerns to U.S. negotiating objectives in

future trade discussions (see app. B). One purpose of

these bills is to assure that U.S. environmental

standards are not weakened in the negotiations

process. (Some of the bills would also include labor

standards in U.S. negotiating objectives.)

Through the give and take of trade negotiations,

the developed countries of the North also could

increase market access for the South’s products,

which would enable the South to pay for more

environmental protection. As discussed earlier in

this chapter, it might be possible to remove certain

North-South trade barriers (such as barriers to

agricultural products) in ways that might benefit the

South economically and also contribute to environmental objectives if undertaken in an appropriate

fashion. These measures might also benefit consumers in developed countries through lower product

prices.

However, removal of specific barriers would

adversely affect some U.S. industries, workers, and

communities. Over the years, several types of

worker or community adjustment programs have

been created or proposed to deal with such adjustment problems.69 Such programs can help. However, U.S. adjustment programs, as currently structured, are neither funded at adequate levels nor

operated efficiently enough to have full effect. This

is in contrast to the extensive adjustment assistance

that is often available to workers in Europe or Japan

when displacement occurs. Moreover, in many

67 Fiwncing New Internatio~l Environw~tal comitment~, Repofi prep~d for the Committee on Foreign Afftis of the U.S. House Of

Representatives and the Committee of Foreign Relations of the U.S. Senate by the Congressional Research Service, Joint Committee Print (Washingto~

DC: U.S. Government Printing Office, 1992).

6s ~~ufit~ S~tes—Res~ctiom on hqNXIS of Tima,” Report of the Panel, Op. CLs~tion 40

69 For ~ disassion of adjustment prom t. respond t. defense spending ~tbacks, see Use co~ess,~lce of T~~ologyAssessmen~ Afier

the Cold War: Living With Lower Defense Spending, OTA-ITE524 (Washington DC: U.S. Government Printing Office, February 1992).
56 ● Trade and Environment: Conflicts and Opportunities

communities, workers may have a difficult time

finding new jobs of comparable quality to their lost

jobs. Thus, in the absence of economic development

or other public and private efforts that lead to new

jobs, adjustment measures alone can be little more

than a palliative. Adjustment policy in the 1990s will

have to take into account the changing competitive

position of the U.S. economy.70

Even if liberalized trade and investment produce

more resources that could be used for environmental

protection, 71 developing countries could still need

financial and technical assistance and support for

technology transfer in order to effectively implement environmental measures. Putting effective

environmental programs in place is not a simple

matter. Even governments that are committed to

environmental protection may lack the requisite

technical know-how, trained personnel, and administrative structures.

It seems unlikely that developed countries will

double or triple their total official aid to the level

said to be needed to catalyze full implementation of

UNCED’s agenda (see box 3-B). But, the alternative

of inaction-and continued environmental degradation—will also have costs. Environmental problems,

if left unchecked, could in time require enormous

expenditures. As developing countries grow in

population and try to climb the economic ladder,

poor environmental choices could not only produce

relatively more impacts on the global environment

but also undermine efforts to improve their standard

of living. Thus, it is likely to be ever more imperative

that environmental degradation in developing countries be greatly reduced.

While there is agreement in principle on the need

for transfer of environmentally sound technology on

mutually agreed terms, substantial differences exist

on how the terms should be defined. The North

prefers technology transfer on commercial terms,

although perhaps supported in part through financial

assistance. The developing countries hold that the

transfer of technology should be on a preferential

and confessional basis. This debate has proceeded at

a high level of generality, with limited consideration

of specific technology availability .72 In some cases,

technology already in use in developed countries

could be readily employed in developing countries.

Often, these technologies are nonproprietary.

Mechanisms for transfer will need to involve not

only governments, but the private sectors of the

respective countries, with opportunities for transfer

occurring not just from but in some cases to

developed countries. The potential for technology

transfer and technology cooperation suggests that

assistance is not always just an expense for a

developed country; it can be an investment in

developing future markets for environmental and

other goods and services. Several countries with

well-established environmental industries, including Germany and Japan, seem to view their foreign

assistance in this way. U.S. industry is highly

competitive in many sectors of the environment

industry. In addition to official development assistance, several U.S. Government programs exist to

facilitate commerce between U.S. firms and developing and newly industrialized countries. U.S.

companies may be missing commercially attractive

opportunities due to lack of information about such

programs. Chapter 2 discusses some of these programs briefly, while the current and prospective

market for environmental technologies and services

is discussed in Appendix D.73

70 For diScu~~ion ~f~~ ~~~~o~itiom S= u-s. Congess, ~lce of T~~olo~Assessmen~ Competing Economies: Amn”ca, Europe, andrhe

Pacific Rim, O’JA-ITE-498 (Washington, DC: U.S. Government Printing Office, October 1991).

71 Witi ~e~fo~s of the world pop~atioq developing cow~a awowt for o~y one-f~~ to one-fo~ of w dti@ foreign hWeStmt?nt. Fift~

developing countries attracted 75 percent of this investment. The World Banlq World Development Report 1991 (New York NY: Oxford University

Press, 1991), p. 96.

72 T~kolo~ tr~fer issues are discussed in Report of the Secretary ~ntd Of the COIIferenCG ‘‘Transferof Environmentally Sound Technology”

(Section N, Chapter 2 of Agenda 21), A/CONF.151/PC/100/add.9, Fourth Sessio~ Preparatory Committee for the United Nations Conference on

Environment and Development, March 2 to April 3, 1992.

73 Subswuat ~po~ ~ this ~s=sment ~&scms tW~oloW @nsfer t. d~elop~g co~tries ~d the possible role of U.S. industry in pmVid.@

environmental goods and services.
Chapter 4

Effects of Environmental

Regulations on Trade

and Competitiveness
Chapter 4

Effects of Environmental Regulations

on Trade and Competitiveness

The previous chapter discussed ways in which

trade affects the environment, and the circumstances

under which trade restrictions might be appropriate

to reach environmental goals. This chapter considers

how environmental regulations can affect trade and

manufacturing competitiveness.

In some cases, domestic environmental regulations, particularly on products or product disposal,

can act as ontariff trade barriers. Such measures are

sometimes needed to achieve environmental goals.

However, some fear that de-facto trade barriers will

be erected under the guise of environmental protection. Sorting out the impacts of these measures on

both trade and the environment can be difficult. The

effects of environmental provisions on trade are not

well understood.

At the same time, domestic environmental regulations, particularly on industrial processes, can put

domestic firms at a disadvantage in international

competition. (Regulations on products’ inherent

characteristics, use, and recycling or disposal would

be less likely to have competitive impacts since

these types of regulation would apply equally to

imported and domestic goods.) A disadvantage

might occur if competitors in a foreign country face

weaker regulations and/or enforcement (and thus

lower compliance costs). Domestic firms could also

be disadvantaged if foreign firms face similar

regulations but receive more government help in

meeting them. This chapter considers the extent to

which U.S. manufacturing firms suffer a competitive

disadvantage, and possible responses to such disadvantage.

Over the years, many studies have examined the

competitive impacts of environmental regulations

for manufacturing. (This literature is reviewed in

appendix E.) These studies are difficult to summarize and offer somewhat mixed conclusions. Some

studies have not found a relationship between

environmental regulation and trade and investment.

Others judged the overall effect to be “small” or

‘‘insignificant,’ though there is no agreed notion of

what those terms mean in this context. However, in

certain sectors facing high environmental control

costs, the effects on trade performance were larger.

Serious problems with both the data and methodology of these studies make anything but limited

and/or tentative conclusions problematic. Also,

caution should be taken in applying these results to

the present competitive and environmental climate.

Much of this research involves data from the 1970s,

when fewer U.S. industrial sectors were under as

great competitive challenge from abroad. What were

modest impacts 10 or 15 years ago might well be

more troubling today when competition as a wholearising from many nonenvironmental reasons-is

more intense, and U.S. environmental regulation is

more strict.

This chapter also discusses whether countervailing duties or other trade measures are likely to bean

effective response when U.S. firms face possible

competitive disadvantages from lax environmental

standards in other countries. While such measures

merit consideration, their effectiveness in remedying competitive impacts is limited. Other alternatives, such as negotiating with other countries to

raise their standards, domestic support for research

and development, and technical assistance to industry, may need equal or greater consideration in a

strategy to maintain U.S. manufacturing competitiveness.

ENVIRONMENTAL

REGULATIONS AS TRADE

BARRIERS

As has been mentioned, governments use various

means to regulate environmental conduct within

their borders. They may regulate manufacturing

processes, for example, by requiring permits for the

release of pollutants. Countries also may regulate

which products may be produced and sold, and how

they may be used and disposed of. For example, a

country might require cars to meet specified emissions standards; products not to contain banned

compounds (such as polychlorinated biphenyls

(PCBs)); and manufacturers to take back empty

beverage containers for refilling and reuse.

To be effective, a country’s system of regulations

to some extent must cover imported products. A

–59–
60 . Trade and Environment: Conflicts and Opportunities

country’s internal regulations seldom extend to the

process by which imported products are made.1 But

the regulations likely would subject imported products to the same standards as domestic products

regarding the nature of the product (PCB-free

equipment), its use (catalytic converters must operate effectively for a specified number of miles), and

its disposal (reuse of beverage bottles).

Differences in internal regulations can impede

trade: products made for use in one country might

not meet another country’s standards.2 When standards can be harmonized, or made similar, trade can

be more open, and trade disputes rarer. Thus, as

recognized by the Organisation for Economic Cooperation and Development’s (OECD) ‘harmonization principle’ (see ch. 2), harmonization can be a

worthwhile goal. However, as OECD recognized,

harmonization is not always appropriate or feasible;

sometimes it makes sense for countries to have

different standards (see ch. 3 and box 3-A).

The most comprehensive effort to harmonize

environmental standards has been taken within the

European Community (EC) (see box 2-A in ch. 2).

EC’s supra-national government facilitates harmonization. Outside the EC, standards harmonization has focused on nonenvironmental areas, such as

technical compatibility of products, and has been

achieved largely by the private sector. Harmonization of environmental standards requires governmental action.

The basic General Agreement on Tariffs and

Trade (GATT) normally permits differences in

internal regulations. Internal regulations need not be

justified; GATT only requires that domestic goods

and imported goods from all countries be treated in

the same way (see the annex to ch. 2). Moreover,

these regulations may be enforced against imported

goods at the border: nations that ban, tax, or

otherwise regulate certain domestic goods may ban,

tax, or regulate the importation of those same

goods.3 The GATT Standards Code (which applies

only among countries that have signed onto the

Code) goes somewhat further, providing procedures

and principles designed to minimize the trade effects

of domestic standards (see the annex to ch. 2). The

Standards Code also provides for challenges to

domestic regulations as unduly restricting trade,

although no such cases have been adjudicated.

However, the Standards Code, like the basic GATT

agreement, does not call for second-guessing a

country’s environmental policy or weighing the

environmental benefit of a regulation against its

disruption of trade. Rather, a country’s environmental goals are taken as given, and trade effects of

regulations are accepted as long as the regulations

conform to GATT’s requirements (e.g., no discrimination against foreign goods). This approach, while

allowing countries flexibility in achieving environmental goals, also has the potential to permit

protectionist regulations taken in the name of

environment.

Quite apart from GATT’s particular rules, it can

be a complex task to judge the appropriateness of

specific environmental measures with trade effects.

A recent dispute between the United States and

Canada over lobsters illustrates some of the difficulties (see app. A for further details). This dispute was

decided by a binational panel under the terms of the

U.S.-Canada Free Trade Agreement; however, under

the terms of that agreement, the panel applied GATT

law. Both U.S. and Canadian regulations prescribed

a minimum size for harvested lobsters, to ensure that

lobsters reached reproductive maturity before they

were caught. Canada’s minimum size was smaller

because lobsters in Canadian waters reached reproductive maturity at a smaller size. However, the

United States banned imports of live Canadian

lobsters below the U.S. minimum. Canada saw this

as an unfair trade barrier, holding that the ban was

not necessary to protect lobster stocks. The United

States argued it could not effectively enforce its

domestic lobster conservation program if foreign

lobsters under the U.S. minimum size were permitted in the U.S. market, because it was too difficult to

determine lobsters’ origin. The majority of the

binational panel deciding the case did not evaluate

what conservation benefit the U.S. regulation had, or

1 Attempts to influeme processes used abroad often take a more indirect fonq such as threatened or actual trade restrictions. As discussed in ch. 3,

such trade restrictions have greater potential to conflict with the rules of the General Agreement on Thriffs and Trade (GA’lT) rules than do the domestic

environmental measures considered here.

2 In this paper, “regulation” and “standard” are, unless otherwise specilled, used interchangeably to denote requirements imposed by governments

rathex than actions taken voluntarily by fm.

3 This is clearly so for regulations based on the product itself, but more doubtful for regulations based on the process by which a product was made.

(See annex to ch. 2.)
Chapter 4-Effects of Environmental Regulations on Trade and Competitiveness ● 61

weigh that benefit against trade disruption. Rather,

it found the regulation proper because U.S. and

Canadian lobsters were subject to the same specific

requirements as U.S. lobsters.

As has been mentioned, GATT cases are not now

decided by balancing environmental benefit against

possible distortion to trade. Such a balancing has

occurred in a dispute within the EC, where EC trade

rules apply. This occurred in a case4 involving a

1981 Danish regulation providing that gaseous

mineral waters, lemonade, soft drinks, and beer

could only be marketed in returnable containers,

defined as containers for which there was a system

of collection and refilling under which a large

proportion of containers used would be refilled.

Furthermore, except for some limited circumstances,

manufacturers could only use containers the Danish

Government had approved. Foreign companies perceived these requirements as unfair because returning containers for refilling would be much more

costly for them than for local producers. Also, they

were afraid the Danish Government might limit its

approval to a few standard bottle shapes, thus

prohibiting foreign companies from using distinctive bottles carrying brand recognition. The Danish

regulation was also viewed with suspicion because

it did not apply to milk and wine, two products for

which Danish producers had little foreign competition.

The European Commission brought a complaint

against Denmark, asserting the Danish regulation

unduly restricted the free movement of goods among

EC member countries. The Danish Government

argued its measure was justified by environmental

concerns. With regard to the deposit-and-return

system for empty containers, the European Court of

Justice (the EC’s highest court) agreed with Denmark. It noted that protection of the environment is

one of the EC’s essential objectives, and therefore

may justify certain limitations on the free movement

of goods. Regarding the Commission’s argument

that there were less restrictive options available to

the Danish Government, the court found that the

trade burden of the Danish requirement for returnable containers was not disproportionate to its environmental benefits.

However, the court did find that the burden of

requiring foreign manufacturers to use only governmentapproved containers was disproportionate to the

benefit. It noted that a system for returning nonapproved containers was capable of protecting the

environment, and observed that the volume of

bottles at issue would be small in any case owing to

the deposit-and-return system’s substantial restrictive effect on imports.

This decision is an example of how a court or

other dispute settlement panel could apply a proportionality test to balance competing objectives of free

trade and environmental protection. Some critics

argue that the court was too accepting of the Danish

regulations, thus leaving the door open to protectionist use of environmental legislation.5 Perhaps encouraged by this case, Germany has fashioned a

tough law on recycling of packaging that also could

put imported products at a disadvantage.6

Ultimately, both the EC and GATT face the same

tough problem: how to leave leeway for legitimate

domestic regulations for health, safety, environment, and similar matters, while at the same time

preventing the use of regulations for protectionist

ends. This can at times be a delicate balancing act;

attempts to more fully satisfy one of these goals can

frustrate the other.

The difficulties in striking this balance are apparent in the GATT Uruguay Round negotiations that

focus on minimizing trade barriers. This negotiating

goal was endorsed by Congress, which in 1988 listed

“the reduction or elimination of barriers and other

trade-distorting policies and practices” as one of

three overall trade negotiating objectives, and also

singled out ‘‘unjust~led phytosanitary and sanitary

standards.

The “Dunkel draft” of proposed GATT Amendments under consideration in early 1992 would

address this objective through a revised Agreement

4 me use is discussed in more detail in app. A.

5 It is ~ofi ~ofig tit De-k ~s had a ~@y ~oncen~at~ beer fidus@y. ~ the mid.1980s Cmlsberg ~d l’hborg, both controlled by United

Breweries, together had 70percentof the Danish market for beer. See ‘The Danish Bottles Case,” an unpublished case study prepared by Ph.D. candidate

John Clark under the supervision of Professor Scott Barretl the London Business School, and supported by the Management Institute for Environment

and Business, Washington, DC, 1991.

G Verpackungsverordnung (Ordinance on the Avoidance of Paclmging Waste), June 12, 1991.

7 Otibus Trade ~d competitiveness Act of 1988, public MVV 1(J)-418, sec. llol(a)(2), 1lO1(b)(’7)(C).
62 . Trade and Environment: Conflicts and Opportunities

on Technical Barriers to Trade (commonly called the

Standards Code), and a proposed new Decision on

Sanitary and Phytosanitary Standards (commonly

called the SPS Code).* The draft would make the

Standards Code a part of the basic GATT agreement,9 at the same time strengthening some of its

language. The Standards Code now states:

Parties shall ensure that technical regulations and

standards are not prepared, adopted or applied with

a view to creating obstacles to international trade.l0

The Dunkel draft would change the last part of the

sentence to “with a view to or the effect of creating

unnecessary obstacles to international trade. ”11

Thus, even if innocently intended, standards could

be considered improper based on their actual effect.

As to when an obstacle to trade is “unnecessary,”

the Dunkel draft adds:

For this purpose, technical regulations shall not be

more trade-restrictive than necessary to fulfill a

legitimate objective, taking account of the risks

non-fulfillment would create.12

The draft explains in a footnote that:

This provision is intended to ensure proportionality between regulations and the risks non-fulfillment

of legitimate objectives would create.13

In principle, there is nothing wrong with judging

regulations on their effects as well as their intentions; a trade barrier does not become less harmful

because it is unintended. It is also in principle proper

to judge adverse trade effects by whether they are

necessary to achieve an environmental goal, and

whether a less trade-restrictive means could be

found. It would be beneficial for those making

environmental policy to anticipate possible trade

effects, and to craft regulations to minimize them. In

particular, just as environmental impact assessment

is sometimes proposed to evaluate changes in trade

laws, so might a trade impact assessment be appropriate for major changes proposed in environmental

laws.

However, depending on how these proposed Standards Code provisions are interpreted, their practical

effect might be to make it harder for nations to

maintain legitimate environmental regulations. Such

regulations could be subject to second-guessing: in

hindsight, it might be easy to think of an alternative

approach that would have had less effect on trade.14

The requirement to use the least trade-restrictive

means might be interpreted to mandate the use of

more flexible (but seldom tested) forms of regulation

(e.g., tradable over nontradable permits, or taxes

instead of quantity limits), on the theory they pose

less of an obstacle to trade, unless strong evidence

showed the less restrictive form of regulation would

not meet the environmental goal. Also, it could be

difficult for a panel to determine whether certain less

trade-restrictive measures could address environmental concerns effectively and in a timely manner.

Another amendment proposed in the Dunkel

draft, the SPS Code, would cover regulations

concerning the life or health of plants and animals,

the diseases spread by them, and health and the

healthfulness of foods derived from them.15 This

Code too would be made part of the basic GATT

agreement. The proposed SPS Code requires standards to be “based on scientific principles and [not

be] maintained against available scientific evidence.’ ’16 While ‘[sanitary or phytosanitary measures which conform to international standards,

guidelines or recommendations shall be deemed” to

comply, stricter measures must have “a scientific

8 The Dunkel draft, named for GATT’s Secretary-General (see ch. 2), is set out in Multilateral Trade Negotiations, the Uruguay Round, Trade

Negotiations Committee, “Draft Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations,” Dec. 20, 1991, GA~

Document MTN.TNC/W/FA.

Ch. 2 discusses certain other proposed changes found in the Dunkel draft, such as strengthened dispute nxolution procedures.

9 The ~ent StatUS of GA~ Codes is described in the annex to ch. 2.

10 GATT standar& Code, paragraph 2.1.

11 D~el draft, p. G.2, paragraph 2.2 (emphasis denotes words added).

12 Dur.dcel draft, pp. G.2-G.3, paragraph 2.2.

IS bid., p. G.3, footnote 1.

14 ~ ~t~re~g GA~ ficle~ some panels ~ve fo~d tit ~ternative, less trade-res~ctive approaches sho~d have been @kd. ThiS OCCUKed

with the United States’ case against Thailand concerning cigarette import licensing (see app. A), and in Mexico’s case against the United States in tbe

turddolphin dispute (see chs. 2 and 3).

15 ‘f’he complete def~tion of s~~and phytosanitary me-esis given fi meD~el &afs, p. L.45, paragraph 1.

16 Dunkel draft, p. L.36, paragraph 6.

17 D~el draft, p. L.37, paragraphs 10, 11.
Chapter 4-Effects of Environmental Regulations on Trade and Competitiveness ● 63

justification.’ ’17 These provisions, like the proposed

amendments to the Standards Code, are for a

worthwhile purpose. If the scientific evidence behind regulations is never scrutinized, the door is

opened to trade barriers. A case often cited in this

regard is an unadjudicated dispute between the

United States and the EC. The EC banned the import

of beef from cattle fed certain hormones, even

though the United States maintained there was no

scientific evidence of a health risk. (See app. A.)

On the other hand, the proposed SPS Code could

be interpreted so as to discourage legitimate SPSrelated environmental regulations. How much scientific evidence will be required for “a scientific

justification?’ Scientific certainty is rare; usually

scientists can at best agree on a range of outcomes,

with estimates as to their probabilities. There is

typically uncertainty regarding the severity of the

effects likely to arise from particular forms of

environmental problems. Would the SPS Code

require, if not a scientific certainty, at least a

scientific consensus that an outcome is probable?

What if there is no scientific consensus? Would

regulations be permitted in order to avoid a potentially catastrophic outcome that scientists agreed

was possible but very unlikely, or that only a small

minority of scientists thought possible? It is not clear

how the SPS Code would be interpreted. At issue is

who has what burden of proof. Some environmentalists hold that the term ‘sound science” implies that

those in favor of a regulation could have the burden

of proving that it is justified. They would urge a

“precautionary principle” that puts the burden of

proof on those who challenge the regulation.18 Since

often neither side can actually prove its case, the

allocation of the burden of proof is important. And

whatever the scientific burden of proof is, it is not

clear dispute resolution panels can reliably determine whether it is met; that task could be difficult

even for international scientific organizations.

Even if there were no scientific uncertainty, it

would still be unclear what constitutes ‘a scientific

justification.’ While science can evaluate environmental risks, it cannot in the end determine how

society should trade off environmental concerns

against economic and other concerns. How much

expense is justified in order to avoid a particular

form of environmental damage or a particular health

effect, or the risk of such effects? This cannot be

answered in the abstract, nor can it be answered by

scientists alone; it is a societal question, one that

normally would be resolved at least in rough

measure by a political process. It is not clear how

GATT panels could judge for society what regulations are justified.

While the proposed SPS Code could result in

GATT panels making the judgments described

above, it would not necessarily be interpreted in that

way. The staff of the U.S. Trade Representative

(USTR) commented to OTA that the text (which

refers to ‘a” scientific justification) and the negotiating history make it clear that: 1) when the scientific

community is divided into two or more scientific

positions, each country would be free to choose

which of those scientific positions to adopt; and 2)

each country would be free to make its own tradeoffs

between environmental risk and other concerns.19

Also, some environmentalists are concerned the

SPS Code recognizes the Codex Alimentarius Commission (CAC) as a source of international standards

for food safety .20 CAC, which now sets voluntary

industry guidelines for food safety, is jointly sponsored by two agencies of the United Nations, the

Food and Agriculture Organization and the World

Health Organization. U.S. delegations to CAC have

had heavy industry representation and much less

representation of environmental and consumer

18 me ~r=autiom ~ficiple is ~~at em-that “a Substance or activity posing a threat to the environment k prevented from *=-tie

environmen~ even if tbere is no conclusive scientiilc proof linking tbat particular substance or activity to environmental damage.” James Cameron and

JuliAbouchar, “ThePrecautionaryPrinciple: A Fundamental Principle of LawandPolicyforthe Protection of the Global Environmen4° Boston College

International and Comparative Luw Review, vol. XIV, No. 1, 1991, p. 2.

B perso~ communication with USTR stdf, Mu. 27, 1992.

m Dunlcel draft, p. L.46, pma~aphs.
64 ● Trade and Environment: Conflicts and Opportunities

groups; it is claimed that the same is true for other

countries.21

The proposed Standards and SPS Codes also

could call on GATT’ members to make more effort

than now required to get state and local governments

to follow the Codes’ rules. These proposed Codes

provide that counties “shall formulate and implement positive measures and mechanisms in support

of the observance of” the Codes’ provisions by

‘‘other than central government bodies. ’22 In principle, it makes sense to require subnational governments to follow GATT’s rules regarding technical

regulations; indeed, subnational regulations, because they can vary from region to region within a

country, have even greater potential than national

regulations to disrupt trade. However, depending on

how the Codes’ other provisions are interpreted

(including those discussed above), state and local

governments might find it harder to maintain even

legitimate environmental regulations, and a national

government might find it harder to let them. Where

a state’s regulation was stricter than international

norms, the state might face a heavy burden of

justifying its deviation. In the United States, states

and localities sometimes impose stricter standards or

requirements than Federal Law.23 Some states and

localities have established their own materials and

waste policies including deposit-refund and redemption value systems for beverage containers, minimum recycled fiber content for newsprint, and bans

on particular materials (e.g., aseptic drink containers

and polystyrene fast-food packaging).

In sum, the trade disputes and the proposed

amendments just discussed highlight some issues

likely to arise when the objective is to both promote

liberal trade and foster environmental protection.

Such a goal will likely require both informed scientific judgment on environmental risks and possible

responses, and choices on how such risks should be

balanced against other societal concerns. These

judgments are not ones GATT dispute resolution

panels, as now constituted, would seem well-suited

to make; possible procedural modifications and

institutional alternatives are considered in chapter 5.

EFFECTS OF LAX

FOREIGN REGULATIONS

ON MANUFACTURING

TRADE AND COMPETITIVENESS

In examining whether lower environmental standards abroad should be met by trade measures to

counteract possible adverse impacts on U.S. manufacturing firms, several complex questions need to

be considered. One question is how standards

compare. Standards are not always lower abroad. A

few other leading industrial countries, such as

Germany and Japan, have standards that are, at least

on balance, roughly comparable to the United States.

In some areas the United States may have higher

standards; in other cases, Japan or Germany. (See

21 Dapne Wysham, “The Codex Connection, Big Business Hijacks GA~,” The Nation, Dec. 17, 1990, pp. 770-773; Tom Hillard, Trade Advisory

Comw”ttees: Privileged Access for Polluter, Public Citizen’s Congress Watc4 December 1991, pp. 27-28 (citing sources including Report of the

Nineteenth Session of the Joint FAOIWHO CodtxAlimentarius Commission (Rome, Italy: Food and Agriculture Organization of the United Nations and

World Health Organization July 1991)); Charles Arden-Clarke, WWF International, The General Agreement on Tarzjfs and Trade, Environmental

Protection and Sustainable Development, revised November 1991, p. 28. If an institution such as CAC has instilcient environmental representatio~

the institution might be made serviceable by changing the representation. In 1991, for the fiit time, the U.S. delegation to CAC included some

representation from consumer groups. Tom Hillard, op. cit.

22 Dtiel draf~ p. G.5, paragraph 3.5, and p. L.43, paragraph 45. The current Standards Code includes a simik duty, but us= weak~ lmge,

requiring that parties “shall take such reasomble measures as may be available to them to ensure that local government bodies within their territories

comply.” GATT Article XXIV, paragraph 12, contains similar language. However, the effective difference between the current and proposed language

may be small. As this paper was going to press, The GATT Council adopted and released a decision interpreting the Article XXIV language to require

that the mtional government make a “serious, persistent and convincing effort” to secure compliance by the local government with GATI”S rules.

“Canada-Irnport, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing Agencies,” Report of the Panel, Oct. 16, 1991, GATT

Document DS17~ paragraphs 5.35 through 5.39. That case concerned a U.S. complaint against alcohol regulation by Canadian provinces. The Arlicle

XXIVlanguage is also pertinent to another very recent dispute, this one brought by Canada concerning state alcohol regulations within the United States.

The panel’s report in this case was given in mid-March 1992, to GATT’s member countries, and at that time was thought likely to be considered at the

April 30 GA’IT Council meeting. Inside U.S. Trade, Mar. 20, 1992, Special Report, p. S-1 (article prints sections 5 and 6 of the panel’s report). The

panel stated that the qualifications on the duty to make state and local regulations conform to GATT ‘grants a special right to federal states without giving

an offsetting privilege to unitary states, and has to be construed narrowly to as to avoid undue imbalances in rights and obligations between contracting

parties with unitary and federal constitutions.” Ibid., p. S-13, paragraph 5.79. The panel expressed the opinion that failure to force compliance is justifkd

only when a country’s “constitutional distribution of powers” prevents the mtional government from controlling measures by regional and local

authorities. Ibid.

u See, for e~ple, 33 UeS.CeA. 1370 in tie Federal Water pollution Control A@ and 42 U.S.C.A. 7412(r)(l 1) (accident pmventionprovisiom) ~

42 U.S.C.A. 7429(h)(1) (solid waste incineration) in the ClCan Air Act.
Chapter 4-Effects of Environmental Regulations on Trade and Competitiveness ● 65

app. E.) However, some other OECD countries do

have lower standards. Standards in developing

countries are generally even lower. The case of

greatest current interest is Mexico because of its

common border with the United States and the

possibility of a North American Free Trade Agreement (NAFTA) (see ch. 2). Another OTA study,

expected to be issued in the summer of 1992, is

examining the implications of U.S.-Mexico trade,

technology, and investment in detail.

Newly industrializing countries such as South

Korea and Taiwan, with substantial manufacturing

capacity but weaker environmental standards, probably present the greatest potential difficulty. Taiwan

is in the early stages of implementing environmental

reforms; South Korea lags behind. Legal standards

alone are an imprecise gauge of competitive impact;

implementation and enforcement have to be taken

into account. There may be more likelihood that

environmental standards will be enforced and implemented in a country, like the United States, with

open political processes and substantial opportunities for citizen action, than in countries with less

open systems. Even when standards and enforcement are roughly comparable, governments can

differ in the form of regulation, the level and kind of

support (e.g., tax incentives, technical assistance) to

help their industries comply with environmental

regulations, and the nature of the relationship

between government and industry. This subject will

be addressed more fully in the final report in this

assessment.

Another question to be considered is the degree to

which regulations affect competitiveness. Although

higher U.S. standards, when they are present, can

constitute a competitive disadvantage for U.S.

manufacturing in some sectors, there are many

complicating factors. Some firms have implemented

strict U.S. regulations in ways that reduce any

competitive disadvantage or even create a competitive advantage. This can happen in two ways, only

mentioned here but to be treated more fully in OTA’s

final report. First, compliance with higher standards

can sometimes lead to process improvements that 24 Second, higher increase manufacturing efficiency.

U.S. standards can put U.S. firms in the lead for

technology to meet those standards. Being first with

the technology could give U.S. firms an edge in

countries that subsequently adopt similar standards.

Higher standards can also give U.S. companies an

edge in the market for environmental goods and

services. Germany, the United States, and Japan are

the largest producers and exporters of environmental

equipment and services because of their relatively

strict environmental standards. (See app. D.)

Various responses (including both trade and

domestic measures) could be taken in cases where

lower standards abroad do put U.S. firms at a

disadvantage. A possible trade response would be to

treat weaker foreign regulations as a subsidy, and to

levy countervailing duties.25 This approach has an

appealing logic. According to economic theory,

environmental regulations are supposed to “internalize’ the costs of pollution to society; that is, to

make the polluter pay those costs. When costs are

internalized, the market operates more efficiently,

producing private behavior that in theory maximizes

social welfare. Compared to this situation, a failure

to internalize costs of pollution amounts to a kind of

market-distorting subsidy to the polluter. Under U.S.

law, subsidized imports can sometimes be subject to

countervailing duties. These are extra import tariffs

designed to neutralize the effect of the subsidy, thus

in principle counteracting a market distortion and

removing U.S. firms competitive disadvantage.

Whether it would be appropriate to apply such

duties to imports to adjust for lax (or nonexistent)

foreign environmental regulations would depend on

many factors. Some economists point out that more

permissive regulations abroad do not necessarily

represent a major distortion of the free, costinternalized market.26 Factors such as industrial

makeup, population density, and social priorities

(this latter influenced by the country’s degree of

wealth) enter into the calculation (see ch. 3).

Nevertheless, regulations in other countries, especially in developing countries, are often less strict

than would best serve that country’s interest—

especially in the longer term (ch. 3); in such cases,

the absent or lax regulation distorts the market.

Moreover, a country’s regulations will not normally

take into account harm done abroad by domestic

24 U.S. conwe~~, offiW of T~~~ology A~sessmen4 &n”ous Reduction of Hazardous Waste: For pollution Prevention and Industrial E@”ciency,

OTA-ITE-317 (Washington DC: U.S. Government Printing Office, September 1986), pp. 6,20,77.

~ See appo B for discussion of some countervailing duty legislation proposed in tie Imd Congress.

26 For exmple, see Judi~ M. De~, Tr~e ~~ f~e Environment: A s~~ey of the Literature, paper prepar~ for the World B* 1991.
66 ● Trade and Environment: Conflicts and Opportunities

activities that produce transborder or global environmental degradation; from the point of view of the

world as a whole, this is another market distortion,

which countervailing duties could address.

In particular, when transborder or global environmental degradation affects the United States, the

environmental damage suffered in the United States

might outweigh whatever bargain the price of the

goods represents. In that case, countervailing duties

could be appropriate to stop a transaction that hurts

the United States. In a case of what seems to be

purely local pollution, the goods’ mode of production might not have an adverse environmental effect

on the United States—but could have a competitive

impact, depending on the industry.

Even when weak foreign regulations act as a

market-distorting subsidy, it is not always in the

United States’ own economic interest to levy

countervailing duties. This is true for subsidies in

general, not just those in the form of lax environmental standards.27 Also, levying countervailing

duties based on the level of environmental standards

could spark resentment, especially from developing

countries. Some developing countries see protectionism as the motive underlying developed countries’ efforts to raise developing countries’ environmental standards (see ch. 3). Finally, countervailing

duties on lax environmental regulations probably

would be deemed to violate GATT. if challenged.28

(It is unlikely GATT’s members would agree to

change this.) A unilateral U.S. decision to apply

them could provoke rounds of retaliation and

counter-retaliation.

Another concern is whether countervailing duties

would be effective. The threat of trade measures

such as countervailing duties sometimes can in itself

prompt change in a foreign country’s policies.

However, OTA’s previous studies on trade show the

present countervailing duty laws are not very

effective in counteracting foreign advantages. Reasons include: delay before duties can be applied;

difficulty of discovering and proving subsidies; cost

of legal proceedings as a disincentive to seeking

relief; difficulty in quantifying subsidies; and difficulty of satisfying the injury requirement.29 To some

extent, these problems could be ameliorated. For

example, the government could pursue cases on its

own, without waiting for industry (as is now

permitted under U.S. law but very rarely done), and

the injury test might possibly be made easier to

satisfy under U.S. law. Even with these changes,

questions about effectiveness would remain. The use

of countervailing duties as a response to inadequate

environmental standards would probably suffer

many of these same problems.

Treating weaker foreign regulations as subsidies

would raise new issues in the administration of

countervailing duty laws. To quantify the subsidies

would require computing the hypothetical extra

costs foreign firms would incur if they had to meet

U.S. standards. It could be difficult to determine

precisely what a foreign firm would have to do in

this case, and how much it would cost (including

time spent as well as money paid). Moreover, it is

not clear what it would mean for a foreign country

to have comparable standards as the United States.

For example, a country that imposes less strict air

pollution emission requirements on industry than the

27 co~tem~~gduties will often be benefici~ to the country imposing them when foreign subsidies involve a key industry, one tit ~ntribut=

disproportionately to a country’s wealth because of factors such as increasing returns to scale, increasing returns to learning, and technology spillovers

to other industries. When a domestic industry experiences a sudden surge in competition from imports, countervailing duties can help to avoid sudden

displacement of workers and facilities, and to permit orderly reshucturingand downsizing to improve competitiveness. However, in both cases, domestic

measures to aid the industry are normally preferable to trade measures. In general, whether countervailing duties are desirable is hard to say; it depends

on many factors including the condition of downstream industries that use the imported item. U.S. Congress, Offke of Technology Assessment,

Competing Econom”es:America, Europe, and the Pacific Rim, OTA-ITE-498 (Washingto~ DC: U.S. Government Printing Office, October 1991), pp.

55, 122-124, 153-154.

28 while G~ does not Pr=isely define the concept of subsidy ~d the ~tter is not free from doubt a @im ding tit couMUWd.@ duties ~

a permitled response to lax environmental regulations is unlikely. If countervailing duties were permitted to address how a fm benefits from lax

environmental regulatio~ they might also appear justiled to address benefits from lax governmental regulations in other areas such as labor, and worker

health and safety laws. This would be quite an extension of the currently understood scope of permitted

application of countervailing duties under GA~.

29 u-s+ ConWess, Offle of Technology Assessment, Competing Econo~”es:America, Europe, andthe paCificRim, OTA-ITE-498 (’w~hingto~ DC:

U.S. Government Printing Office, October 1991), pp. 138-154. The injury requirement is the requirement to show that the domestic injury is stiering

or threatened with material injury. GATT normally permits countervailing duties only if this showing is made. As interpreted by the International Trade

Commission and the courts, this requirement has often been dh%cult to satisfy, especially for industries promising growth and high reward. However,

since countemtiling duties based on low foreign environmental standards are probably to begin with inconsistent with GA7T, there might be no

compelling reason for U.S. law to include the injury requirement in this context.
Chapter 4-Effects of Environmental Regulations on Trade and Competitiveness . 67

United States might still achieve the same or abetter

level of ambient air quality. The other country might

have less industry, or might have topographic

features that discourage atmospheric inversions.

Other problems could arise. Standards can vary from

state to state within the United States. Also, different

countries might frame regulations in ways that make

comparisons difficult.30

A possible alternative to countervailing duties

would be some form of border tax adjustment

(defined below). Border tax adjustments could only

be applied when domestic environmental requirements take the form of a tax on a product. Since this

is seldom the case now, the immediate opportunities

would be limited. There could be different ways to

apply a border tax adjustment, each with different

strengths and weaknesses as to GATT consistency,

administrative workability, and achievement of

environmental objectives. No approach is fully

satisfactory.

If a nation taxes a domestic product, GATT, as it

has been interpreted, permits the nation to levy an

equivalent tax (a “border tax adjustment”) on the

same product when it is imported, regardless of how

that product is taxed abroad. When the taxed product

is incorporated into a downstream product, GATT

has also been interpreted to permit an equivalent tax

on the import of that downstream product (again, a

“border tax adjustment’ ‘), based on the quantity of

the first product present. These interpretations were

made in a dispute concerning U.S. taxes under the

1986 Superfund Amendments and Reauthorization

Act, in which the United States taxed domestic and

imported petroleum, certain domestic and imported

feedstock chemicals, and imported products derived

from those chemicals.31 While there is no guarantee,

it appears probable that GATT in the future would be

interpreted along the same lines.

A border tax adjustment might be applied to

neutralize the foreign advantage of more permissive

environmental regulation of manufacturing processes. However, to do so, domestic regulations

would need to be changed so as not to regulate a

polluting process as such, but instead to tax a

product. (There could for example be an excise tax

levied when the product is first sold.)

One approach would be to tax a product that

happens to be the end product of a polluting process.

This would be easy to do administratively, and

would probably be deemed GATT-consistent. This

approach might reach the economic objective of

preventing competitive disadvantage; however, an

end-product tax could have perverse results from an

environmental standpoint. If the taxis on the product

as such, it would not depend on what production

process was used; there would thus be no incentive

for domestic or foreign manufacturers to reduce

pollution, and no incentive for foreign countries to

adopt regulations limiting that pollution.

An alternative approach would be to adjust the

end-product tax depending on the process used both

at home and abroad. This would restore incentives to

minimize environmental degradation. However, GATT

would likely prohibit such taxes if they were

challenged.32 Also, such a tax would face some of

the same formidable administrative problems that

the countervailing duty approach would entail. The

government would need to investigate the process

by which foreign and domestic goods are made, and

periodically update that information. Separate investigations would be needed for each product from

each country, and perhaps broken down by companies within a given country. Only then would the

government know enough to apply the tax.

Another approach would be to tax not an end

product but a raw material to a polluting process,

30 me ~omtcw~~g du~ ~~~r~a~h ~ t. remove tie competitive disadvantage to U.S. firms o~y in the U.S. market. It has been proposed that

the competitive disadvantage facing U.S. exports could be addressed by an export subsidy. When a good is sent to a country where that good is cheaper

to make because of less strict environmental standards, the U.S. Government could pay a subsidy to makeup that difference. Most export subsidies would

violate GATT; export subsidies also would present the same practical and conceptual problems discussed above in identifying and quantifying the cost

differences due to different environmental regulations. The export subsidies would also cost the government money.

31 me use is des~bed fi app. A+ me ~~ on imports were found to be permitted under G~ so Iong M imports were tied at the Same rate as

domestic goods. The U.S. law in some cases taxed imports at a higher rate; that feature was found to violate GAIT

GATT also permits the taxes to be rebated when products are exported, regardless of how the products am taxed in the destination country. See GA~

Subsidies Code, Annex (Illustrative List of Export Subsidies), items (g), (h).

32 me d~ision ~ tie Supefid case did not me it explicitly clear tit GA” would prohibit such tax~. However, a tax ht depends on tie

manufacturing process used seems outside the purview of the border tax adjustment doctrine as set out in that case; and sucha tax would likely be deemed

to violate the most-favored-mtion and mtional treatment requirements because they treat physically identical products differently based on their origin

(see annex to ch. 2).
68 ● Trade and Environment: Conflicts and Opportunities

such as fossil fuel.33 This could encourage pollution

prevention and resource conservation by domestic

manufacturers, since the more fuel or material a

manufacturer consumes, the more tax it would pay.

Imports of products could be taxed based on the

fossil fuel or material used to produce the product,

again providing an incentive for conservation. This

approach would likely be deemed consistent with

GATT, at least under some circumstances.34 However, it would have the administrative problem of

determining amounts of the raw material used in

processes at home and abroad.35

Despite the cautions raised above, trade measures

such as countervailing duties or border tax adjustments might still be considered as part of a strategy

to safeguard U.S. competitiveness. In this regard,

several alternative approaches might be considered

either separately or in tandem with trade measures.

One approach would be to use negotiations or other

means to encourage other countries to adopt similarly strict regulatory approaches. The 1990 amendments to the Clean Air Act, for example, call on the

President to report to Congress with an evaluation of

competitive impacts and a strategy for addressing

impacts through trade consultations and negotiations (see ch. 2 and app. E). In the NAFTA

negotiations and parallel-track environmental discussions, the attraction of increased access to the

U.S. market has become an incentive for Mexico to

strengthen its environmental regime. In other circumstances where new trade agreements with developing countries are anticipated, it might be appropriate to begin discussions on environmental matters

well before trade discussions begin. The United

States very likely would need to offer technical

and/or other assistance to help these countries

develop and implement higher standards (see ch. 3).

While current budgetary constraints limit options,

initial steps might include technical assistance to

developing countries for planning, institution building, and pilot projects on the environment.

Also, as discussed below, domestic policies could play

an important role in ensuring U.S. competitiveness.

Strategic use of domestic policies may make trade

responses to lax foreign regulations unnecessary.

GOVERNMENT

ENVIRONMENTAL ASSISTANCE

TO MANUFACTURING FIRMS

The discussion up to now has focused on trade

measures as a response to a competitive disadvantage due to variations among countries’ regulatory

strictness. Trade measures are also urged by some as

a response to a competitive disadvantage due to

national variations in government assistance with

regulatory compliance. For example, it is possible

some countries that have standards roughly comparable to the United States may offer their firms more

help (e.g., research and development support, technical assistance or other industrial services, tax

incentives, and/or favorable financing) in meeting

the standards. (Variations among national approaches

will be more fully addressed in the final report of this

assessment.)

Under current U.S. law, the government could in

some cases levy countervailing duties on imported

goods produced with the aid of subsidies. This

would in principle be consistent with GATT, though

amendments under consideration in the Uruguay

Round would exempt some R&D assistance from

countervailing duties.36 However, in addition to the

limitations discussed above, countervailing duties

have very limited effectiveness in counteracting the

effects of government subsidies that promote the

development and application of new technology.

Such subsidies can have an effect that grows with

33 The EC is thinking of such a “carbon tax” along these lines, though it is not yet considering applying the klx tO @Ol@ Of dow@amP@ucts.

(See box 2-A.)

34 me ~rdm ~adjw~entbas~on~w~t~su5~fithe forei~ pmductiOn wo~d app~ to f~ wi~~border tax adjustment doctrine

of the Superfund case. However, the reach of tbat doctrine is not clear. It is possible, for example, that GATT would approve of the border tax adjustment

if the taxis on feedstock chemicals, whose molecules are physically incorporated into the downstream product (as was so in the Superfund case), but

not if it is on fuel, whose molecules are not physically incorporated into the downstream product. Also, on a practical level, verifying the amount of fuel

used in a process could be harder to do than verifying the amount of feedstock chemicals used.

35 A pr~uct~~d border adjustment could ~.make env~omnen@ ~~e, and wo~d be easy to apply, when conmrned with the product’s UK

or disposal. For example, a tax on products to represent their disposal costs would provide an incentive to minimize production and consumption of such

products. However, in this case a product tax would not be needed to prevent a competitive disadvantage, since a tax on the disposal of end-products

would have the same competitive impact on imported and domestic products.

36 D~el &@ pp. I-9, I+lo. me D~el &ft wo~d also exempt c- subsidies for disadv~taged regions, which cotid include subsidies fOr

environmental compliance. Earlier drafts of proposed amendments included a broader exemption for environmental compliance subsidies.
Chapter 4-Effects of Environmental Regulation on Trade and Competitiveness ● 69

time, rather than dissipating with time as countervailing law assumes. 3 7

Apart from questions of effectiveness and GATT

consistency, it is worth considering whether it is

appropriate for governments to respond with countervailing duties when other governments’ provide

environmental assistance. The answer depends in

part on the type of government help. Some subsidies

(such as permanent operating subsidies) can perpetuate inefficient activity. Other forms of assistance,

such as support for the development and application

of new technology, can produce broad societal

benefits. Because firms cannot capture all the

benefits their R&D brings to society, and sometimes

cannot take the risks inherent in ambitious R&D

programs, the free market acting alone will likely

induce less R&D than would be best for society.

Government policies thus have an important role in

encouraging R&D, including environmental R&D.

Given the broad benefits of R&D, it is not

surprising the Uruguay Round proposals would

exempt R&D support from imposition of countervailing duties. This proposed change is in essence a

recognition that R&D should be encouraged rather

than discouraged. Similarly, OECD’s Polluter Pays

Principle, which states that firms should bear the

costs of complying with environmental regulations,

allows for a possible exception for government aid

to promote development of new pollution control

technologies and equipment (ch. 2).

Some other forms of government assistance,

while not directly developing technology, can do so

indirectly. An example: incentives to aid manufacturers or other customers purchase equipment embodying new technology. Japan gave an important

boost to its computer industry by subsidizing and

facilitating computer leasing.38 Today Japan is

supporting its fuel cell industry through anew policy

of subsidizing fuel cell purchases;39 it is also

requiring utilities to reimburse fuel cell cogenerators

of electricity. (Although an energy technology, fuel

cells have environmental benefits over many traditional forms of energy generation.)

Given foreign governments’ industrial promotion, and the limited effectiveness of countervailing

duties, other possibilities might be considered as

part of a strategy to help ensure that strict U.S.

regulations do not disadvantage U.S. fins. Examples include government incentives for development

of U.S. environmental technology and technical

assistance to help firms adopt pollution prevention

approaches. Previous OTA studies have discussed a

broad range of domestic policy options to enhance

manufacturing competitiveness in general.40 The

final report in this assessment will consider what

domestic policies might be appropriate for competitiveness concerns arising specifically from environmental compliance.

Possible policies might be considered in the

broader context of the emerging global opportunities

in environmental technologies and services. As

environmental concerns increase and environmental

costs become a greater fraction of total manufacturing costs, access to improved environmental technology could be helpful to a wide range of industries.

Increasingly, such technology will entail process and

equipment changes that meet environmental objectives while improving the efficiency of manufacturing.

There is a growing global competition in the provision of environmental technology and services, a

competition that will be discussed in detail in the

final report of this assessment. Many U.S. environmental firms have focused on the U.S. market, which

is by far the largest market for such goods and services. (See app. D.) Japan, which has used support for

technology development and diffusion to promote

many industries, including automobiles, semiconductors, and computers,

41 has began to use similar

means to promote its environmental industry,

through R&D support, export promotion, and foreign aid programs. Germany and several other European Community countries are also actively promoting their environmental industries, as is the EC itself.

37 s~~OTA, compe~-ng Economies, op. cit., pp. 152-153 ~d foolnote 162.

38 OTA, Competing Economies, op. cit., pp. 261-262.

39 “MITI To Offer Subsidies to Energy Savers,” The Nikkei WeekZy, Oct. 12, 1991. Such institutions as hospitals, hotels, and schools were eligible

for the subsidies, which were scheduled to begin in April 1992.

40 U.S. Cowss, office of T~hnolo~ Assessment, ~~king Things Better: competing in ~UnUfUCfUn-ng, C)TA-ITE-4-43 (waShhgtOQ DC: U.S.

Government Printing Office, February 1990) and Competing Economies, op. cit.

AI OTA, Competing Economies, op. cit., ch. 6.
Chapter 5

Trade and Environment

Decisionmaking
Chapter 5

Trade and Environment Decisionmaking

Until recently, both the United States and international institutions dealt with trade and environment

policies separately, with little attention to their

interactions. Environmental considerations have been

largely absent in the trade regime regulated by the

General Agreement on Tariffs and Trade (GATT).

Similarly, national environmental policies sometimes have been devised with little concern for

possible trade effects.

Several international forums are nowexamining

trade/environment interactions, as are various U.S.

Government agencies through the interagency working group coordinated by the U.S. Trade Representative (USTR) (see ch. 2). This chapter discusses the

possible need for trade/environment guidelines to

facilitate better coordination of trade and environmental policies at all levels. It also reviews possible

changes to GATT, such as special recognition of

multilateral environmental measures and modification of dispute resolution procedures. The chapter

further examines the U.S. environment/trade policymaking process as it relates to domestic competitiveness issues and development of U.S. positions in

international forums.

GUIDELINES AND TRADE/

ENVIRONMENT INTERACTIONS

It might be easier to resolve trade and environmental disputes if broadly accepted guidelines were

developed. Better coordination between trade/

environment policy could ameliorate the potential

for conflict. To have widespread credibility, a

process for developing guidelines on trade/

environment interactions ideally would need several

features. Both developing and developed countries

would need to participate. In some cases, the

guidelines would have to consider the special needs

of developing countries. The process would also

need to involve both trade and environment agencies

of participating governments and to safeguard both

trade and environment objectives. Making the process open to public participation might give it more

credibility with nongovernmental organizations (NGOs )

and other interests.

In addition to GATT, other international institutions might contribute to the process. The most

thorough discussion of trade/environment interactions to date has been at the Organisation of

Economic Co-operation and Development (OECD).

Because both trade and environment agencies are

involved, OECD discussions may produce guidelines for addressing trade and environment questions

in an integrated fashion. OECD members are working to revise the 1972 “Guiding Principles Concerning the International Economic Aspects of Environmental Policies’ (see ch. 2). But OECD has no

power to set policy for nonmembers. Moreover,

developing countries are not OECD members and

might not accept OECD’s findings. Hence, further

discussion and action in forums with broader membership will probably be required.

Various United Nations agencies might contribute. As discussed in box 5-A, the final preparatory

meeting before the upcoming United Nations Conference on Environment and Development (UNCED)

produced draft language on trade/environment matters, including some possible principles. Some of the

UNCED discussion drew on provisional findings

from a recent session of the United Nations Conference on Trade and Development (UNCTAD) which,

among other things, considered several trade and

environment issues within the context of sustainable

developmental

New UN arrangements for coordinating environ

ment/development issues may also emerge. Several

alternatives were discussed in UNCED’s preparatory meetings. One possibility would be to use the

existing United Nations Economic and Social Council (ECOSOC) as a governing body to deal with en

vironment/development connections. Another option would be to establish anew high-level multilateral coordinating mechanism. A third possibility

could be to set up regionally or nationally focused

mechanisms.

I Possible roles for UNCTAD in encouraging sustainable development and in addressing environmenthrade issues were discussed by delegations

to UNCT~’s eighth session meeting in Cartagena de Indias, Columbia, in February 1992. See, United Nations Conference on Trade and Development

A New Partnership for Development: The Cartagena Com”tment, Feb. 27, 1992, n.p.

–73–
74 ● Trade and Environment: Conflicts and Opportunities

Box 5-A—Trade/Environment and Sustainable Development: The UNCED Perspective

Trade and environment concerns will be considered cross-cutting issues, relevant to several agenda items, at

the June 1992 United Nations Conference on Environment and Development (UNCED) in Rio de Janeiro. Delegates

at the final UNCED preparatory meeting (in March 1992) included several trade/environment principles in a draft

text on international cooperation for providing a supportive climate to help developing countries accelerate

sustainable developmental

The text calls on governments, through the General Agreement on Tariffs and Trade (GAIT), the United

Nations Conference on Trade and Development (UNCTAD), and other multilateral forums, to “make international

trade and environment policies mutually supportive in favor of sustainable development’; to clarify the role of

GATT, UNCTAD, and other international organizations, including in conciliation or dispute resolution; and to

encourage a constructive industry role in dealing with environment and development issues.

In a section on activities for “developing an environment/trade and development agenda,’ the draft text calls

on governments to encourage GATT, UNCTAD, and other relevant international and regional economic institutions

to consider examining several propositions and principles. To paraphrase a few of these, the draft calls on these

institutions to consider ways to:

. Avoid unilateral actions to deal with environmental challenges outside the jurisdiction of the importing

country. Instead, environmental measures addressing transborder or global environmental problems should

be based on international consensus.

● Deal with root causes of environment and development problems so as to avoid adoption of environmental

measures that unjustifiably restrict trade.

● Ensure that environment-related regulations or standards (including health and safety standards) do not

become a disguised restriction on trade.

Many of the provisions relate especially and explicitly to developing countries. For example, the draft calls

on relevant institutions to:

. Encourage participation of developing countries in multilateral agreements through such mechanisms as

transitional rules.

. Keep in mind the special factors affecting environment and trade policies in developing countries. It notes

that environmental standards valid for developed countries may have unwarranted social and economic costs

in developing countries.

. Encourage an open, multilateral trading system, supported by the adoption of sound environmental policies,

that would have a positive impact on the environment and contribute to economic development.

The draft statement recognizes that trade provisions in multilateral environmental agreements in some cases

have played a role in tackling global environmental challenges. It suggests several specific activities as steps toward

improving the process of addressing environment/trade issues. These include:

. Conducting more studies to understand relationships between trade and environment for the promotion of

sustainable development;

. Promoting dialogue among trade, developmental, and environmental communities;

. Clarifying the relationship between GATT provisions and multilateral environmental measures; and

● Ensuring public input in the formation, negotiation, and implementation of trade policies.

The suggested actions focus on trade and development needs. Less attention is focused on meeting

environmental protection goals.

1 fiwwatov Co-ttee for the united Nations Confmence on Environment and Development, Internatiotzd Cooperation To Accelerate

Sustainable Development in Developing Countries, and Related Domestic Policies (text submitted by the Chairman on the basis of negotiations

held on document A/CONF.151/PC/100Add.3, Mar. 31, 1992). The statement will be printed in section 1, chapter 1 of Agenda 21. The draft

identifkd four key items: 1) promoting sustainable development through trade liberalizatio~ 2) making trade and environment mutually

supportive; 3) providing adequate fiincial resources to developing countries and for dealing with intermtional debc and 4) encouraging

macroeconomic policies conducive to environment and development.

The draft text adopted some language from the eighth session of the United Nations Conference on Trade and Development held in

February 1992 in Cartagena de Indias, Columbia.
Chapter 5-Trade and Environment Decisionmaking ● 75

Whatever its specific form, such a coordinating

institution might work with GATT (which is autonomous, but affiliated with the United Nations) and/or

OECD to further develop some procedural and

substantive guiding principles on trade and environment questions. To this end, participation by other

international organizations (such as UNCTAD and

the United Nations Environment Program) might be

encouraged. Existing international environmental

and scientific institutions could work with GATT to

the same end. A few areas in which guidelines could

be useful are identified below. (See also ch. 3.)

Some national environmental regulations might

impede imports more than necessary (see, for

example, the discussion of the Danish bottles case in

ch. 4 and app. A). Application of existing GATT and

OECD principles (such as national treatment and

nondis crimination, see chapter 2) have helped limit

circumstances in which trade conflicts might arise.

In addition, guidelines for balancing trade and

environmental concerns would be helpful (see ch. 4)

Guidelines also might help identify appropriate

and inappropriate circumstances for application of

trade restrictions aimed at influencing environmental conduct by other countries. As discussed in

chapter 3, many factors could be considered in

evaluating whether such measures are appropriate—

for example, the importance of the environmental

problem, the domestic efforts made by the country or

countries in question to address that problem, the

efforts made to reach an agreement that would make

trade measures unnecessary, and the financial or

other impacts of the trade measures.

In particular, there might be a presumption in

favor of multilateral action. To some, multilateralism confers more political legitimacy than unilateral

measures. Unilateral measures often do not take

foreign interests into account. As a result, laws and

regulations can disadvantage foreign firms. This

happened with a U.S. tax to pay for Superfund

cleanup, in which the United States taxed imported

petroleum at a higher rate than domestically produced petroleum (see app. A), and in the ban on

certain tuna imports taken pursuant to the U.S.

Marine Mammal Protection Act. In the latter case,

U.S. tuna fishermen were given a freed limit of

dolphin kills each year but their foreign counterparts

did not know their limits for a particular year until

the year ended.2

In the absence of effective international environmental agreements, some countries may view unilateral trade measures as playing a useful environmental role at times. In some cases, these measures

or threat of their use may have induced countries to

change their behavior more quickly than they

otherwise might.3 This may have happened with

several threatened unilateral U.S. trade measures

directed at conserving fish and wildlife. U.S. threats

to employ Pelly Amendment sanctions4 led to a

commitment by Japan to phase out imports of

hawksbill turtle shells.5 Similarly, U.S. negotiations

(backed up by possible use of import restrictions)

have been effective in obtaining commitments from

14 targeted countries to change their shrimp catching practices to protect sea turtles.6

The justification for unilateral measures to regulate conduct abroad seems stronger when the environmental impacts extend beyond the targeted

country. When the effect of the behavior abroad

appears localized, trade measures may be harder to

justify. However, it is by no means unprecedented

for one country to seek change in another country’s

policies, even when those policies have only internal

effects. For example, the United States has in some

z 16 U.S.C. 1371(a)(2); “United States Restrictions on Imports of ‘ha,” Report of the Panel, Sept. 3, 1991, GA~ Document DS21/R, paragraphs

5.2,5.28. This case is discussed in more detail in chs. 2 and 3.

3 AS Pofited out fi a recent repofl by the U.S. Gene~ Accounting OffIce, it can be di.t%cult to monitor countries’ comptince with intematio~

agreements. U.S. Congress, General Accounting Office, International Environment: International Agreements Are Not Well Monitored,

GAO/XED-92-43 (Gaithersburg, MD: U.S. Government Printing Gillce, January 1992).

4 me PeHy Amendment is a 1971 amendment to the I%herman’ s Protective Act of 1967. (Public Law 92-219, adding section 8 to the Fisherman’s

Protective Act of 1967, codifkd at 22 U.S.C. 1978.) It gives the President discretion to restrict imports of ffiproducts or wildlife products from countries

that engage in practices that diminish the effectiveness of intermtional fishery conservation programs or intermtional programs for endangered species,

respectively. While the amendment restricts the President’s discretion to measures sanctioned by GATI’, what GATT permits is often not known for

sure. Trade restrictions under the Pelly Amendment have never actually been imposed. If they are imposed in the future, it is possible that they would

be found to violate GATT’s rules.

5 S.S. Lieb~ “JapanAgrees To Phase Out Trade in Endangered Sea ‘Ihrtles, ‘‘ Ena2zngeredSpecies Technical Bulletin, vol. XVI, No. 7-8,1991.

6 Repofi ofthe secm~ of Stite t. the Cowess of the United States on the Status of Efforts fOr the COnse~tion ~d fitection of Sea ‘M

Pursuant to Section 609 of P.L. 101-162, “The Departments of Commerce, Justice, and State, the Judiciary and Related Agencies Appropriations Act,

1990” (transmitted to Congress Feb. 5, 1991), p. 5.
76 ● Trade and Environment: Conflicts and Opportunities

cases made aid and trade relations contingent on a

foreign country’s human rights record; GATT itself

permits members to ban imports of goods made with

prison labor.7

Guidelines for national regulations with trade

effects might also take into account the need to foster

the development of environmental technology. Environmental regulations are sometimes an important

driver of environmental technology. For example,

national regulations pursuant to the Montreal Protocol, signed in 1987, prompted technology development enabling phaseouts of some categories of

ozone-depleting chemicals at a faster pace than most

thought possible. When an environmental regulation

appears likely to accelerate technology development, that factor might weigh in its favor. Governments can further encourage the development of

environmental technology by other means such as

research and development (R&D) support and tax

incentives. Trade rules might be adjusted to encourage such government action, as recognized in

OECD’s 1972 Guiding Principles and in the Uruguay Round proposal to exempt certain R&D

subsidies from countervailing duties (see ch. 4).

ADDRESSING TRADE/

ENVIRONMENT ISSUES IN GATT

While helpful, guidelines on trade/enviromnent

issues will not necessarily resolve conflicts that

could arise within GATT. Mechanisms might still be

needed for GATT members to finally adopt, agree

to, or tap into such accommodations.

International environmental agreements might

have a special claim in GATT; indeed, GATT’s

Secretariat has urged multilateral action with respect

to the environment as a way of reducing the potential

for conflict. GATT contracting parties could approve resulting trade measures in several ways,

including:

●

●

●

Formal amendment under Article XXX (in

some cases requiring unanimous consent and in

others two-thirds of all members);

A waiver under Article XXV, paragraph 5; and

Separate agreements (like GATT’s current

Codes).

None are fully satisfactory mechanisms.8 In the

short term the waiver is perhaps most promising. It

could, for example, suspend application of GATT

requirements for trade measures under specified

environmental agreements for a certain number of

years. Two-thirds of those voting and a majority of

the total GATT members must vote for a waiver. It

is easier to accomplish than formal amendments

under Article XXX. However, it is not guaranteed

that all signatories of a particular environmental

agreement that are also members of GATT would

vote to approve a waiver for measures taken under

that agreement. If some members of the environmental agreement signed reluctantly, perhaps out of

fear of trade consequences if they did not, they might

ask for compensation in exchange for their vote for

a waiver.

GATT also could be amended to automatically

approve trade measures under agreements meeting

certain criteria. This approach could be modeled on

GATT Article XX(h), which permits an exception to

GATT’s rules for measures:

. . . undertaken in pursuance of obligations under any

intergovernmental commodity agreement which conforms to criteria submitted to the [GATT members]

and not disapproved by them or which is itself so

submitted and not so disapproved.

While Article X.X(h) has never been invoked, and

the criteria to be used have never been established,

one could in principle amend GATT to provide a

similar mechanism for environmental agreements.

However, an amendment to GATT's text is quite

difficult to achieve. Also, thought would have to be

given to the criteria for evaluating the trade provisions of particular agreements. These criteria might,

for example, include the number of signatories, the

openness of the negotiating process, and the relative

roles of trade and nontrade measures.

Finally, some members of GATT could decide to

develop a separate code or treaty for environment/

trade matters. Such agreements only bind those

who accept it. However, its signatories could agree

to apply guidelines or other trade/environment rules

among themselves.

7 Article XX(e).

8 Jo~H.Jackso~ Hes~l E. Yntema prof~sor of Law, University of Michigan School of Law, memorandum of Nov. 7, 1991, regarding “tinging

GATT Rules” (prepared for the Trade and Environment Committee of The Environmental Protection Agency’s National Advisory Council for

Environmental Policy and Technology).
Chapter 5-Trade and Environment Decisionmaking . 77

Dispute Resolution Procedures

GATT’s dispute resolution process was not setup

to weigh the merits of competing environmental and

trade claims. Yet such a weighing is likely to be

needed in the future. Such weighing would first

require understanding the limits of an often ambiguous body of scientific evidence. Members of a

dispute resolution panel could not be expected to

articulate a consensus in cases where the scientific

community is divided. Scientific evidence is only

one aspect to be weighed. Environmental disputes

usually have societal dimensions that require judgments about how to balance environmental, economic, and other concerns, while GATT panels are

intended to focus on a single dimension, trade law.9

A GATT panel could more effectively make these

judgments if it worked closely with international

organizations with expertise in science, environment, and economic development. Requiring some

panel members to possess scientific, environmental,

and economic development expertise, as well as

trade expertise, could help enable panels to be more

effective in weighing interests.

GATT’s process for resolving disputes is normally closed. Only governments have the right to

make presentations to the panels. Public access to

GATT panel proceedings is not allowed, and panel

reports normally are not made public until adopted

by the GATT Council.

A closed process might make it more likely that

parties will settle their dispute without a formal

ruling. However, the environment-related disputes

brought to GATT are of interest to more than just the

governments that are parties to the dispute; a more

open process would better inform the panel and help

countries weigh competing concerns. Public awareness can be especially important for environmental

concerns, because it allows those concerns to be

heard by governments.

GATT’s dispute resolution process might be

better able to address environmental issues if nongovernmental organizations (NGOs) were provided

opportunities to present evidence and argument, and

if there was prompt public disclosure of both

submissions to a dispute resolution panel and the

panel’s report. NGOs (which could include business

groups as well as environmental organizations)

often have important information and perspectives;

governments might not always present that information, either out of ignorance or for political reasons.

Without this input, panels might be poorly informed

about some dimensions of the dispute.

U.S. INSTITUTIONS

Closer coordination of trade and environmental

policies would be useful. The United States also

needs to develop positions as contributions to

international forums such as OECD. This is one

purpose of the interagency task force on trade and

environment.

Policy coordination requires some agreement

about goals. Given the different perspectives on

trade and environment issues, developing agreement

on goals may be difficult. Indeed, given the many

agencies involved in the interagency discussions,

differences in opinions about trade and environment

matters, and how they should be addressed, no doubt

will continue to exist.

Guidance from Congress might make the USTRled interagency work group more effective and

better able to resolve differences among agencies.

Congressional oversight on the interagency process

could be needed to ensure that U.S. negotiators have

adequate policy guidance. It might help for Congress

to encourage continuing coordination on trade and

environment policy, so that coordination would

persist despite changes of political party and policymakers.

At some point negotiations (and preparations for

negotiations) must be conducted in confidence.

However, while U.S. negotiators are still in the early

stages of formulating positions, public involvement

can contribute to effective policymaking by assuring

that all views are considered. International discussions pertinent to trade and environment are progressing in GATT, OECD, and the United Nations.

U.S. statements (or lack of statements) can even at

this early stage affect the debate. In theory, this

9 under ~went ~ractiw, at le~t~pficiple, tie adoption of tie p~el’s repofi by be GAm COUIICil is a step at which tradeoffs of different kt~WS

could be considered and a political consensus formed. However, under revised procedures proposed in the Dunkel drafti the Council would lose that

function since the Council’s adoption of the panel decision (or the decision of an appellate body) would be virtually assured (see annex to ch. 2).
78 ● Trade and Environment: Conflicts and Opportunities

might lock in U.S. positions before the public has

much input into the process.l0

Although some steps have been taken to broaden

access to environment/trade policy discussions,

public involvement in the interagency process has

been limited. As mentioned in chapter 2, the U.S.

delegation to some of the OECD trade/environment discussions has included one representative

from an environmental organization and one representative from industry. These representatives have

attended some interagency meetings. However, the

group meetings are generally not accessible to the

public; drafts of background and position papers

have been slow to issue forth; and the Administration does not routinely keep the public abreast of

developments in international forums or make

available copies of public documents issued by those

forums.

One issue of longstanding interest to Congress is

the effect of environmental regulations on trade and

competitiveness. Congress has expressed concern

that strict U.S. regulations could harm U.S. firms.

Even if regulations are agreed to internationally, the

ability to monitor compliance is often doubtful,11 so

that U.S. firms could still be at a disadvantage.

Attempts to understand these effects have been

hampered by problems with methodology and data

(see app. E). Congress might consider calling for

assessment of trade and competitiveness impacts

when it enacts major new environmental laws, as it

did under the 1990 Clean Air Act Amendments (see

app. E). If Congress were to establish one agency as

the overall leader on competitiveness issues, an

option examined in a previous OTA report,12 that

agency might be able to conduct such assessments

more easily than any existing agency.

10 ~s my~ve ~e~y ~pWn~ tirh tie Dtiel draft. After the Dunkel dm.ft was promulgated, the GATT S-etiat s~med @* -rised bY

the extent of opposition among U.S. environmental groups. This suggests that the GATT Secretariat had not been made sufficiently aware of U.S.

environmental groups’ opinion as it was putting the draft together. Now that the draft has been circulated, it is much hinder to change.

11 U.S. CoWess, Gener~ ~oufig office, Intermtioml EnViron~nt: ~nterWtional Agreements Are Not Well Monitored, RCED-92-43

(Gaithersburg, MD: U.S. Geneml Accounting office, Jan. 27, 1992).

u U.S. CoWss, ~lce of TeChnOIO~ Assessment, Competing Economies: Amen”ca, Europe, and Pacijic Rim, op. cit., pp. W-78.
Appendixes
Appendix A

Some Trade Disputes Pertinent to

Trade/Environment Interactions

Contents

GATT Disputesl

1.

2.

3.

4.

5.

6.

7.

United States: Prohibition of Imports of Tuna and Tuna Products From Canada, Report of the Panel, GATT, BISD

29 Supp. 91 (1982).

United States: Trees on Petroleum and Certain Imported Substances, Report of the Panel, GATT’, BISD 34 Supp.

136 (1987).

Canada: Measures Affecting Exports of Unprocessed Herring and Salmon, Report of the Panel, GATT, BISD 35

Supp. 98 (1988).

United States: Section 337 of the Tariff Act of 1930, Report of the Panel, GAIT, BISD 36 Supp. 345 (1989).

Thailand: Restrictions on Importation of and Internal Taxes on Cigarettes, Report of the Panel, GATT, BISD 37

Supp. 200 (1990).

United States: Restrictions on Imports of Tuna, Report of the Panel, GATT Dec. 21/R (Sept. 3, 1991).

Unresolved United States Dispute Against the EC’s Regulation Concerning Imports of Beef From Animals Fed

Certain Hormones

Panel Decisions Under the U.S.-Canada Free Trade Agreement

8. In the Matter of: Canada’s Landing Requirement for Pacific Coast Salmon and Herring, Final Report of the Panel

(Oct. 16, 1989).

9. In the Matter of: Lobsters from Canada, Final Report of the Panel (May 25, 1990).

Decisions of the Court of Justice of the European Communities

10. Commission of the European Communities v. Kingdom of Denmark, 1988 E. Comm. Ct. J. Rep. 4607,54 Comm.

Mkt. L.R. 619 (1989).

1 AU but two of these disputes resulted in GA~’s adoption of the dispute resolution panel’s report. The sixth listed dispute, the so-called tunddolpti

dispute, has yet to be considered by the GA’ITCouncil. In the last dispute, concerning beef hormones, the United States unsuccessfully sought to convene

a panel under the Standards Code.

Ch. 2 and the annex to ch. 2 give background on GA’IT that may be helpful in reading these case summaries, including a discussion of GATT Article

x x .

The case summari es in this appendix are provided for the reader’s convenience. By providing these summari es, OIA does not mean to take any

position on how these cases should be interpreted.

–81–
82 . Trade and Environment: Conflicts and Opportunities

GATT Disputes

L United States: Prohibition of Imports of Tuna and

Tuna Products From Canada (1982)2

Complaining Party: Canada

The impetus of this dispute was Canada’s seizure of 19

U.S. tuna boats caught fishing inside Canada’s 200-mile

fisheries zone. The United States retaliated by prohibiting

the importation of all types of tuna and tuna products from

Canada pursuant to section 205 of the Fishery Conservation and Management Act of 1976. These events were part

of a broader disagreement between Canada and the United

States relating to jurisdiction over Pacific fisheries.

The GATT Panel first determined that the U.S. import

ban constituted a quantitative ‘prohibition” for purposes

of the general proscription against quantitative trade

measures in GATT. Article X: 1. The panel determined that

the ban did not fall under the exception in Article XI:2(c)

for limits on agricultural and fisheries imports in connection with domestic production restrictions, even though

the United States had limited the catch by U.S. boats of

some species of tuna (e.g., Pacific and Atlantic yellowfin,

and Atlantic bluefin and bigeye). The exception did not

apply because:

(i) The ban applied to the catch of species (e.g., albacore

(ii)

(iii)

and skipjack) whose domestic production-the United

States had not limited;

The ban was continued even after the limitation on the

domestic catch of Pacific yellowfin tuna was ended; and

While Article XI:2(a) (quantitative measures to relieve

food shortages) and Article XI:2(b) (quantitative measures for grading and classification) cover both ‘prohibitions” and “restrictions,” Article XI:2(c) extends only

to “restrictions.” The U.S. ban was a prohibition.

The panel then considered the United States’ claim

that its measure fell within the general exception in

Article XX(g) for measures relating to the conservation of

natural resources. Referring first to the limitations in

Article XX’s preamble (see annex to ch. 2), it noted that

the United States “might not necessarily” have discriminated against Canada in an arbitrary or unjustifiable

manner since it had taken similar actions for similar

reasons against Costa Rica, Ecuador, Mexico, and Peru.

Furthermore, according to the panel, the U.S. action did

not constitute a “disguised restriction on international

trade” because it “had been taken as a trade measure and

publicly announced as such. ”

This latter finding is important because it makes part of

Article XX’s preamble hollow.3 If publicly announcing a

measure is all that it takes to overcome the limitation

against a “disguised restriction on international trade,”

then the limitation offers little help in screening or curbing

protectionist trade restrictions posing as safety or environmental initiatives-thus perhaps bringing pressure to bear

to interpret the individual paragraphs of Article XX

restrictively. This interpretation of the ‘disguised restriction” language was essentially followed in a 1983 GATT

case, United States: Imports of Certain Automotive Spring

Assemblies. 4

The remainder of the panel’s report was fairly straightforward. The panel noted that both Canada and the United

States had agreed that tuna stocks constituted an “exhaustible natural resource” in need of conservation

management for purposes of GATT Article XX(g).

However, to fall within the ambit of Article XX(g), the

United States needed to have acted in conjunction with

restrictions on domestic production or consumption. The

panel noted that the U.S. import ban on all tuna and tuna

products from Canada went far beyond its restrictions on

domestic catches of certain tuna species. Moreover, the

United States offered no evidence of any restrictions on

domestic consumption of tuna or tuna products. The panel

concluded that the U.S. embargo did not meet the

requirements of Article XX(g) and so was a prohibited

quantitative restriction under Article XI:l.

2. United States: Taxes on Petroleum and Certain

Imported Substances (“ Superfund Act”) (1987)5

Complaining Parties: Canada, European

Economic Community, Mexico

Canada, Mexico, and the EC brought this case against

the United States over the Superfund Amendments and

Reauthorization Act of 1986 (SARA). As part of its

reauthorization of the U.S. program to clean up hazardous

waste sites, that statute provided for:

(i) A change in an existing excise tax on petroleum, which

resulted in a higher tax rate on imported petroleum than

domestic;

(ii) A continuation of an excise tax on certain “feedstock”

chemicals; and

(iii) A new excise tax on certain imported substances

produced or manufactured from such taxable feedstock

chemicals.

2 United States: Prohibition of Imports of i%na andllma Productsfiom Canaalz, Report of the Panel, G~, BISD 29 Supp. 91 (1982). Note that

the official GATT title for a panel report leaves out the name of the complaining country; it lists only the name of the country whose practices were under

scrutiny. Unless otherwise noted, all panel reports are cited to GA’IT’s Basic Znstrunwnts and SelectedDocuments (BZSD). The citation in this footnote

is to the 29th Supplement volume, page 91.

3 See Charnovitz, “Exploring the Environmental Exceptions in GA~ Article XX,” Journal of World Trade, 1991, vol. 25, pp. 37,47-48.

4 United States: Zmporfs of Certain Automotive Spring Assemblies, Report of the Panel, GATT, BISD 30 Supp. 107 (1983).

5 United States: Trees on Petroleum and Certain Imported Substances, Report of the Panel, GA~, BISD 34 Supp. 136 (1987).
Appendix A-Some Trade Disputes Pertinent to Tradel/Environment Interactions . 83

The three complainants claimed that the new excise

tax differential between imported and domestic petroleum

was inconsistent with the obligations to treat imported

and domestic products alike (’‘national treatment obligation”) set forth in GATT Article 111:2. The EC also

maintained that the new excise tax on certain imported

substances made from taxable feedstock chemicals was

not a proper border tax adjustment under GATT (see ch.

4 for a discussion of border tax adjustments). This was the

only time that a GATT dispute panel had addressed the

legitimacy of a border tax adjustment scheme intended to

further environmental objectives.

The EC claimed the purpose of the new excise tax was

to tax polluting activities occurring in the United States

and to finance environmental programs benefiting only

U.S. producers. The EC contended that the Organisation

of Economic Co-operation and Development’s (OECD)

Polluter Pays Principle required the United States to tax

just products of domestic origin because only their

production gave rise to environmental problems in the

United States. The threefold U.S. response to the EC’s

argument was that the purpose of the tax was irrelevant to

its eligibility for border tax adjustment; that GATT did not

incorporate the Polluter Pays Principle; and that, even if

it did, the Polluter Pays Principle applies only to pollution

incident to production, not pollution incident to disposal.

The EC also challenged the new excise tax as inconsistent

with the national treatment obligations of GATT Article

111:2 because there was no equivalent tax burden imposed

on like domestic products. Finally, the EC claimed the

national treatment obligations of GATT Article 111:2 were

violated by the SARA provision authorizing a penalty of

5 percent of the appraised value of an imported substance

against importers who fail to furnish information necessary to determine the amount of tax to be imposed.

The panel concluded that the tax differential between

imported and domestic petroleum was indeed inconsistent

with the national treatment obligations of Article 111:2. It

rejected the United States’ contention that the minimal

impact of the differential did not nullify or impair benefits

accruing to Canada, Mexico, and the EC on the grounds

that Article 111:2 protected expectations about the competitive relationship between imported and domestic products rather than expectations about export volumes.

As for the eligibility of the excise tax on feedstock

chemicals for a border tax adjustment on downstream

imports, the panel noted that:

[GATT's] tax adjustment rules . . . distinguish

between taxes on products and taxes not directly

levied on products; they do not distinguish between

taxes with different policy purposes. Whether a sales

tax is levied on a product for general revenue

purposes or to encourage the rational use of environmental resources, is therefore not relevant for the

determination of the eligibility of a tax for border tax

adjustment. 6

Thus, the key for the panel was that the excise tax was

levied directly on products rather than the purpose of the

tax. If it had been a tax not directly levied on products,

such as social security or payroll taxes, then it would not

have been eligible for border tax adjustment. The purpose

of the tax, whether to raise revenue, to correct environmental problems, or to serve some other purpose, was

irrelevant in the panel’s view.

The panel pointed out, however, that the Working Party

on Border Tax Adjustment agreed that the provisions of

GATT on tax adjustment only prohibited contracting

parties from having a greater tax on imported products

than on like domestic ones; a country is free to charge the

same tax, a lower tax, or none at all:

Consequently, if a contracting party wishes to tax

the sale of certain domestic products (because their

production pollutes the domestic environment) and

to impose a lower tax or no tax at all on like imported

products (because their consumption or use causes

fewer or no environmental problems), it is in

principle free to do so. [GATT’s] rules on tax

adjustment thus give. . . [but do not oblige the] party

the possibility to follow the Polluter-PaysPrinciple. . . .

Noting that its mandate was to examine the case solely

“in the light of the relevant GATT provisions,’ the panel

refused to consider the consistency of SARA’s revenue

provisions with its environmental objectives or with the

Polluter Pays Principle. The panel suggested that if the EC

wanted to pursue these points, the proper forum was the

then moribund 1971 GATT Working Group on Environmental Measures and International Trade (see ch. 2).

As for the excise tax’s alleged inconsistency with the

national treatment obligations of Article 111:2, the panel

observed that paragraph 2(a) of Article II provides that a

tariff concession (that is, an agreement to limit a tariff on

a particular product to a particular level) does not prevent

the levying of a charge equivalent to an internal tax

imposed on a like domestic product or on an article from

which the imported product has been manufactured or

produced in whole or in part. The panel cited the

following example given by the drafters of GATT in

explaining the word “equivalent” as used in the aforementioned provision:

If a charge is imposed on perfume because it

contains alcohol, the charge to be imposed must take

into consideration the value of the alcohol and not

6 In reaching its conclusio~ the panel referred to the report of the 1970 Worldng Party on Border Tax Adjustments, BISD 18 Supp. 100 (1970).
84 ● Trade and Environment: Conflicts and Opportunities

the value of the perfume, that is to say the value of

the content and not the value of the whole”

(EPCT/TAC/PV/26, page 21).

Thus, the panel concluded that the tax was not

inconsistent because the imported substances were produced from chemicals subject to an excise tax in the

United States, and the tax rate was determined in principle

in relation to the amount of these chemicals used and not

in relation to the value of the imported substance. If the

excise tax had been levied on the appraised value of the

imported substances themselves, the panel probably

would not have found it consistent with Article 111:2.

Finally, the panel considered SARA’s penalty provision. Under that provision, an importer failing to furnish

sufficient information on an imported product composition to determine the proper tax could then be subject to

a penalty tax of 5 percent of the appraised value of the

imported substance. Since that rate was higher than the

excise tax U.S. Customs might otherwise levy, the panel

believed it was not in conformity with the national

treatment obligations of Article 111:2. However, SARA

permitted the Secretary of the Treasury to prescribe by

regulation, in lieu of the 5 percent rate, a rate that would

equal the amount that would be imposed if the substance

were produced using the predominant method of production. Taking the U.S. Government’s word that in all

probability the 5 percent penalty would never be applied,

the panel concluded that the existence of the penalty rate

provisions as such did not constitute a violation of U.S.

obligations under GATT.

This has implications for any border tax adjustment that

Congress might consider to “level the playing field” for

U.S. companies with regard to environmental standards.

Such a program could require importers (and thus their

foreign suppliers) to provide substantial data on process

and product methods (PPMs) involved in the production

of the imported goods (see ch. 4). The Panel report in this

case suggests that an ad valorem penalty to force the

production of such data, at least one that bore no relation

to any actual difference in environmental standards,

would run afoul of U.S. obligations under GATT. This

could limit the GATT--consistent measures available to

secure the information for the program to work efficiently

and fairly.

3. Canada: Measures Affecting Exports of

Unprocessed Herring and Salmon (1988)7

Complaining Party: United States

The basic issue in this case was the GATT consistency

of Canada’s prohibitions on the export of certain unprocessed herring, herring roe, and pink and sockeye salmon

(“unprocessed herring and salmon”). Canada did not

dispute that such prohibitions were inconsistent with the

terms of GATT Article XI:l, which provides that GATT

members shall not institute or maintain prohibitions on

the exportation of any product destined for the territory of

any other member. However, Canada invoked as justifications for the prohibitions two exceptions in GATT:

(i)

(ii)

Article XI:2(b) permitting “export prohibitions . . .

necessary to the application of standards or regulations

for the classification, grading or marketing of commodities in international trade. ’

Article XX(g) permitting any measure “relating to the

conservation of exhaustible natural resources . . . made

effective in conjunction with restrictions on domestic

production or consumption.’

With regard to Article XI:2(b), Canada argued that its

prohibitions were necessary to prevent the export of

unprocessed herring and salmon not meeting its quality

standards for these fish. The panel noted, however, that

the prohibitions applied to all unprocessed herring and

salmon, not just substandard specimens. The panel

therefore found that the export prohibitions could not be

considered as “necessary” to the application of standards

with the meaning of Article XI:2(b).

Canada also argued that the export prohibitions were

necessary to enable Canadian processors to develop a

superior quality fish product for marketing abroad and to

maintain their share of the Japanese market for herring

roe. The panel found that the export prohibitions could not

constitute regulations necessary for marketing under

Article XI:2(b). The reason: the panel interpreted Article

XI:2(b) to permit only export restrictions designed to

promote sales of the restricted product, while here

restrictions on the unprocessed product were designed to

promote sales of the processed product.

The panel then considered whether Article XX(g)

justified the export prohibitions. The panel agreed with

the parties that salmon and herring stocks are “exhaustible natural resources” and that Canada’s limitations on

the harvesting of such stocks were “restrictions on

domestic production” within the meaning of Article

XX(g). The panel then examined whether the export

prohibitions were “relating to” the conservation of

salmon and herring stocks and whether they were made

effective “in conjunction with” Canada’s harvesting

limitations. It interpreted these terms as requiring that the

measure be “primarily aimed at” such conservation and

“primarily aimed at” rendering effective such domestic

restrictions. The Panel then determined that Canada’s

7 Canada: Measures Aflecting Exports of Unprocessed Herring and Salmon, Report of the Panel, GA~, BISD 35 Supp. 98 (1988). For further

information on this case and the related case decided by a dispute settlement panel convened pursuant to the U.S.-Canada Free Trade Agreement, see

T.L. McDormarL “IntermtionalTrade Law Meets InternationalFisheries Law: The Canada-U.S. Salmon and Herring Dispute, ’’Journa2ofZnternationaZ

Arbitration, December 1990, pp. 107-121.
Appendix A-Some Trade Disputes Pertinent to Trade/Environment Interactions ● 85

export prohibitions were neither primarily aimed at the

conservation of salmon and herring stocks nor primarily

aimed at rendering effective the restrictions on the

harvesting of salmon and herring. This was because the

export prohibitions did not limit access of domestic

processors and consumers to salmon and herring supplies

at all, and only limited the access of foreign processors

and consumers to the unprocessed product.

On March 21, 1988, Canada advised the United States

that it would accept the adoption by the GATT Council of

the report of the GATT Panel and would act to remove the

export restrictions. At the same time, it stated that it

believed its conservation and management goals could

not be met without a landing requirement.

In April 1989, Canada revoked its regulations prohibiting the export of unprocessed herring and salmon. At the

same time, Canada introduced new regulations requiring

the landing in Canada of: 1) all roe herring, sockeye, and

pink salmon caught commercially in Canadian waters

(species that were subject to the previous “process in

Canada” rule), and 2) all coho, chum, and chinook

salmon caught commercially in Canadian waters (species

that were not subject to the previous ‘process in Canada”

rule). Under these regulations, salmon and roe herring had

to be off-landed at a licensed “fish landing station” in

British Columbia or onto a vessel or vehicle ultimately

destined for such a landing station.

After consultations on these new regulations failed to

resolve the matter, the United States decided to seek a

dispute settlement panel to hear the dispute under the

provisions of the Canada-U.S. Free Trade Agreement.

The

4.

decision of that panel is described in case 8 below.

United States: Section 337 of the Tariff Act of 1930

(1989)8

Complaining Party: European Economic

Community

This case concerned section 337 of the Tariff Act of

1930, which relates to unfair methods of competition and

unfair acts in the importation of articles into the United

States, or in their sales including the importation or sale of

goods that infringe on valid U.S. patents. As such, this

dispute did not involve environmental measures. However, the panel’s interpretation of the word “necessary”

in GATT Article XX(d) (excepting from GATT’s obligations measures “necessary to secure compliance with

laws or regulations which are not inconsistent with the

provisions of the Agreement”) has implications for how

future panels might interpret the word “necessary” in

GATT Article XX(b). 9 That provision provides an

exception from GATT’s obligations for measures ‘necessary to protect human, animal or plant life or health. ”

The panel noted that the parties agreed that, for the

purpose of Article XX(d), section 337 could be considered as measures “to secure compliance with” U.S.

patent law. The conformity of U.S. patent law with GATT

was not in question. Thus, the issue considered by the

panel was the necessity of the section 337 system to

enforce U.S. patent law.

The panel concluded that a GATT member cannot

justify a measure inconsistent with another GATT provision as “necessary” in terms of Article XX(d) if an

alternative measure that is not inconsistent with other

GATT provisions is available. By the same token, it said

that, in cases where a measure consistent with other

GATT provisions is not reasonably available, a contracting party is bound to use, among the measures reasonably

available to it, that which entails the least degree of

inconsistency with other GATT provisions.

Applying these guidelines to the issue before it, the

panel stated that its interpretation of the word “necessary” did not mean a GATT member could be asked to

change its substantive patent law or its desired level of

enforcement of that law, provided such law and such level

of enforcement are the same for imported and domestically produced products. However, if a GATT member

could reasonably secure that level of enforcement in a

manner not inconsistent with other GATT provisions, it

would be required to do so.

The panel rejected the United States’ argument that it

should consider whether section 337 as a system is

“necessary” for the enforcement of U.S. patent laws

rather than whether the individual elements of section 337

are “necessary.” To do so, the panel said, would permit

GATT members to introduce inconsistencies that are not

necessary simply by making them part of a scheme

containing elements that are necessary. In the view of the

panel, what has to be justified as “necessary” under

Article XX(d) is each of the inconsistencies that is found

to exist with another GATT article.

This decision suggests that any environmental measure

for which justification is sought under Article XX(b) is

likely to incur considerable scrutiny by a GATT dispute

settlement panel. Some scrutiny of a measure’s necessity

would seem desirable: if measures to protect life or health

were given carte blanche under GATT, Article XX(b)

could become a smoke screen for trade barriers. However,

the decision’s language could leave environmental measures open to considerable second-guessing. Even for

8 United States: Section 337 of the TatiffAct of 1930, Report of the Panel, GA~, BISD 36 Supp. 345 (1989).

9 me Pmel ~ a subsequent ~se tivolvfig access of U.S. cigarettes to Thailand’s market in fact relied on tis c~e h interpre~ the “n~essi~”

requirement in Article XX(b). See the description of Thailand: Restn”ctions on Importation of and Znternal Taes on Cigarettes, Report of the Panel,

GA~, BISD 37 Supp. 200 (1990), elsewhere in this appendix.
86 ● Trade and Environment: Conflicts and Opportunities

reasonable measures undertaken with good intentions, it

might often be possible in hindsight to find some way that

the environmental objective could have been achieved

with less trade disruption. Also, it is not clear that a GATT

Panel would have the expertise to know if alternative

actions would achieve the environmental objective. For

example, if a problem is urgent, certain actions (such as

negotiating an international environmental agreement)

might take too long.

5. Thailand: Restrictions on the Importation of and

Internal Taxes on Cigarettes (1990)10

Complaining Party: United States

Thailand prohibited imports of cigarettes except under

a license issued in accordance with its 1966 Tobacco Act.

It had not granted a license for 10 years. In addition, until

just before the panel heard the dispute, Thailand had

maintained higher excise taxes on imported cigarettes

than on domestic ones.

Thailand defended its action in part under GATT

Article XX(b), which provides an exception from GATT

obligations for measures “necessary to protect human,

animal or plant life or health. ” Thailand argued that its

trade restrictions were “necessary” to: 1) make effective

a domestic program to control smoking, and 2) protect its

citizens from U.S. cigarettes, which had additives that

might make them more harmful than Thai cigarettes.

This case was thus a further exploration of the term

‘‘necessary,’ which had been addressed first (in the

context of Article XX(d)) in the panel report on United

States: Section 337 of the Tariff Act of 1930 (1989) (case

4 above). Following the reasoning in the earlier case, the

panel found that the Thai actions were not “necessary”

within the meaning of Article XX(b) since Thailand could

have employed other means that were compatible with

GATT to protect public life and health. Those other means

included requiring greater disclosure of cigarettes’ composition, banning cigarette advertisements, banning the

use of certain additives, controlling price and retail

availability, and establishing uniform taxes that did not

discriminate between imported and domestic cigarettes.

In this case, the parties agreed the panel could consult

with the World Health Organization (WHO) on technical

matters. On the one hand, WHO acknowledged that in

Latin America and Asia the opening up of closed markets

dominated by a public tobacco monopoly had led to a rise

in consumption. On the other hand, it believed that excise

taxes to increase cigarette prices could fully offset the

increased demand.

6. United States: Restrictions on Imports of Tuna,

Report of the Panel (1991)11

Complaining Party: Mexico

As of March 1992, the panel report had not yet been

considered for adoption by the GATT Council, and the

parties were attempting to settle the case, without a formal

GATT decision. This case is discussed in detail at the

beginnin g of chapter 2, and in chapter 3 in the section

“Trade Measures and GATT.’

7. United States’ Controversy With the European

Community Over Beef Hormones

This dispute has not been the subject of a formal GATT

dispute settlement panel report. However, it is an example

of the potential for trade conflict over differences in

product standards relating to environmental and public

health or safety concerns.

In December 1985, the European Community adopted

the “Council Directive Prohibiting the Use in Livestock

Farming of Certain Substances Having a Hormonal

Action (EC Hormone Directive) .12 When this prohibition

ultimately went into effect on January 1, 1989, the EC

banned the importation of all beef treated with growth

hormones. 13 AS a result, the United States lost an export

market valued at approximately $145 million per year.14

The United States protested the adoption of the EC

Hormone Directive, maintaining that it was not based on

scientific evidence and so was a disguised barrier to trade.

In January 1987, the United States requested consultations on the measure under the provisions of the GATT

Standards Code.15 When consultations failed to resolve

the matter, the United States attempted to invoke the

10 Wnd: Restrictions on ZrnpOrtutiOn of andlnternal Tues on Cigarettes, Report of the Panel, GATZ BISD 37 SUPP. 200 (1990).

11 GA~ Doe. 21/R (Sept. 3, 1991).

12 Comcfl Directive 85/649,28 O.J. Eur. COmm. (NO. L 382) 228 (1985).

13 me 1985 E(J Ho~oneD~~tiv~ ~~ ~@ed~led tob~~rne effective on J~~1, ~9880 A proced~~ c~lenge to tie tiwtivebefore the COti

of Justice of the European Community led to it being declared null and void in 1987. However, the unaltered text of the nullified directive was readopted

by the EC Council following a different procedure in March 1988. Council Direetive 88/146, 311 O.J. Eur. Comm. (No. L 70) 16 (1988). This is the

measure that became effective on January 1, 1989.

14 See ~ ~~e U< S..EC Ho~one B~f con~over~y ~d tie s~d~ds code: ~plicatiom for tie Application of He~~ Regulations to A@tdtud

Trade,” North Carolina Journal of International Law and Commercial Regulation, vol. 14, No. 1, winter 1989, p. 135. Other articles on this dispute

include Holly Hammonds, “A U.S. Perspective on the EC Hormones Directive,” Michigan Journal of International Law, VO1. 11, sP@ 1990, PP.

840-844, and Werner P. Meng, “The Hormone Conflict Between the EEC and the United States Within the Context of GAm” Michigan Journal of

International Law, vol. 11, spring 1990, pp. 818-843.

M AW=ment on Tec~c~ B~ers t. Trade, openedfor sig~tire April 12, 1979, 31 U.S.T. 405, T.I.A.S. No. 9616 (1979). Bo~ fie United S~teS

and the EC are signatones of this agreement.
Appendix A-Some Trade Disputes Pertinent to Trade/Environment Interactions . 87

Code’s formal dispute settlement provisions. Among

other things, it requested the establishment of a technical

experts group pursuant to Article 14.9 of the Code to

examine whether the EC Hormone Directive had any

scientific basis and whether it could have been drafted as

a technical product standard (prohibiting beef with

hormone residues) as opposed to a production standard

(prohibiting beef grown with hormones). One of the EC

arguments against the applicability of the Code to the

dispute was that the Code does not cover processing and

production standards.

The EC blocked the U.S. initiative by calling for the

establishment first of a panel of government officials to

determine whether the EC was attempting to circumvent

the Code. The United States blocked this in turn, and a

stalemate resulted over the use of the Code’s dispute

settlement mechanisms.

In December 1987, President Reagan took unilateral

action against the EC Hormone Directive by finding that

it was a disguised barrier to international trade and so

proclaiming retaliatory increases in import tariffs on

certain EC products pursuant to section 301 of the Trade

Act of 1974, as amended.16 He suspended this retaliation

for so long as the EC did not implement its directive. The

retaliation was triggered on January 1, 1989, when the EC

Hormone Directive took effect. In February 1989, the

United States and the EC setup a bilateral Beef Hormone

Task Force in an attempt to settle the matter or at least

keep it from escalating further. These talks resulted in

interim measures allowing some U.S. beef imports, and

thus a reduction in the additional duties on some EC

products. The issue continues to be a major concern in

U.S.-EC trade relations.

Besides highlighting the inadequacies in the dispute

settlement procedures of the GATT Standards Code

(which both the United States and the European Community have attempted to address in the Uruguay Round), the

dispute has left open the issue of whether the EC Hormone

Directive is an unnecessary barrier to trade. The United

States argues that there is no scientific evidence showing

that proper application of beef growth hormone poses a

threat to human health. The EC counters that there is no

scientific evidence providing a guarantee that beef treated

with growth hormone is totally risk free. The EC

maintains that it should therefore have the right to adopt

a precautionary ban on such products to protect its

consumers.

Panel Decisions Under the U.S.-Canada Free

Trade Agreement

8. In the Matter of: Canada’s Landing Requirement

for Pacific Coast Salmon and Herring, Final

Report of the Panel (Oct. 16, 1989)17

This case arose in the aftermath of the GATT panel

report on Canada: Measures Affecting Exports of Unprocessed Herring and Salmon (case 3 above). After the

GATT dispute settlement panel found Canada’s prohibitions on the export of certain forms of unprocessed

herring and salmon inconsistent with GATT, Canada

advised the United States that it would accept adoption of

the report by the GATT Council and would remove the

export restrictions.

In April 1989, Canada revoked those prohibitions, but

immediately introduced new regulations requiring the

landing in Canada of: 1) all roe herring, as well as sockeye

and pink salmon, caught commercially in Canadian

waters (species that were subject to the previous “process

in Canada” rule); and 2) all coho, chum, and chinook

salmon caught commercially in Canadian waters (species

that were not subject to the previous ‘process in Canada”

rule). Under these regulations, roe herring and salmon had

to be off-landed at a licensed “fish landing station” in

British Columbia or onto a vessel or vehicle ultimately

destined for such a landing station, thus preventing direct

at-sea sales and direct delivery by Canadian fishermen to

U.S. ports. 18 The new regulations provided for the

completion of catch reports and other data, as well as

on-site examination and biological sampling by Canadian

officials at landing stations.

The United States complained that although the new

regulations were carefully worded to avoid the appearance of creating direct export prohibitions or restrictions,

their clear effect was to restrict exports because of the

additional burdens on U.S. buyers relating to the extra

time involved in transporting the fish, extra cost involved

in landing and unloading, possible dockage fees, and

product deterioration resulting from off-loading. It noted

that the burdens fell solely on exports and thus put U.S.

processors at a competitive disadvantage since herring

and salmon purchased by Canadian processors must of

necessity be landed in Canada in any event.

When consultations between Canada and the United

States failed to resolve this matter, the United States had

the choice of seeking settlement of the dispute under

either GATT or the U.S.-Canada Free Trade Agreement

(FTA). 19 It chose to proceed under the latter agreement.

16 Trade At of 1974, ~blic ~w No. 93. fj18, s=. 301, 88 S@t. 1978, 2364 (1975), as amended, 19 U.S.C. 2411.

17 For additio~ infoMMtioq see McDonnan, op. cit., foolllote 8.

18 See MCDO- op. cit., footnote 8, p. 116.

19 Done at wm~gtom DC, Jan-2, 1988; ~We ~to force Jan- 1, 1989; repfited in 27 rnternatio~ Ugal Materials (1988), pp. 281-402.
88 . Trade and Environment: Conflicts and Opportunities

The dispute settlement panel assigned to the case was

asked to consider whether the landing requirement was a

measure prohibited by GATT Article XI (which FTA

Article 407 incorporates into the FTA) and, if so, whether

the requirement was subject to an exception under GATT

Article XX (which FTA Article 1201 incorporates into the

FTA). GATT Article XI prohibits quotas, license requirements, and other “prohibitions or restrictions” (other

than tariffs) on, among other things, the “exportation or

sale for export of any product destined for” another

GATT member, while GATT Article XX lists general

exceptions to GATT’s obligations, including Article

XX(g)'s exception for measures ‘relating to the conservation of exhaustible natural resources if such measures are

made effective in conjunction with restrictions on domestic production or consumption. ”

The panel first concluded that even if the term

“exportation” in GATT Article XI was to refer to the act

of exporting at the border alone, the concept of “sale for

export’ extends the coverage of Article XI to restrictions

imposed at an earlier stage of the process, before the act

of exportation itself. Thus, Article XI’s applicability did

not depend on whether the regulations constituted a

border measure or an internal measure. The panel also

concluded that the term “restrictions” in GATT Article

XI encompassed more than just quotas and licenses for

import or export.

The panel then rejected Canada’s argument that GATT

Article XI covers only measures that actually provide for

different treatment of domestic and export sales. The

panel stated that where the primary effect of a measure is

in fact the regulation of export transactions, the measure

may be considered a “restriction’ within the meaning of

GATT Article XI if it has the effect of imposing a

materially greater commercial burden on exports than on

domestic sales. The Canadian landing requirements, in

the panel’s view, had such an effect because a considerable number of potential exporters would find the extra

expense of making an unwanted landing in Canada to be

significant.

The panel did not consider it necessary to demonstrate

the actual trade effects of such a measure. It noted that

actual data on what would have happened without the

measure does not exist, and GATT decisions have not

required such proof. It was sufficient, the panel stated, that

the measure has altered the competitive relationship

between foreign and domestic buyers.

Having concluded that the Canadian landing requirement violated GATT Article XI, the panel next addressed

whether the requirement was nevertheless excused by

GATT Article XX(g). Both the United States and Canada

agreed that the applicable criteria were set out in the

GATT panel report on Canada’s former export prohibitions on unprocessed salmon and herring (case 3 above).

That panel concluded that, “while a trade measure did not

have to be necessary or essential to the conservation of an

exhaustible natural resource, it had to be primarily aimed

at [such] conservation” (emphasis added). In interpreting

that test, the panel in the instant case asked whether the

Canadian landing requirement would have been adopted

for conservation reasons alone; the panel in turn interpreted that question as asking whether Canada would

have adopted the landing requirement if that measure had

required an equivalent number of Canadian buyers to land

and unload elsewhere than at their intended destination.

This required the panel to make its own independent

evaluation of the conservation justification in question. It

recognized that there might be a need to single out the

salmon and herring fisheries for special data collection

because they were more important commercially and

more difficult to manage. It also agreed that just because

Canada was forced to accept imperfect data relating to

other aspects of the salmon and herring fisheries did not

mean it could not insist on better data when it could be

obtained.

However, on balance, the panel concluded that a

requirement to land a fleet’s entire catch did not contribute to these objectives sufficiently so that Canada would

have adopted it if the commercial inconvenience had

fallen on Canadian buyers. In its view, the Canadian

regulations were thus not primarily aimed at the conservation of an exhaustible natural resource and thus not

exempted by GATT Article XX(g). The panel stated that

a landing requirement could be considered primarily

aimed at conservation if provision were made to exempt

from landing that proportion of the catch whose exportation without landing would not impede the data collection

process. It noted that this might be as little as 10 to 20

percent of the catch, depending on the actual data and

management needs of each fishery or group of fisheries.

9. In the Matter of: Lobsters From Canada, Final

Report of the Panel (May 25, 1990)

On December 12, 1989, the United States enacted an

amendment to the Magnuson Fishery Conservation and

Management Act to prohibit, among other things, the sale

or transport in or from the United States of whole live

lobsters smaller than the minimum possession size in

effect under U.S. Federal law. 20 The minimum size

requirement is intended to allow lobsters to reach sexual

maturity and thus ensure stocks for the future. By the 1989

amendment, lobsters originating in foreign countries or in

states having minimum lobster size requirements smaller

20 me 1989 ~en~ent is section 8 of tie 1989 Natio~ ocefic ~d A~osphefic Aws~ation and Ocem ad COmti Mogr~s Authorization

Act, Fablic Law No. 101-224, sec. 8, 103 Stat. 1905, 1907 (1989) (codified at 16 U.S.C. 1857 (l)(J)).
Appendix A-Some Trade Disputes Pertinent to Trade/Environment Interactions ● 89

than the minimum limits imposed by U.S. Federal law

were prohibited, with effect from December 12, 1989,

from entering into interstate or foreign commerce for sale

within or from the United States.

The legislative history of the 1989 amendment reveals

three underlying objectives in extending the prohibition

of undersized lobsters to cover imports. First, the measure

was expected to facilitate the enforcement and management of the Federal conservation program by deterring

unscrupulous U.S. lobster dealers from using fraudulent

documentation to show Canadian origin of their lobsters.

Prior to the 1989 amendment, U.S. dealers were able to

avoid action under U.S. conservation by showing that

their undersized lobsters came from Canada. Second, the

amendment was expected to strengthen the conservation

of U.S. lobster stocks by removing the lure of the already

illegal market for subsized U.S. lobsters. Third, the

amendment was expected to redress a perception of

unfairness by U.S. lobstermen that the Federal size

requirement put them at a competitive disadvantage in

relation to their Canadian counterparts.

In December 1989, Canada advised the United States

that it viewed the U.S. ban on undersized imports as

inconsistent with U.S. obligations under GATT. It argued

that the measure was a quantitative import restriction

covered by GATT Article XI, which prohibits, among

other things, quotas, license requirements, and other

nontariff restrictions or prohibitions on imports. Canada

denied that the measure was exempted by GATT Article

XX(g), which exempts measures “relating to the conservation of exhaustible natural resources if such measures

are made effective in conjunction with restrictions on

domestic production or consumption.”

The United States maintained that the minimum size

requirement should be considered an internal measure

applying equally to domestic and foreign lobsters rather

than a border measure targeted at imports (see the annex

to ch. 2). As such, the United States argued that the

measure was permitted by GATT Article III, which

permits internal regulatory measures as long as they are

applied in a manner that does not favor domestic products

over imports. Even if GATT Article XI rather than GATT

Article III applied, the United States asserted that the

measure was a legitimate conservation measure exempted

by GATT Article XX(g).

After consultations between Canada and the United

States failed to resolve the matter, Canada had the choice

of seeking settlement of the dispute under either GATT or

the U.S.-Canada Free Trade Agreement. 21 It chose to

proceed under the latter agreement.

The dispute settlement panel’s report on the matter

consists largely of a legalistic examination of the terms

and drafting history of GATT’s Articles III and XI, which

the FTA incorporates. The majority of the panel agreed

with the United States that the minimum size requirement

was an internal measure permitted by GATT Article III.

In reaching its conclusion, the panel apparently did not

take into account one way or another an argument made

by Canada that its lobsters reach sexual maturity at a

smaller size than U.S. lobsters because of differences in

water temperature between U.S. and Canadian lobster

grounds.

Decisions of the Court of Justice of the

European Communities

10. Commission of the European Communities v.

Kingdom of Denmark (1989)22

At issue was a 1981 Danish regulation providing that

gaseous mineral waters, lemonade, soft drinks, and beer

could only be marketed in returnable containers, i.e.,

containers for which there was a system of collection and

refilling under which a large proportion of containers used

would be refilled. This effectively ruled out plastic or

metal containers. Also, except for some limited circumstances, manufacturers could use only containers that the

Danish Government had approved.

The Danish system was noteworthy because it went

beyond mandating recycling of the containers’ material to

requiring reuse of the containers. The logistical and

administrative burdens of such a system dictate that types

of containers be kept to a minimum. That is why the

Danish Government said it prohibited most use of

nonapproved containers.

Foreign companies perceived these requirements as

unfairly disadvantaging them because returning beverage

containers for refilling would be more costly for them

than for local producers. Moreover, requiring government

approval for containers raised the issue whether the

Danish Government might limit its approval to a few

standard bottle shapes, thus prohibiting foreign companies from using distinctive bottles carrying brand recognition. The Danish regulation was also viewed with

suspicion because it did not apply to milk and wine, two

products for which Danish producers had little foreign

competition.

The European Commission complained that the Danish

regulation unduly restricted the free movement of goods

among EC member countries contrary to Article 30 of the

EC’s Treaty of Rome. Initially, the Danish Government

tried to mollify the Commission by amending its regula21 Done ~twaS~gtOn, DC, J~~~2, 1$)88; ~me ~to fOrceJ~~ 1, 1989; repfited tilnternatio~l~gal Materials 1988, VO1. 27, pp. 281-402.

22 Commission o~t~e European Co-nities v. Kingdom of Den~rk, 1988 E. co-. ct. J. R~. 4607,54 COIIMII. Mkt. L. R. 619 (1989).
90 ● Trade and Environment: Conflicts and Opportunities

tion in 1984 to allow the use of nonapproved containers

(except metal) if volume was less than 300,000 liters per

producer per annum or if the market was being tested and

the new entrant provided for a deposit and return system.

However, the Commission continued to object, and in

response the Danish Government argued that no further

changes in the regulation were necessary and that the

measure was justified by the need to protect the environment .

With regard to the deposit-and-return system for empty

containers, the court agreed with the Danish Government’s position. It noted that protection of the environment is one of the EC’s essential objectives, which may

as such justify certain limitations on the free movement of

goods. Responding to the Commission’s argument that

there were less restrictive options available to the Danish

Government, the court found that the burden of the

Danish system on trade was not disproportionate to its

environmental benefits.

However, the court did find that requiring foreign

manufacturers to use only government-approved containers was disproportionate. Noting that a system for

returning nonapproved containers was capable of protecting the environment, the court observed that the volume

of bottles at issue would be small in any case owing to the

restrictive effect which the deposit-and-return system had

on imports. It thus acknowledged that the restrictive effect

of the measure would likely be substantial.

This decision is important for a number of reasons.

Some observers see it as highlighting how a court or other

dispute settlement panel could apply a proportionality test

to balance the competing but equally valid objectives of

free trade and environmental protection. Some critics

argue, however, that the court was too accepting of the

Danish law, and that the decision could encourage EC

member nations to protect their industries with laws

claimed to be necessary for the environment. It bears

noting that Denmark has a highly concentrated beer

industry. United Brewers, which controls Carlsberg and

Tuborg, controls 70 percent of the Danish market for

beer. 23 Perhaps encouraged by this case, Germany has

fashioned a tough law on recycling of packaging that

could also put imported products at a disadvantage.24

23 S= $t~eDanishB~tdeS Cme,>’ an~publi~hed ~s~dyprepmedby ~e~ndonBusiness School and the hgementmtitutefor ~vironment

and Business, Washington, DC, 1991.

24 verpackungweror~nung (~~nce on the Avoi&nce of pac~ging Wrote), June 12, 1991.
Appendix B

Selected Bills on Trade/Environment Issues: 102d Congress

Numerous bills and resolutions concerning the relationship of international trade and environmental issues

have been introduced into the 102d Congress. l Som e

relate to specific trade discussions (e.g., negotiation of the

North American Free Trade Agreement) or international

environmental agreements (e.g., the Basel Convention on

the Control of Transboundary Movement of Hazardous

Wastes and Their Control). A number of the other trade/

environment bills or resolutions would apply broadly to

bilateral or multilateral trade agreements or negotiations.

These proposals address several issues, including: 1)

whether U.S. trade negotiators should take environmental

questions into account in negotiating trade agreements; 2)

whether to authorize countervailing duties or other

penalties to compensate for competitive disadvantages

when other countries have weaker environmental standards; and 3) whether institutions to deal with environmental and/or trade questions need strengthening. Selected issues and legislative proposals are briefly discussed below.

Fast-Track for the Uruguay Round and

North American Free Trade Agreement

A major trade/environment issue in the first session of

the 102d Congress was whether to deny or condition the

extension of the President’s “fast-track” negotiating

authority. (Under the fast-track procedures, Congress

agrees to vote up or down, without amendment and under

a specified timetable, legislation to implement trade

agreements negotiated by the President). The Administration sought 2 additional years (through May 31, 1993) of

fast-track authority to complete the Uruguay Round

General Agreement on Tariffs and Trade (GATT) negotiations and also to negotiate a North American Free Trade

Agreement (NAFTA) among Mexico, Canada, and the

United States.2

Proposals to deny extension of fast-track authority to

the President failed in both the House (H. Res. 101) and

the Senate (S. Res. 78). However, the House, in passing

House Resolution 146, noted that fast-track authority was

an expression of the rulemaking power of the House and

the Senate, respectively, and could be changed by either

House. The House resolution also indicated, among other

things, that the United States under NAFTA must be able

to maintain and enforce strict health and safety standards

for imported agricultural products, and that NAFTA must

be accompanied by an effective worker adjustment

program. It also emphasized the need for a joint border

environmental program.

Environmental Objectives and

Trade Negotiations

The fast-track debate and the September 1991 tuna/

dolphin report by a GATT dispute resolution panel have

focused attention on the relation of environmental issues

(and other issues such as labor standards) to trade

negotiations. Should such issues be part of trade discussion+

or should they be addressed separately or independently?

The issue is partly procedural and partly substantive. With

respect to NAFTA, the Administration has said that

environmental (and labor standards) questions will be

addressed in “parallel” discussions.

In addition to NAFTA, several bills or resolutions

introduced in the 102d Congress would call on the

President and U.S. trade negotiators to include environmental and/or health and labor standards as a part of future

trade negotiations.

House Concurrent Resolution 246 would express the

sense of Congress on the relation between trade agreements and U.S. health, safety, labor, and environmental

laws. It would call upon the President to undertake

negotiations in the Uruguay Round to make GATT

compatible with the Marine Mammal Protection Act and

other U.S. laws, including those intended to protect the

environment beyond U.S. borders. The proposed concurrent resolution also asserts that Congress would not

approve a NAFTA or Uruguay Round agreement that

jeopardizes U.S. health, safety, labor, or environmental

laws, including the Federal Food, Drug, and Cosmetic Act

and the Clean Air Act.

Another concurrent resolution (H. Con. Res. 227) calls

on the President to encourage GATT contracting parties

to discourage trade in goods and services produced in a

manner harmful to the global environment and world

wildlife, and to oppose GATT actions that adversely

affect the ability of the United States to protect the global

environment and wildlife through “nondiscriminatory”

application of trade laws.

House Concurrent Resolution 247 proposes to express

the sense of the Congress that the U.S. Government

should, among other things, negotiate consideration of

different environmental, life and health, and worker rights

policies as justifiable exceptions in Article XX of GATT.

1 For updates on legislative status, see Susan Fletcher and Mary Tiemau Environment and Trade, CRS Issue Brief IB92006.

2 The United States already has a free lrade agreement with Canada.

–91–
92 ● Trade and Environment: Conflicts and Opportunities

Countervailing Duties or Other Trade

Measures to Address Weaker Environmental

Standards in Other Countries

A number of legislative proposals have been introduced that would treat the failure of other countries to

enforce environmental standards comparable to U.S.

standards as a kind of subsidy for their industries. Trade

measures (such as countervailing duties) would then be

allowed to makeup the difference in the cost of a product

attributable to the lower standards when compared to a

similar U.S. product.

For example, S. 984, the proposed International

Pollution Deterrence Act, would allow inadequate pollution controls and environmental safeguards (including

inadequate enforcement of such controls and safeguards)

to be considered as subsidies. Countervailing duties in the

amount of the cost that it would take the foreign firm to

comply with U.S. environmental standards could then be

imposed. A pollution control index would be created for

the top 50 countries exporting to the United States; the

index would attempt to measure each country’s compliance with standards similar or equal to U.S. standards,

through analyses of technology and actual costs incurred.

Half the revenues collected under S. 984 would go to

a Pollution Control Export Fund. The Agency for

International Development would administer the fund to

assist purchases of U.S. pollution control equipment by

developing countries. The remaining revenues would be

for a Pollution Control Research and Development Fund,

administered by the Environmental Protection Agency

(EPA).

Another 102d Congress bill, S. 1965, the proposed

Global Clean Water Incentives Act, would require the

Secretary of Commerce to impose fees on imported

products subject to or manufactured from processes that

do not comply with U.S. Clean Water Act standards. The

funds would be used to enhance the export of U.S.

products with higher prices resulting from the Clean

Water Act. It also calls on the U.S. Trade Representative

to take steps to initiate amendments to GAIT to allow any

country to impose additional duties on imports for

countries that do not comply with water quality standards

comparable to those in the United States.

S. 59, the proposed General Agreement on Tariffs and

Trade for the Environment Act of 1991, would authorize

actions to be taken under section 301 of the Trade Act of

1974 (19 U.S.C. 2411) against acts, policies, or practices

of foreign countries that would ‘‘diminish the effectiveness” of international agreements on the environment or

plant and animal conservation.

Strengthening Institutions on International

Trade and Environment Issues

Several bills call for steps to increase knowledge or

improve institutions on interactions between trade and

environmental issues. S. 59, discussed above, calls on the

U.S. Trade Representative and EPA (with consultations

from the Departments of State, Commerce, Agriculture,

and Health and Human Services) for continuing reporting

(through the National Academy of Sciences) on trade and

environmental issues, including an analysis of the competitive impact on specific industries of differences

between U.S. and foreign country environmental, conservation, and health laws. One purpose of the bill would be

to consider ways to establish within GATT (or another

institution) mechanisms to: 1) monitor and enforce

compliance with international environmental agreements

with trade measures, and 2) ensure foreign environment

conservation and health laws are not disguised trade

restrictions.

Another bill introduced in the 102d Congress, H.R.

3431, calls on the U.S. Trade Representative to seek

reform of GATT to take national environmental laws and

international environmental treaties, conventions, and

agreements into account; secure a working party on trade

and environment in GATT that includes representatives

from the United Nations Environment Program and the

U.N. Conference on Trade and Development; and take an

active role in making GATT responsive to national and

international environmental concerns.

Still another bill, S. 201, the proposed World Environmental Policy Act, would establish a Council on World

Environmental Policy in the Executive Office of the

President. The Council, chaired by the EPA Administrator and comprised of the heads of various agencies and

departments and Presidential appointees, would develop

and update every 3 years a strategic plan for coordinating

policy responses to world environmental problems. The

bill also proposes the appointment of a U.S. Environmental Negotiator to participate in negotiations relevant

to global environmental issues. The bill would direct the

President to request that the United Nations set up a

temporary new agency, headed by the director of the U.N.

Environment Program, to coordinate international environmental efforts and to help developing countries

improve their living standards while addressing environmental issues.
Appendix C

Selected Congressional Hearings

Relating to Trade and Environment

102d Congress

U.S. Pesticide Exports and the Circle of Poison—February 20, 1992.

House Foreign Affairs Committee, Subcommittee on International Economic Policy and Trade. Not yet

published.

U.S. Waste Trade with Mexico and Canada—November 21, 1991.

House Committee on Government Operations, Subcommittee on Environment, Energy and Natural Resources.

Not yet published.

Environment and Food Safety Issues Involved in the Proposed North American Free Trade Agreement-October

31, 1991.

House Committee on Energy and Commerce, Subcommittee on Commerce, Consumer Protection, and

Competitiveness. Serial No. 102-88.

Trade Policy and the Environment—October 25, 1991.

Senate Finance Committee, Subcommittee on International Trade. Not yet published.

Environmental Issues Associated with the Proposed North American Free Trade Agreement—October 16, 1991.

House Committee on Rules, Subcommittee on Rules of the House. Not yet published.

Basel Convention on the Export of Waste-October 10, 1991.

House Committee on Energy and Commerce, Subcommittee on Transportation and Hazardous Materials. Serial

No. 102-66.

Protecting the Environment in North American Free Trade Agreement Negotiations-September 30, 1992.

House Committee on Small Business, Subcommittee on Regulation, Business Opportunities, and Energy. Serial

No. 102-44.

GATT: Implications on Environmental Laws-September 27, 1991.

House Committee on Energy and Commerce, Subcommittee on Health and the Environment. Serial No. 102-53.

Preventing Ozone Depletion—June 11, 1991.

Senate Committee on Environment and Public Works, Subcommittee on Environmental Protection. S. Hrg.

102-137.

North American Free Trade Agreement—March 20 and May 8-15, 1991.

House Committee on Energy and Commerce, Subcommittee on Commerce, Consumer Protection, and

Competitiveness. Serial No. 102-12.

Economic and Environmental Implications of the proposed North American Free Trade Agreement—April 23 to

May 8, 1991.

Joint hearing before the Senate Committee on Environment and Public Works and the Subcommittee on Labor

of the Committee on Labor and Human Resources. S. Hrg. 102-116.

The U.S.-Mexico Free Trade Agreement—April 16, 1991.

House Committee on Banking, Finance and Urban Affairs, Subcommittee on International Development,

Finance, Trade and Monetary Policy. Serial No. 102-20.

Issues Relating to a Bilateral Free Trade Agreement with Mexico-March 14 and 22 and April 11, 1991.

Senate Foreign Relations Committee, Subcommittee on Western Hemisphere and Peace Corps Affairs. S. Hrg.

102-95.

101st Congress

Trade and the Environment—July 30,1990.

Senate Finance Committee, Subcommittee on International Trade. S. Hrg. 101-1230.

1 Citations are listed in reverse chronological order. Published hearings are available from the Superintendent of Documents, U.S. Government

Printing OffIce, Washington DC.

-93–
Appendix D

Trade in Environmental Goods, Services, and Technologies

The global market for environmental goods and

services (EGS) is large and growing fast. The United

States is the world’s biggest producer and consumer of

EGS thanks to its size and relatively strict environmental

laws. It is also the second largest net exporter of

environmental goods after Germany; Japan is the third.

Several other industrial countries are competitive exporters of some types of EGS.

There is expanding worldwide interest in “cleaner

production” technologies that prevent, rather than control

and treat, pollution and waste. Although not usually

included in EGS market estimates, demand for cleaner

industrial, energy, and agricultural technologies, as well

as for “green” products, seems likely to increase as

concerns about global climate change, toxic substances,

and more familiar soot and sewage’ problems continue

to mount.

The Organisation for Economic Co-operation and

Development (OECD) estimates that the worldwide

environmental market was $200 billion in 1990 and will

grow at a 5.5 percent annual rate to $300 billion by 2000.1

OECD defines the environmental industry to include

end-of-pipe pollution abatement equipment+. g., water

and wastewater treatment, stack gas scrubbers, solid

waste handling-plus engineering, management, and

consulting environmental services. Thus, OECD considers pollution prevention consulting services in its definition of environmental industry. However, it excludes both

technologies incorporated into processes for pollution

prevention and “green” consumer products—those that

are more energy efficient, made with less toxic components, contain recycled materials, etc.

The U.S. EGS market is 42 percent of the global

market; OECD nations together account for 82 percent.2

EGS markets in newly industrialized and developing

country markets are expected to expand. There will be

greater opportunities for international trade in EGS as

environmental standards and demands grow in stringency

in both developed and developing nations. For instance,

Mexico’s environmental market is projected to increase

15 percent annually during the early 1990s.3 Some

projections have Taiwan spending $105 billion over the

next 10 years for environmental protection, with imports

of pollution control equipment expected to grow at 20

percent annually.4 Environment is a concern in Eastern

Europe and the former Soviet republics. Those European

Community (EC) countries with less developed environmental infrastructures and regulations must upgrade to

meet EC standards. The Clean Air Act Amendments of

1990 in the United States5 and stronger waste minimization and recycling incentives in Germany and France6 

are

among initiatives in the industrial nations that will likely

add billions of dollars to the world EGS market, and thus

to trade opportunities.

As the largest net exporters of environmental products,

Germany, the United States, and Japan earn estimated

trade surpluses of $10 billion, $4 billion, and $3 billion,

respectively. 7 The United Kingdom, France, the Netherlands, and Sweden are also net environmental goods

exporters. About 10 percent of U.S. environmental

production is exported, while import penetration has

grown in the waste and air sectors, accounting for 26

percent in the case of industrial air pollution control

equipment. Japan exports 6 percent of environmental

equipment production, importing under 3 percent of its

consumption. Germany exports 40 percent of its product,

about half of that within Europe, but imports only 5

percent of demand.

These figures do not include trade in so-called cleaner

production—processes that prevent pollution and waste.

Cleaner production encompasses a wide range of technologies, from solar power and “clean coal” burning to less

polluting steelmaking processes, chlorofluorocarbon

(CFC)-free integrated circuit production, and chromiumfree leather tanning. In contrast to end-of-pipe or remedial

cleanup technologies, these environmentally preferable

1 Organisation for Econonic Co-operation and Development (OECD), The OECD Environment Industry: Situation, Prospects and Government

Policies,” OCDE/GD (92)1 (Paris: OECD, 1992).

z These percentages were derived from data in OECD, ibid.

3 U.S. Dep~ent of Commerce, International Trade Adrnimistratio~ “Market Research s~: 1991-The Mexican Market for Pollution

Instruments Equipment and Services.”

4 ‘tTaiwan Firms To Buy Waste Treatment Equiprnen4° NewsACTION Q.mblished by International Business Development, Northwestern

University), vol. 6, No. 1, spring 1991.

5 ICF Resources Inc. and Smith Barney, Harris Upham and Co., Inc., ‘‘Business Opportunities of the New Clean Air Act: The Impact of the CAAA

of 1990 on the Air Pollution Control Industry, ’ draft report prepared for the Office of Air and Radiatiou U.S. Environmental Protection Agency, January

1992.

6 “Green Germany Drags Brussels Into Environmental Arenq” Financial Times, Jan. 24, 1992, p. 2.; “France Launches Attack On waste,”

Financial Times, Jan. 24, 1992, pp. 1, 14.

7 OECD, op. cit., is the source for all data in this paragraph.

-94-
Appendix D--Trade in Environmental Goods, Services, and Technologies . 95

technologies are integral to production processes.8 Markets and trade in cleaner products and processes are

therefore very difficult to define and quantify. Should

scrap-using electric arc steel mini-mills be considered in

this market because they have fewer environmental

impacts than integrated steel production that starts with

iron? Should all industrial monitoring and control instruments be included because, in addition to contributing to

productivity and product quality, they can diminish

materials and energy waste? Probably not. As an analog,

one probably would not count apples and running shoes

as health expenditures. Regardless of these taxonomic

difficulties, demand for cleaner production seems likely

to accelerate. Trade opportunities arise from industrialization of developing countries, reconstruction of Eastern

European and former Soviet economies, and from demand for new and replacement capital stock within

OECD.

Trade in environmental technologies-both end-ofpipe and cleaner production-is not greatly impeded by

tariffs and explicit nontariff barriers (e.g., local content

requirements). For instance, tariffs imposed on U.S. air

pollution control equipment by major foreign markets are

typically under 5 percent, although there are some

exceptions—South Korean and Canadian tariffs are being

phased down from higher levels (in 1990,20 percent and

9.2 percent, respectively) .9 Preliminary research by OECD

on transfer of seven commercially available clean technologies to developing countries suggests that traderelated policies (e.g., tariffs, local content requirements,

patents, and currency restrictions), while sometimes an

issue, are not major obstacles to environmental technology trade.

Trade and transfer of environmental technologies to

developing countries can be expected to increase if those

countries have greater resources to implement environmental regulations and finance technology acquisition.

Without regulation, industry has little incentive to invest

in pollution control or to adopt clean technologies that

offer no cost advantage. (Some pollution preventing

processes do offer cost advantages, however, even in the

absence of environmental control costs.) Inadequate

financial resources are a major constraint in expanding

environmental trade to developing countries, Eastern

Europe, and former Soviet republics. Credit and foreign

exchange are often lacking. Poor cash flow can even keep

firms from purchasing pollution preventing processes that

offer lower operating costs and improved productivity.10

(See box 3-B in ch. 3, “Financing Environmental

Measures in Developing Countries,” for further discussion.)

Differing standards further complicate efficient market

entry and reduce economies of scale by requiring

companies to alter their products and procedures for each

country. These inconsistencies can offer advantages to

home country firms. The problem of differential regulation across different jurisdictions is not limited to the

international arena. In the United States, disparate State

and local standards and procedures present similar

problems to domestic producers of environmental technologies.

The U.S. Government has taken some steps that

encourage trade in EGS and the transfer of environmental

technologies. For instance, the United States Environmental Training Institute was recently established as a

joint venture between the U.S. Government and the

private sector to train developing country public- and

private-sector participants. The Institute may familiarize

foreign trainees with U.S. equipment, procedures, and

expertise, creating brand loyalty for U.S. products while

strengthening developing countries’ capabilities to manage their environment.

The U.S. Agency for International Development (AID)

has a variety of programs for developing country technical assistance and project financial support that can

benefit U.S. environmental industries. The U.S. Environmental Protection Agency (EPA) engages in foreign

technical assistance that may promote use of U.S. brand

equipment. EPA, AID, and the Department of Commerce

cooperate on trade missions and other export promotion

activities. The Department of Commerce is trying to

advance U.S. firms’ awareness of foreign environmental

market opportunities. The Department of Energy leads the

interagency Committee on Renewable Energy Commerce

and Trade (CORECT) that seeks to promote renewable

energy related commerce.

The Overseas Private Investment Corporation (OPIC)

is a Federal agency that supports U.S. business ventures

in developing and Eastern European countries (and soon

former Soviet republics) through information, investment

missions, project financing, and insurance programs.

OPIC’s Environment Investment Fund, as well as general

and specialized regional funds for Asia and Africa, can

promote U.S. environmental exports and investments.

The Trade and Development Program’s financial support

for project feasibility studies, Export-Import Bank credit

and insurance programs for U.S. exports, and the Small

8 u-s.COn9eSS,office of TW~oloW ~sessmen~ Serious Reduction of Hazardous Waste: For pollution Prevention and Industrial Ejiciency,

OE4-ITE-317 (Washingto% DC: U.S. Government Printing Office, September 1986).

g U.S. Department of Commeree, International Trade Administratio~ “b. Competitive Assessment of the U.S. Industrial Air Pollution Control

Equipment Industry,” August 1990, table 20, p. 40.

10 mid.
96 ● Trade and Environment: Conflicts and Opportunities

Business Administration are other sources of help for U.S. of $203 million for fiscal year 1993. This will be in

environmental companies seeking to compete overseas. addition to $460 million over 3 years announced by the

There are special U.S. Government-sponsored regional

efforts to promote foreign environmental capability

which can benefit the U.S. EGS industry. The United

States-Asia Environmental Partnership (US-AEP) was

recently established by the Administration to promote the

use of U.S. expertise and technology to solve Asian

environmental challenges. US-AEP involves over 20

Federal agencies. Assistance for Eastern Europe, including the Support for East European Democracy Act, first

passed by Congress in October 1989, contains environmental components. For the U.S.-Mexico border region,

the Administration has proposed environmental spending

Mexican Government for environmental purposes in the

border region.ll

Opening foreign market channels will not, by itself,

assure a strong, internationally competitive U.S. environmental industry. The United States faces stiff competition

from other nations, notably Japan and Germany, whose

governments are actively promoting the development and

deployment of new environmental technology. These

efforts, as well as U.S. effort and options, will be analyzed

in the final report of this assessment, to be delivered in

1993.

11 Jm Gfibreath R@ 4<Ffi~c@ Env~o~en~ and ~as~c~ Costs Under a Nofi A,mefican Rtx T@e Agrement With Emphasis On tie

Texas-Mexico Border,” draft presented to the Institute of the Americas conference“Latin American Environment and Technological Cooperation,”

La Jell% CA, NOV. 17-19, 1991.
Appendix E

Assessing Trade and Competitiveness Impacts of

Environmental Regulations on U.S. Manufacturing

There have been attempts to assess the competitive

impacts of environmental regulation on U.S. manufacturing at least since the early 1970s. A number of studies

were done in the early to mid-1970s; after a period of

reduced interest, the topic appears to be gaining scholarly

and government attention today.1 The U.S. Government

was involved early and continues to work in this area.

The majority of studies dealing with this question have

concluded that environmental regulation does increase

the costs for U.S. producers, but that these increases are

relatively small. Some studies have failed to find a

relationship between environmental regulation and trade

and investment. However, other studies have found an

effect, but have judged the overall effect to be small. In

certain sectors facing high environmental control costs,

the effects on trade performance were larger.

However, serious problems with both the data and the

methodology make anything but limited and/or tentative

conclusions problematic. Limitations of the research

methodologies make valid assessments difficult. Many of

these studies may underestimate the total costs of

environmental regulation, particularly for some industries; at the same time, they may neglect the benefits of

regulation, such as increased energy and materials efficiency and increased public health.

Moreover, it is important to note that much of the

research dates from the 1970s, and thus many of the

conclusions about the effect of environmental regulation

on trade come from a time when U.S. industry was just

beginning to feel the competitive pressures that have so

greatly intensified in recent years. As a result, what were

modest impacts on a competitively strong industry then

could be more significant today when competition as a

whole is more intense. Thus, while the studies generally

concluded that the effects were small, this does not mean

that these effects are currently insignificant and should

not be addressed.2 This is particularly true given the new

and stricter environmental regulations which will go into

effect in the 1990s. In an era of heightened competition,

increased environmental costs can diminish trade performance, and when combined with other effects (e.g.,

cost of capital, foreign industrial policies, etc.) may

contribute to significant competitiveness difficulties. But,

as other OTA reports have shown, factors such as capital

availability, a well-trained workforce, and strong development and diffusion of commercially oriented technologies remain important determinants of competitiveness.3

The Impact on Trade

Economic theory suggests that the increased environmental control costs borne by U.S. producers would

reduce their competitive advantage in global markets as

they face increased competition from producers in nations

with lower environmental control costs. Many of the

empirical models of the effect of environmental regulation on trade hypothesize that increased environmental

control costs will worsen U.S. trade performance.

While studies have been done on the relation between

environmental regulation and economic growth, only a

few have assessed the cost of environmental regulation

and examined its impact on international trade and

investment. 4 Overall, the studies are difficult to summarize and offer somewhat mixed conclusions.

1 The studies on the relationship between environmental regulation and tmde are distinct from those examining the impact of regulation on overall

economic growth. This report limits its focus to the trade impacts of environmental regulation. Other material has examined the effect of environmental

policies on overall U.S. economic growth (e.g., GNP, investmen~ jobs). (See, e.g., Dale W. Jorgenson and Peter J. Wilcoxen, “The Impact of

Environmental L@slationon U.S. Economic Gro~rnvestmen~ and Capital Costs,’ paper presented at the U.S. Environmental Policy and Economic

Growth conference, sponsored by the American Council for Capitrd Formatiou Washington DC, Sept. 12, 1991.)

2 For exaple, ~ a s~dy of tie steel fidustry, C)TA concluded, “In a world industry in which !mlfits ae kW or absen4 enviro~~M costs cm ~

significant even though they may account to only a small percentage of costs.” See U.S. Congress, Office of Technology Assessmen4 Technology and

Steel Zndustry Competitiveness (Washington, DC: U.S. Government Printing Office, June 1980), p. 83.

3 See U.S. Congress, Office of Technology Assessment, Mah”ng Things Better: Competing in Manufacturing, OTA-ITE-44 3 (Washingto@ DC: U.S.

Government Printing Office, February 1990); also Competing Econom”es:America, Europe, andthePacijlcRim, OTA-ITE-498 (Washington DC: U.S.

Government Printing Office, October 1991).

4 Ugelowreviewd ealier s~dies done tithe 1970s, while Dean s~eyed sfidies done through 1990. Judi~L. Ugelow, “A Survey of Recent Studies

on Costs of Pollution Control and the Effects of Trade, ’ in Seymour J. Rubin and Thomas R. Graham (eds.), Environment and Trade (London: Frances

PinterLtd., 1982); Judith De% “Trade and the Environment: A Survey of the Literature,“ Background Paper, WorldDevelopmentReport, 1992, World

Ba~ April 1991; see also Charles S. Pearson and Robert Repetto, ‘‘Reconciling Trade and the Environment: The Next Steps, ” prepared for the Trade

and Environment Committee of the EPA, December 1991.

–97-
98 ● Trade and Environment: Conflicts and Opportunities

Virtually all studies agree that environmental regulation increases the cost structure of firms producing in the

United States.5 For example, the U.S. Bureau of the

Census reports that in 1988 the average cost of environmental regulation for 445 manufacturing industries was

1.1 percent of value added.6 Some other estimates are

higher.7 For example, world business leaders surveyed by

Organisation for Economic Co-operation and Development (OECD) report that environmental costs average 2.4

percent of sales income and are anticipated to rise to 4.3

percent by the end of the decade.8

While relatively small overall, the costs of environmental regulation are higher for certain industies. For

example, 14 percent of 445 industries have environmental

regulation costs of more than 2 percent of value added.9

Copper smelting or refining, petroleum refining, steel,

and cement all have relatively high costs from environmental regulation. Dow Chemical estimates a 2.5 to 3

percent price increase because of environmental capital

investments.l0 When compared to the trade shielding

effects of tariffs, environmental regulation costs are by no

means trivial.11

Even though environmental regulation imposes expenses on U.S. producers, it is another matter to show

whether these costs negatively affect trade performance.

To do this, economists usually rely on economic models

that include a number of variables, including the cost of

environmental regulation, to either measure or predict

trade performance and overseas investment.

Some studies find that it is impossible to isolate the

effect of environmental regulation on trade, particularly

because other variables, such as the cost of capital and

exchange rate fluctuations, overshadow the effects of

increased environmental regulation costs. For example, in

1979 the U.S. Department of Commerce concluded that

its studies “have disclosed no evidence of either significant out-migration of U.S. industries to ‘pollution havens’

or of trade pattern dislocations directly attributable to

pollution control costs.”12 They expected any cost

differentials to be masked by other factors affecting the

state of the economy.

13 Similarly, a later study, looking at

net exports in five pollution-intensive industries, found no

trade impact from environmental control costs.14

However, other studies have found more evidence of

impacts-albeit small. A 1978 OECD study concluded

that the general increase in prices due to environmental

regulation is not highly significant, “but is nevertheless

sufficient to trigger some reduction in private consumption and in exports. “

15 Another study found that “pollution abatement regulations have a negative and fairly

significant effect on trade performance (in the 1970s).”16

A third study found that a 1 percent increase in cost due

to environmental regulation would result in a net reduc5 This background paper focuses on the impact on trade of process regulations that limit pollution from industrial facilities. It does not examine the

impact of other types of environmental regulatio~ including product regldations (e.g., automobile emission standards), regulations on product reuse (e.g.,

recycling laws), or other types of regulations.

G The main source for data on pollution control costs for industry is from the Bureau of the Census, Manufacturer’s Poliution Abatement Capital

Expenditures and Operating Costs, published annually.

7 There are two different ways to express environmental control COStS. The first uses the share of environment control costs paid directly by the firm

= a mtio of value added. A second measure, relying on an input-output model, includes both the direct costs to the fm plUS the indirect costs of

environmental controls embedded in the firm’s inputs and supplies. These cows are higher but they are divided by the total fm costs, not the lower value

added. However, using only direct environmental control costs as a share of total costs, rather than value added, as is sometimes done, results in estimates

tit understate the true cost of environmental reguhtion. See Joseph P. Kal~ “The Impact of Domestic Environmental Regulatory Policies on TJ.S.

International Competitiveness, “ in A. Michael Spence and Heather A. Hazrud (eds.), Znternatiorud Competitiveness (Cambridge, MA: Ballinger

Publishing Co., 1988).

8 Prelidnary information from OECD, 1991.

g U.S. Trade Representative, “Review of U.S.-Mexico Environmental Issues,” February 1992.

10 ~lesJ.-Comenton ~ ~~tmmtio~compfiom of &v~oMen~Re@atio~’~ymondJ. Kopp, pa~R. Portney, and Diane E. Dewitt,

in Environmental Policy and the Cost of Capital, American Council for Capital Formation, September 1990, WashingtoIL DC.

11 By 1979 tie avemge ~ for nonpmpmduc@@~uct5Otha @ores, ~er, and the like) imported bto indus~~d countries WM down

to4.7 percent. (John Jackson, The World Trading System:Luw and Policy of International Relations (Cambridge, MA: MIT Press, 1989), p. 53.) Given

that environmental control costs in the most affected industries are above 2 percent of value added, their magnitude in comparison to tariffs can be

si@lcant. See also Ingo Walter, “International Economic Repercussions of Envhonmental Policy: An Economist’s Perspective,” in Rubin and

Graham, op. cit.

12 u.S. Department of commerce, “U.S. Pollution Control Costs and International Trade Effects-1979 Status Report” (mimeo), September

1979, p. 3.

13 Cited in Ugelow, Op. Cit.

14 J. Tobey, “The Effects of Domestic Environmental Policies on Patterns of World Trade: An Empirical Test,” Kyklos, vol. 43, No. 2, 1990, pp.

191-209.

M ~g~sation for Economic Co-operation ~d l)evelopmen~ Macroeconomics Evaluation of Environmental pmgra-s, 1978, P. 11. cit~ in

Ugelow, op. cit. Pasurkaalsofound small impacts of environmental regulation see Carl Pasurka, “Environmental Control Costs and U.S. Effective Rates

of Protection” Public Finance Quarterly, vol. 13, No. 2, April 1985, pp. 161-182.

16 IW4 op. cit.
Appendix Assessing Trade and Competitiveness Impacts of Environrnental Regulations on U.S. Manufacturing ● 99

tion of the U.S. balance of trade of $6.5 billion in 1982.17

While the study concludes that this is a small effect, if the

impact was the same in 1990, it would result in an $8.6

billion worsening of the U.S. merchandise trade deficit of

$101 billion. Yet another study found that a pollution tax

imposed on Mexico equal to the value of environmental

control costs of the counterpart U.S. industries would lead

to a 1.2 to 2.6 percent reduction in Mexican exports to the

United States.18 This would reduce U.S. imports from

Mexico by approximately $375 million a year.

While assessments generally conclude that the economy-wide effects are minor or nonexistent, some studies

suggest that sectoral effects are more significant. For

example, the Commerce Department concluded that

while it could find no relationship between environmental

control costs and overall trade patterns, environmental

regulation in 1979 did add $7.30 more per ton to the costs

of U.S. bleached kraft pulp (paper) over that of Sweden or

Canada for a 5.8 to 8 percent increase.19 Because U.S.

producers already held a competitive cost advantage, the

study concluded that the impacts on trade would be

minimal. Similarly, the Commerce Department found that

environmental control costs averaged 6.6 cents per pound

in the U.S. copper industry, but only 2.7 cents in Canada,

and 0.5 cents in Peru and Chile. The report predicted that

U.S. copper imports would rise from 167,000 tons in 1974

to 661,000 tons in 1987, and that 16 percent of this

increase (79,000 tons) would be attributable to additional

environmental regulatory controls on U.S. copper producers.

20 The Department classified these impacts as small.

By contrast, in 1988, OTA concluded that the cost to the

U.S. copper industry, particularly copper smelting, of

environmental regulation “has been large, with substantial negative impacts on competitiveness and capacity.”2l

Another study estimated that water pollution control

expenditures would lead to differential trade impacts, for

example, an increase of shoe imports of less than 1

percent, but an increase in steel imports of 6 percent.22

Because the products of many industries with high control

costs tend to be highly standardized intermediate goods

purchased by other industries (e.g., chemicals, petroleum,

minerals) with high price elasticity of demand, small

changes in price may cause larger changes in sales.23

Finally, one study found that between 1973 to 1982 the

United States increased its net imports of goods more

from industries with higher environmental control costs

than from those in which such costs were lower.24 In other

words, as a ratio of imports to exports, the United States

increasingly imported goods in industries that had high

environmental control costs. However, the ratio did not

change for imports from Canada, a country whose

environmental regulations are similar to those of the

United States.

The Impact on Investment and Relocation

In addition to affecting trade directly, some argue that

uneven regulation may induce U.S. firms to migrate to

countries with lower levels of regulation-the so-called

pollution haven effect. Studies of the location impacts of

environmental regulation are inconclusive, but suggest

that the effect is modest. There are reasons to suggest that

the migratory effect of environmental regulation is likely

to be less than the trade effect.

Unlike decisions to buy discrete items, U.S. overseas

investment decisions are often driven by such considerations as foreign market access or savings in areas such as

wages. For relocation decisions driven by cost considerations, the savings have to be large enough to overwhelm

17 I-I. David Robiso@ C’Industrial Pollution Abatement: the Impact on Balance Of Trade,” Canadian Journul ofEconomics, vol. 21, No. 1, February

1988.

18 pa~~k~w, ‘tTradeM~~~esand EnVironmen@ Q~~:~pfi~tions for Mefico’sfipo@’ paper presented at the Sy’mpOSiUm OnhlterlMtiOXld

Trade and the Environment, sponsored by the World Ba~ Washington, DC, Nov. 21-22, 1991.

19 Us. Department of Commerce, 1979, Op. Cit., p. 12.

20 U.S. DW~entof Commeme, 1979, Op ~it., app. 2,P0 4. me Congessio~Budget Office es~t~~tenvironmental re@atiOn dSO contributed

to significant declines in the zinc smelting industry. (U.S. Congress, Congressional Budget OffIce, Environmenta/Regulation andEcononu”c Eficiency,

March 1985.)

21 U.S. Congess, ()&lce of Technology Assessmen~ copper: Technology and Competitiveness, OTA-E-367 ~@kl@O~ DC: U.S. Govtinm~t

Printing Office, September 1988).

22 ~b~c Research ~ti~te, The Eflects of E&lUent DiSc~rgeLi~”tationson Foreign Trade in Selected Industries, R~ort tO the U.S. National

Commission on Water Quality (Arlingto~ VA: February 1976).

23 General Agreement on Tariffs and Trade (GA~, “Trade and the Environment” Feb. 12, 1992, p. 20.

2’$ Robisom op. cit.
100 ● Trade and Environment: Conflicts and Opportunities

the costs of opening up a new plant (which can be

substantial). 25 Many firm location decisions are not

driven by low cost, as access to markets, skilled labor, and

quality infrastructure may be more important. And

usually savings from lax environmental regulations will

be relatively modest compared to the savings from other

factors, such as low wages. However, many countries

with low labor costs also have low levels of environmental and worker health and safety regulations, which

when combined, can result in even lower costs.

Most economy-wide studies suggest a low impact on

investment from differing environmental regulation.26

Leonard found no significant effects on investment of

differential environmental regulation.27 A study of U.S.

“maquiladoras” plants (plants locating in Mexico near

the U.S. border through a special Border Industrialization

Program) found no relationship between the level of low

Mexican regulations and U.S. investment.28

While economy-wide studies find no investment effect,

anecdotal evidence, case studies, and surveys of firms

suggest that lower environmental regulation does play a

role. For example, one study found that 26 percent of

maquiladora operators in Mexicali cited Mexico’s lax

environmental enforcement as an important reason for

their relocation there.29 The U.S. General Accounting

Office found that between 11 and 28 wood furniture

manufacturers in the Los Angeles area relocated to

Mexico between 1988 and 1990, taking with them 960 to

2,547 jobs.30 About 80 percent of the firms cited stringent

air pollution standards as well as lower labor costs as

major factors in their location decision. In Mexico, these

firms faced no air pollution standards for the application

of paint coatings and solvents.31

Case studies may find impacts because environmental

regulation affects some industries more than others. For

example, U.S. operations that moved to Mexico were

either relatively labor-intensive light manufacturing operations and generally not highly polluting, or producers of

hazardous waste such as asbestos. 32 A few industries

more likely to relocate due to environmental regulation

include some mineral processing, toxic products, and

intermediate organic chemicals.33 This is consistent with

a finding that environmental regulation does not affect

industry location in the United States overall, but that it

may have some effect on the location of highly polluting

industries. 34 For the subset of industry that is labor cost

sensitive, is relatively footloose or is making new

investment decisions, and has high environmental compliance costs, low environmental regulation can add to the

cost advantage gained by low labor costs.

Limitations of the Studies

These studies do not provide definitive conclusions.

Studies relying on economic models are limited by

several factors. First, it is difficult to separate the effects

of environmental regulation from other variables, such as

wages and exchange rates, on overall trade patterns.

OECD concluded that in relation to differing environmental costs among OECD nations, the fact that there

have been no evident changes in competitive status does

not suggest that environmental costs have not affected

competitiveness, but that the totality of influences on

competitiveness is such as to disguise any effect.35

Second, data limitations relating to the costs and

benefits of environmental regulation make it difficult to

accurately assess the competitiveness impact. Some of

these limitations would suggest that the actual impacts are

even lower than currently measured, but others would

lead in the opposite direction, to suggest larger impacts.

None of the models include the benefits from environmental regulation and as a result may overstate the impact

on trade. Firms may indeed accrue benefits from environ25 However, the savings horn lax environmental regulations maybe a more impo~ntdctcm nt for new investment decisions than for relocations.

26 For example, see h.lgo Walt% “Environmentally Induced Industrial Relocation to Developing Countries,” in Rubin and Graham, op. cit.

27 H. Jeffrey ~onar~ Pollution and the Strugglefor the World Product (New York NY: Cambridge UniVers@ ~~% 1988).

28 @neMO &oSSmand~nBe ~ega, ~~~v~omen~~pac~ of a Nofi~eric~Fr~ Tr~eA~ement,” papmpresented at the COnfelKXICe

on the U.S.-Mexico Free Trade Agreement sponsored by the Mexican Secretary of Commerce and Industrial Developmen~ Oct. 8, 1991.

29 ~eenpercent of me fms s~d titwe~m envfioma~ le@s~tion Wm a ~jor factor in selecm Mexico, while ~o~er 13 percent sttid it

was an important factor. (Roberto Sanchez, ‘‘Health and Environmental Risks of the Maquiladora in Mexicali,” Natural Resources Journal, vol. 30,

winter 1990.) One economic development ofllcial for the Mexican state of Sonora suggests, “The red tape and expense of American environmental law

is a powerful incentive for some companies to locate in Mexico. I’ve had a couple of compaaies come down solely for that reason.” (Quoted in Sandy

Tola.rL “Hope and Heartbrek” The New York Times Magazine, Best of Business Quarterly, winter 1990-91.)

~ us. congress, U.S. General Accounting OffIce, “U.S.-Mexico Trade: Some U.S. Wood Furniture Firms Relocated From Los Angeles Area to

Mexico,” April 1991.

31 Ibid.

32 Leonard, op. cit.

33 ~id.

34 T~ B@ “me ~ec~ of fivfiomen~ R@ation on BUSinMS ~~tion in the United States,” Growth and Change, summer 1988.

M ~e~WinfOZIIMtiOn from OECD, 1991.
Appendix E-Assessing Trade and Competitiveness Impacts of Environmental Regulations on U.S. Manufacturing ● 101

mental regulation. For example, OTA found that environmental regulations accelerated steel industry modernization.36 Pollution prevention efforts may increase competitiveness, if they result in firms paying closer attention to

energy and materials efficiency and continuous process

improvement. 37 Lower pollution costs may also be

reflected in lower health care costs, increased agricultural

productivity, and lower costs in other pints of the

economy from reduced pollution.38 Companies can benefit from these both directly and indirectly (cheaper

supplies and inputs). Further, as other nations develop

stricter environmental regulation, U.S. firms may receive

some first-mover benefits as firms in other nations spend

money to catch up. Finally, the United States may run a

trade surplus in environmental protection products and

services that acts to offset to some extent negative trade

effects from environmental regulation-induced cost differentials (see app. D).

Third, it is not clear that the models accurately measure

cost, either in the United States or other nations. Most of

the studies rely on data on pollution abatement expenditures from a survey by the Bureau of the Census.

However, there is some evidence that these surveys

underreport environmental control costs.39 For example,

in the copper industry, Census data indicate that environmental control costs added 4 cents per pound to the price

of copper in 1985.@ However, at least four other sources,

based on actual examination of copper smelting firms,

found that the expenses were much higher, ranging from

7.5 cents per pound to 15 cents per pound.41 The Census

surveys may underreport true costs if the respondents do

not have complete knowledge of all expenditures.

Chapman found that survey results of the copper mining

and smelting industry may not have included costs such

as monitoring and planning activities, environmental

activities that are part of the production process, interest

expense on equipment, and productivity 10SS.

42

Moreover, costs may be underestimated if other

expenses are not calculated, including: administrative and

legal fees and fines (these can be sizable in the Resource

Conservation Recovery Act (RCRA) and Superfund

proceedings); 43 costs of having to substitute new materials or processes; costs associated with bans on certain

products or on production of certain hazardous products

(e.g., zinc smelting, arsenic, benzidine-dye); increased

costs of the effects of environmentally related industrial

zoning; costs related to workplace health and safety

protection; fees and taxes for permits; administration and

recordkeeping; and research and development (R&D) for

environmental controls.44 In addition, some argue that the

environment, particularly hazardous waste issues, occupies a significant portion of time for some top executives.

Finally, even though costs may not be all that high now,

new and stricter environmental regulations put in place in

the 1990s may change this picture, particularly for some

industries. This all suggests that current estimates of U.S.

environmental costs, based on surveys, may in fact be too

low, which would lead to impacts that are underestimated.

Another limitation of the studies is that few include

foreign costs of environmental regulation in the models,

which leads to an overestimation of the impact of

environmental regulation on trade and investment. The

United States has among the most advanced environmental regulations in the world, although some other

nations (Canada, Japan, Denmark, and Germany) have

36 u.S. Congress, office of Technology Assessmen~ Technology and Steel Industry competitiveness, Op. cit., P. 83.

37 see Us. C!oqyrjss, (Jfflce of Technology Assessmen~ Sen”ous Reduction ofHazardous Waste: For Pollun”on prevention andIndus~”alEflciency,

OT2MTE-317 (Washingtome DC: U.S. Government Printing Offke, September 1986); also Michael Porter, “America’s Green Strategy,” scientific

American, April 1991, p. 168.

38 See ~g~sation for ~onomic Co-opaation and Development Environmental Policy Benefi”ts: MonetaV Valuation @*: OEC’D, 1989).

39 For e-pie, as discuss~ above, ~bq(op. cit) ~nclud~ tit env~onmen~con~ol ~sts ~d no impact on ~de. However, hiS COSt t%bks

appear too low. For example, he calculated that environmental control costs accounted for only 2.05 percent of the copper smelting industry total costs.

In contms~ as discussed below, the true costs appear to be at least three to five times greater.

40 Da~ from the B~eau of the CeHs, based on the Manufacturer’ sPollution Abatement Capital Expeti”tures and OPerating Costs* 1987”

41 see U.S. Congess,offIce of Technology Assessment, copper: Technology and competitiveness, op. cit.—lo to 15 cents per po~d; National

Research Council, Competitiveness of the U.S. Minerals and Metals Industry (Washington, DC: National Academy Press, 1990)-9 to 15 cents per

pound; “Counting the Cost of Clean Air,” E&MJ, January 1990-7.5 cents per pound; Duane Chapman, “Environmental Standards and International

Trade in Automobiles and Copper: The Case for a Social Tariff,” Natural Resources Journal, vol. 31, winter, 1991, pp. 449461 —10 to 15 cents per

pound. Total U.S. copper production costs averaged 65 cents per pound.

42 Chapman, op. cit.

43 For emple,po~v es~tes that costs of Utigtion and other non-cleanup related expenses cotid exceed 20 percent of to~ SUW*d cl~uP

costs. (Paul Portney, “The Economics of Hazardous Waste Regulation” paper presented at U.S. Waste Management Policies: Jxnpacts on Economic

Growth and Investment Strategies, sponsored by the hmrican Council for Capital FormatiorL Washingto~ DC, Nov. 7, 1991.)

a Chapman, op. cit.
102 ● Trade and Environment: Conflicts and Opportunities

also developed strict and comprehensive approaches.45

Other OECD nations, including France, United Kingdom,

Switzerland, Spain, and Italy, have less strict standards,

and non-OECD nations have even lower standards.46 In

addition, even among countries with similar levels of

environmental regulation, there is wide variation in

enforcement. 47 Moreover, countries differ in the forms of

regulation employed and the relationship between government and industry in forming environmental policy.

Some forms of regulation (e.g., tradeable permits) may

result in lower overall costs to industry while still

achieving a stated environmental goal.

As a percent of gross domestic product (GDP), the

United States spends more than any other nation (1.5

percent of GDP and $78 billion) on environmental goods

and services.48 Japan spends about half the U.S. rate (0.7

percent), northern European nations spend slightly more

than half (0.9 percent), and southern European nations

only one-third (0.5 percent) .49 The costs of regulation in

less developed countries, including the newly industrializing countries (NICs), is significantly lower than in

OECD nations. Table E-1 compares costs for different

regions.

Even though many less developed countries have low

or no regulations, this situation appears to be changing.

Many countries, especially the NICs, are putting in place

stricter environmental regulations.50 Moreover, some

argue that even though many less developed countries

have minimal or no regulations, some multinational

corporations (MNCs) may apply their high home country

standards to their plants in less developed nations.51

However, little systematic evidence has been presented to

substantiate this claim. Thus, it is unclear the extent to

which MNCs do this, particularly smaller firms that

Table E-l—Estimated Per Capita Expenditures

on Environmental Goods and Services

Regions costs ($)

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313

Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197

Northern Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194

Southern Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

OECD average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214

Rest of world . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

SOURCE: Preliminary information from OECD, 1991.

relocate to less developed nations. For example, while

U.S. maquiladoras suppliers say that they don’t illegally

pollute, others dispute this claim and argue that sewage

and other runoff from the area is often highly polluted

with industrial wastes.52 Even if the MNCs abide by home

country standards, they may receive a cost advantage if

local suppliers are unregulated.

Finally, the impact on U.S. firms can be even more

significant because favorable tax treatments and subsidies

in other nations for their firms can help offset these costs,

and change the cost structure between nations.53 Not all

nations are as committed to the polluter pays principle (an

OECD principle that says that polluters should bear the

cost of complying with environmental regulations) as the

United States.

U.S. Government Efforts

Congressional concern about the competitive and trade

impacts of U.S. environmental regulations is not new.

Congress has on different occasions called on the

executive branch to assess the impact of U.S. environmental standards on the competitiveness of American

45 ~e~w~omtionfiom OECD, 1991; Kopp, po~~y, ~~d D~witt ~~~ that OEC’D fi ad water po~utioncon@ol poficies were generidly

the same, and that any cost differential the United States bears is Likelytobe small, but that hazardous waste policies were different. In particular, Resource

Conservation Recovery Act (RCRA) and Superfund imposed more stringent requirements on U.S. manufacturers than on overseas. (International

Comparisons of Environmental Regulation Raymond J. Kopp, Paul R. Portney, and Diane E. Dewit~ inEnvironmenta2 Policy and the Cost of Capital,

American Council for Capital Formatio~ September 1990, Washingto@ DC.)

46 ~em information from OECD, 1991.

47 Ibid.

48 A rwent repofi bY tie Env~Omen~ ~otwtion Agen~Y (EPA) es~~ed higher costs for tie Ufiti s~@ of pro~~tig ~d reStO@ ~

environmentsl15 billion annually, or about 2 percent of U.S. gross national product. However, EEA esdrnates include all costs associated with

municipal andpnvate solid waste collection (approximately $20 Mlim) as well as costs of pollution control equipment on automobiles and othezmobile

sources (approxima tely $8 billion). Without these, the EPA estimate is $87 billiou closer to the OECD estimate. U.S. Environmental Protection Agency,

Environmental Znvestnzents: The Costs of a CYean Environment, EPA-230-90-084 (Washington DC: December 1990).

49 ~eminformation from OECD, 1991.

50 pad Cdlen B~tely, “T’he Benefits of a Global lhvironmental Compfimce s~tegy, “ Corporate Management, vol. 158, No. 3, pp. 14-19, June

1989.

5t USTIL op. cit.

52 For ex~ple, see Joseph La DOU, “Deadly Migration: Hazardous Industries’ Flight to the Third WorkL” Technology Review, vol. 94, No. 5, July

1991; Sanford Lewis et al., “BorderTrouble: Rivers in Peril. A Report on Water Pollution Due to Industrial Development in Northern Mexico,” National

‘lbxics Campaign Fund, May 1991; Diane M. Perry, Roberto Sanchez, William H. Glaze, and Marisa Mazan,. ‘‘Binational Management of Hazardous

Waste: The MaquiladoraIndustry at the U.S.-Mexico Border, Environmental Management, vol. 14, No. 4,1990, pp. 441-450; and Sandy Tblam “Hope

and Heartbr@” The New York Times Magazine, reprinted in Best of Business Quarterly, winter 1990-91.

53 For e~ple, tie Jap~eSe give industrial grant aid to help reduce COst of COrn@~~.
Appendix E-Assessing Trade and Competitiveness Impacts of Environmental Regulations on U.S. Manufacturing ● 103

industry. It has also called on the executive branch to

prompt other countries to raise their environmental

standards.

Water Pollution Control Act

Amendments of 1972

The Federal Water Pollution Control Act Amendments

of 1972 directed the Secretary of Commerce to periodically study and report to Congress on the international

trade impacts of the law. The Secretary, among other

things, was asked to make a determination of the

“probable competitive advantage” for foreign goods

produced in countries without pollution control standards,

or with lesser standards, or with subsidies or reimbursements for manufacturers’ environmental costs.54 In succeeding years the Secretary released four studies.55 The

last report focused on an industrial sector-aluminum—

that is among the most sensitive to environmental controls

because of its high electricity demands. Why the reports

were discontinued is not clear. A fifth report56 was written

in 1977 but not released because it was judged inconclusive.57 The report compared pollution abatement expenditures and exports and imports for 47 manufacturing

sectors between 1973 and 1976. According to its author,

the study could not determine to what extent pollution

control expenditures affected trade.

A 1979 Commerce Department status report on the

congressionally mandated studies summarized the overall

findings as having disclosed “no evidence of either

significant out-migration of U.S. industries to ‘pollution

havens’ or of trade pattern dislocations directly attributable to pollution control costs.”58 The summaries of two

sector-specific reports (pulp and paper, and copper) were

less optimistic, stating that foreign imports may be

slightly advantaged.

The amendments to the Water Pollution Control Act

also directed the President, as a means of heading off

competitive disadvantages, to negotiate “international

agreements to apply uniform standards of performance for

the control of discharge and emission of pollutants from

new sources, uniform controls over the discharge and

emission of toxic pollutants, and uniform controls over

the discharge of pollutants into the ocean.”59 According

to one analyst, President Carter unsuccessfully tried to

implement this policy.60

1990 Amendments to the Clean Air Act

Competitiveness concerns were prominent in the debate about the 1990 Amendments to the Clean Air Act.61

This law, the first major revision of Federal air pollution

control requirements since 1977, significantly strengthened U.S. clean air requirements. Much of the burden of

meeting the law’s requirements will fall on U.S. business.

Congress recognized this in section 811 of the 1990

Amendments, which noted (among other things) that U.S.

business would need to make significant air quality

investments and could incur additional costs in implementing the law’s requirements.62 Congress also expressed concern that complying with the act might make

it difficult for American jobs, production, processes, and

products to compete with countries with less demanding

environmental requirements. Congress also found that

mechanisms ‘should be sought through which the United

States and its trading partners can agree to eliminate or

reduce competitive disadvantages. ’

The law called on the President to report back to

Congress within 18 months (May 15, 1992) with an

evaluation of competitive impacts and a strategy for

addressing such impacts through ‘trade consultations and

negotiations. The strategy is to include options that

might be employed to deal with competitive disadvantages caused by differences in standards among U.S.

major trading partners. Examples of such options stated

in the law were harmonization of standards and trade

adjustment measures. A number of bills and proposals

currently before the 102d Congress seek to promote

foreign environmental standards through trade negotiations or measures (see app. B).

To respond to section 811, the EPA Office of Air and

Radiation assembled an interagency team including EPA,

~ Public Law 92-500, section 6.

55 Us. D~~~~nt of ComaC., The Effects of Pollution A~tement on lnter~tjo~l Tr~e (was~gto~ Dc: U.S. Department Of COmmmCe,

1973). Also for years 1974 and 1975; U.S. Department of Commerce, Environmental Standards and Comparative Costs of Production in theAlumz”num

Zndustry (Washingto~ DC: November 1976).

56 ~ren E. Casement, Effects of pollution A~ternent Cos.s on Exports ad Imports by selected SZC’S (w~tigto~ DC: U.S. Department of

Commerce, 1977).

57 ~ren Cuement, U.S. Department of Commerce, persoti COm.mti~tiOW J~. 28, 1992.

58 U.S. Dep~entof Commerce, “U.S. Pollution Control Costs and IntermtionalTrade Effects-1979 Status Report,” internal documen~ September

1979, p. 3.

59 ~bfic ~w 92-5000

60 Jefiey~~d, Are EnvironmentaZReg~Za~On~ D~~ng us. ]nd~~~ Overseas? (was~gto~ DC: me Co~ervation Foundation 1984), p. 31.

61 Public hW 101-549.

62 Based on~e A*tration3s on-Clem &&,tpropo~,he act wo~dadd rou~y $14.6 bflion in COStS per yem by tie yw2~, KYd@

in total annual air costs to $45 billion. (U.S. Environmental Protection Agency, Office of Policy, Planning, and Evaluation, EnvironmentaZInvestments:

The Cost of a Clean Environment (Washingto% DC: December 1990).
104 . Trade and Environment: Conflicts and Opportunities

Department of Commerce, U.S. Trade Representative,

and the State Department that is preparing a two-part

study. The first phase, which as of March 1 has been

completed in draft form, compares air quality controls of

United States with those of Canada, Germany, Japan,

Korea, and Mexico. The report examines not only the

different air pollution standards and regulations in each

nation, but also the degree to which regulations are

actually achieved and enforced. The second phase, which

is underway, will identify and assess the economic effects

of the Clean Air Act on four U.S. industries and calculate

the likely effect on trade of the price increases. The reports

are expected to be delivered to Congress on or before May

15, 1992. As of March 1992, evaluation of means to

address the competitive impacts of the act through trade

consultations or negotiations had not begun.
Index
Index

Agency for International Development, 30,54,95

AID. See Agency for International Development

Article XX of GATT, 32-33,48-52,76

Basel Convention on the Control of the Transboundary

Movement of Hazardous Wastes and Their Disposal, 19,

46

Beef

EC ban, 18,63,86-87

Beer and soft drink container returnability, 7, 18,61,89-90

Border tax adjustment, 67-68

Business Council for Sustainable Development, 22

Canada. See also U.S.-Canada Free Trade Agreement

export of herring and salmon, 84-85

landing requirements for herring and salmon, 87-88

lobster dispute, 60-61,88-89

U.S. prohibition of tuna imports from, 82

Cigarette import restriction, 50,86

CITES. See Convention on International Trade in Endangered

Species of Wild Fauna and Flora

Clean Air Act, 1990 revisions, 8, 18,68,78, 103-104

Codex Alimentarius Commission, 63

Committee on Renewable Energy Commerce and Trade, 30,95

Compensating import levies and export rebates principle, 26

Competitiveness issues

assessment of environmental regulations, 97-104

bills in Congress addressing, 3,8, 18,65,91-92

developing countries and, 18,52,64

environmental regulations as trade barriers, 7-8,59-64

environmental standards, 7-8, 64-68

European Community and, 9, 18,20-21

government assistance to manufacturers, 68-69

Mexico and, 8, 17-18,64,99, 100

Convention on International Trade in Endangered Species of

Wild Fauna and Flora, 19,40,42,46- “

Countervailing duties, 8,18,65-67,68,92

Decision on Products Banned or Severely Restricted in the

Domestic Market, 23-24

Decisionmaking. See also Dispute resolution; U.S. Congress

addressing issues in GATT, 9-11,76-77

environmental technology development, 76

guidelines, 6,7, 11,73,75-76

U.S. institutions and, 10-11,77-78

Denmark

beer and soft drink container returnability, 7, 18,61,89-90

Department of Commerce, 27,95

Department of Energy, 30,95

Developing countries. See also specific countries by name

agricultural subsidies and, 41-42

assistance issues, 8-9, 52, 54-56, 68

countervailing duties and, 66

environmental standards, 8-9, 64-65

environmental technology transfer to, 95

financing sustainable development and environmental

measures in, 9, 53-54

Group of 77,27

Montreal Protocol and, 45,53-54

trade barrier removal, 55-56

U.S. trade with, 9, 18,55

Dispute resolution

Canada-U.S. Free Trade Agreement and, 60-61,87-89

Court of Justice of the European Communities and, 89-90

GATT and, 4,6, 10-11,15,22,25,33-34, 49-52,60-61,73,

77,82-87

Dolphin Protection Consumer Information Act, 19

Dolphins. See Dolphin Protection Consumer Information Act;

Marine Mammal Protection Act; Tuna imports

Dunkel draft, 24-25,33,61-64

EC. See European Community

Ecolabeling, 18,23

Environmental agreements. See International Environmental

Agreements

Environment Investment Fund, 30

Environmental goods, services, and technologies market, 94-96

Environmental impact of trade.

agriculture and, 40-42

guidelines for amelioration, 75

labor-intensive manufactures and, 41

liberalized trade and, 3,37,38-42

relocation of industries, 17, 39-40

tariff escalation, 41-42

trade measure application, 40

U.S. border area effects, 17,38

Environmental Protection Agency, 27

border environmental plan with Mexico, 17

foreign technical assistance, 95

NAFTA and, 29

Environmental regulation, effects of

investment and relocation impact, 8, 17-18,99-100

research limitations, 8,59, 100-102

trade impact, 97-99

U.S. government assessment efforts, 8, 18, 102-104

Environmental regulations as trade barriers, 7-8, 18-19,31-32,

59-64,74,75

Environmental standards. See also Sanitary and Phytosanitary

Standards; Standards Code

border tax adjustment and, 67-68

countervailing duties and, 65-67, 68

differences among countries and, 54-55,64-65

harmonization efforts, 21,26,60

state to state variance within U. S., 67

EPA. See Environmental Protection Agency

European Community

adjustment mechanisms, 9,18,20-21,55

ban of U.S. beef, 18,63,86-87

dispute resolution, 61,89-90

harmonization efforts, 21,60

trade and environment issues, 20-22

U.S. comparison, 9, 18,55

Export-Import Bank, 30

GATT. See General Agreement on Tariffs and Trade

General Agreement on Tariffs and Trade. See also Sanitary and

Phytosanitary Standards; Standards Code; Uruguay Round

–lo7–
108 ● Trade and Environment: Conflicts and Opportunities

amending, 4, 6, 77

Article XX, 32-33,46,48-52,82,85, 86

Article XXV, 76

Article XXX, 76

border tax adjustment and, 67

compatibility with U.S. environmental laws, 6-7, 15-16,

18-19,23,40,49-52,82, 86-87

debate on trade and environment issues, 23

dispute resolution, 10-11,22,25,33,77,82-87

Dunkel draft, 24-25,33,61-64

focus of, 19

formation, 3,22

Group on Environmental Measures and International Trade,

6,7,23

international environmental agreements relationship, 5-6, 16,

23,46,48-52

“most-favored-nation’ rule, 31

national environmental policies and, 6, 7-8, 15-16,49-50

“national treatment” rule, 31

nontariff barriers, 31

norms of liberal trade, 4

process based import restrictions and, 6,7,46,48-52,67

status of trade and environment activities, 22-25

subsidies, 32,37-38,40-41,66

trade and environment guidelines, 6,7, 11,73,75-76

trade measures and, 46,48-52

trade provisions in multilateral environmental agreements,

5-6,16-17,46,48-52

tuna/dolphin dispute, 7, 15-16, 18-19,23,40,49-52,86

Germany

competitiveness issues, 65, 69

GHG. See Greenhouse gases

Global warming potential. See Greenhouse gases

Governmental assistance to manufacturers, 68-69

Greenhouse gases, 20,51

Group of 77,27

Group on Environmental Measures and International Trade, 6,

7,23

“Guiding Principles Concerning the International Economic

Aspects of Environmental Policies,” 26

Harmonization principle, 7,26,60

Herring and salmon

export dispute, 84-85

landing requirements for, 87-88

Interagency Task Force, 27-29

International chamber of Commerce, 19,22

International Environmental Agreements, 6, 16-17, 19,40,

42-46,49-51,55

International institutions. See specific institutions by name

International Trade Organization, 22

ITO. See International Trade Organization

Japan

competitiveness issues, 65, 69

Lobster dispute between U.S. and Canada, 60-61,88-89

Maquiladora factories, 17, 100

Marine Mammal Protection Act, 6,7, 15,23,40,49

Mexico

competitiveness issues, 17-18

environmental reform, 9

environmental standards, 64

maquiladora factories, 17, 100

tuna/dolphin dispute, 6,7,15-16,18-19,23,40, 49-52,86-87

MMPA. See Marine Mammal Protection Act

Montreal Protocol on Substances That Deplete the Ozone Layer

developing countries and, 55

trade measures and, 6, 16-17,4346,49-51

Most-favored-nation rule, 31

Multilateral environmental agreements. See International

Environmental agreements

NACEPT. See National Advisory Council for Environmental

Policy and Technology

NAFTA. See North American Free Trade Agreement

National Advisory Council for Environmental Policy and

Technology, 30,46,76

National treatment and nondiscrimination principle, 26

North American Free Trade Agreement

environmental effects, 4, 9, 17, 38, 39

negotiating process for, 4, 9, 17, 18,91

U.S. Government and, 29-30

OECD. See Organisation for Economic Co-operation and

Development

Office of the U.S. Trade Representative

Interagency Task Force and, 10,27-28,77

NAFTA and, 29

U.S.-Mexico environmental issues review, 17

Organisation for Economic Co-operation and Development

development assistance by members, 53

environmental effects of trade analyses, 38

focus of, 9-1o, 19

guidelines, 26-27

harmonization principle, 26,60

trade and environment issues, 25-27

trade/environment interaction guidelines, 7,26,73

Overseas Private Investment Corporation, 30,95-96

Polluter Pays Principle, 23,26,69

R&D. See Research and Development

Research and Development, 24,26,32,68-69,76

“Review of U.S.-Mexico Environmental Issues,” 38

Salmon. See Herring and salmon

Sanitary and Phytosanitary Standards Code, 62-64

Small Business Administration, 30

South Korea

environmental standards, 64-65

SPS Code. See Sanitary and Phytosanitary Standards Code

Standards Code, 31-32,60,62. See also Sanitary and

Phytosanitary Standards Code

State Department, 27

Subsidies, 32, 37-38. See also Countervailing duties

agricultural, 40-41

Superfund Amendments dispute, 82-84

Sustainable development, 9,27-28,37,73,74

Taiwan

environmental standards, 64-65

Tariff Act of 1930, Section 337 dispute, 85-86

Tariff escalation, 41-42

Thailand

cigarette import restriction, 50, 86
Index ● 109

Trade and Development Program, 30

Trade impact of environmental regulations, 3,6-8,26,59-64,75,

97-99

Trade measures

CITES example, 42

factors to consider, 43-46

GATT and, 46,48-51

global-local continuum, 47-48

guiding criteria, 46

process restriction, 6,7,46,48-52,67

tropical timber debate, 42-43

unilateral, 6-7,47,48,55,74,75-76

Trade restrictions. See Trade measures

Tropical timber debate, 42-43

Tuna imports

tuna/dolphin dispute, 6,7,15-16,18-19,23,40, 49-52,86-87

U.S. prohibition of imports from Canada, 82

UNCED. See United Nations Conference on Environment and

Development

United Nations

trade and environment interaction guidelines, 73

trade and environment issues, 27

United Nations Conference on Environment and Development,

4, 19,73

Agenda 21,27,28

developing nations assistance, 9,52,53

trade/environment and sustainable development, 74

United Nations Conference on Trade and Development, 19,27,

73,74

United Nations Economic and Social Council, 73

Uruguay Round. See also General Agreement on Tariffs and

Trade

fast-track negotiation authority for, 91

liberal trade principles and, 4

proposed changes, 16,33,68

R&D support exemption, 69

trade barrier negotiations, 61

U.S.-Asia Environmental Partnership, 30,96

U.S.-Canada Free Trade Agreement, 60-61,87-89

U.S. Congress. See also specific laws by name

competitiveness issues, 3, 18,91-92

GATT’ compatibility with U.S. environmental laws, 7

hearings relating to trade and environment, 93

trade/environment bills, 3,77-78,91-92

U.S. Environmental Training Institute, 30

U.S. Government. See also specific agencies and departments by

name; U.S. Congress

assessment of impacts of environmental regulations, 102-104

trade and environment efforts, 27-30

US-AEP. See U.S.-Asia Environmental Partnership

USTR. See Office of the U.S. Trade Representative

Water Pollution Control Act Amendments of 1972, 103

World Bank, 19

U s. GOVERNMENT PRINTING OFFICE : 1992 0 - 321-520