world trade and environmental issues
DESCRIPTION
In depth analysis of world trade and environmental issuesTRANSCRIPT
INDEXSR. NO PARTICULARS PAGE NUMBER
1. Introduction 2
2. Trade 3
3. Environment 8
4. Trade & Environment 9
5. Need for constructive engagement 15
6. Strategies for Sustainable Trade 17
7. Environment Policy Recommendations 20
8. Review of Literature 28
9. Case Study 35
10. Critique and Conclusion 38
11. References 44
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INTRODUCTION
Trade and Environment issues are some of the highly contentious ones as the World Trade
Organization (WTO) has no particular specification on this agreement. However in recent years,
there has been a lot of concern, debate and dispute on this topic. This will be an important mandate
for future discussions because of the emerging framework of Sustainable Development Goods
(SDG) that as discussed recently and will be implemented post Millennium Development Goals
(MDGs) from 2015-2030 by the United Nations (U.N)
The Goal had lost momentum in the past 2008 Global economic crisis due to concerns of an
immediately plummeting global economic growth and recession.
Thus the suggestions of the Rio conference on the environment could not be implemented. Several
Contentious issues surrounding this argument emerged because of disagreement on the nature of
commitment. Also environmental standards need to be set up due to clean development agenda that
ensures high living standards, full employment and high economic growth. This has to be attained
by using scarce economic resources judiciously in order to balance the economy and ecology The
challenge is of laying a uniform policy because different countries are at different levels of growth
and development e.g. Western Europe is very progressive in terms of environmental standards and
is very sensitive to animal rights ranging from banning of killing of crocodiles, snakes and other
reptiles who are endangered as well.
Developed Countries use these items for fashion and high living by Hollywood actors and the rich
and famous even decorate their living rooms with skulls of tiger or stuffed lions or elephant tusks.
Unfortunately poor and developing countries in Africa as well as some Asian countries like China
are involved in trade of endangered species of animals and plants. Thus there is precarious balance
between the prosperity and poverty
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TRADE
International trade is the exchange of capital, goods, and services across international borders or
territories, which could involve the activities of the government and individual
Theories of International Trade
1. Absolute Cost Advantage
The theory of Absolute Cost Advantage was put forward by Adam Smith. The Absolute Cost
Advantage states that when one nation is more productive than another in the production of a
certain commodity, but is less productive in producing another commodity as compared to the other
nation, then in such a situation both the nations can gain by specializing in the production of the
commodity in which each enjoys absolute cost advantage. Both the nations can enter into
international trade with each other by exporting that commodity in which they enjoy absolute cost
advantage e.g. Because of climatic conditions, India is more productive in producing spices but less
productive in producing wheat as compared to USA. USA in turn is more productive in producing
wheat and less productive in producing spices. Thus India has Absolute Cost Advantage in the
production of spices and USA has Absolute Cost Advantage in the production of wheat.
Man Hours Required To Produce One Unit (1 Tonne) of Spices
and Wheat
Commodity India USA
Spices 20 40
Wheat 40 20
In the above illustration, India has Absolute Cost Advantage for production of spices and USA has
Absolute Cost Advantage for production of wheat. In such a situation, India will specialise in
producing spices and produce more than what it requires, and exports the surplus to USA. Similarly,
USA will specialise in producing wheat and produce more than what it requires, and export the
surplus to India.
2. Comparative Cost Advantage Theory
David Ricardo states that even though a country may enjoy Absolute Cost Advantage in the
production of both the commodities it would be more beneficial for a country to specialise in the
production of that commodity in which it has greater Comparative Cost Advantage
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Assumptions of Ricardo’s Theory
1. Labor is only factor of production, other than natural resources. Therefore, the production cost
of commodities is measured in terms of labor units.
2. Labor is perfectly mobile within its country, but perfectly immobile between countries.
3. Labor is homogeneous in nature across industries.
4. Production is subject to law of constant returns.
5. Perfect competition exists in commodity and factor markets.
6. Technology is constant
7. Transport cost is assumed to be nil.
8. Trade between countries takes place on barter basis.
9. Trade is free from restrictions - no trade barriers.
10. Full employment exists in the participating countries.
E.g. Let us assume that the two countries involved in trade are India and Japan, and the
commodities include spices and wheat as shown below:
Commodity India Japan Comparative Cost
Ratio
Spices (S) 20 40 20/40 = 0.50
Wheat (W) 40 50 40/50 = 0.80
Domestic Exchange
Ratio
1 S = 0.50 W 1 S = 0.80 W
In the above illustration, India has Absolute Cost Advantage both in terms of spices and wheat as
compared to Japan. But India has Comparative Cost Advantage in producing Spices, i.e., 50% of
Japan’s labor cost. But in case of wheat India’s Comparative Cost Advantage is less, i.e. 80% of
Japan’s labor cost.
As far Japan is concerned, there is Absolute Cost Disadvantage in producing both spices and wheat.
However, the Comparative Cost Disadvantage is less in producing wheat.
In the above illustration, Since India has Comparative Cost Advantage in producing spices, and then
India would specialise in production of spices, and export the surplus to Japan. Similarly Japan has
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least Comparative Cost Disadvantage in producing wheat, and then Japan would specialise in
production of wheat and export the surplus to India.
3. Heckscher - Ohlin (HO) Modern Theory
Eli Heckscher and Bertil Ohlin developed Factor Endowment Theory of International Trade. This
theory does not invalidate Ricardo’s Comparative Cost Advantage theory but supports it since it
also accepts comparative advantage as the cause of international trade .This theory states that each
nation is best suitable to produce the commodity that requires a large proportion of the factor which
is relatively abundant. Conversely, each nation is least suitable to produce the commodity which
requires a greater proportion of factor which is scarce or available in small quantity. Thus, the
ability of a nation to produce goods differs due to differences in factor endowment. A nation will
export products that use its relatively abundant factors of production. It will import those products
that use relatively scarce factors of production.
Assumptions of Heckscher - Ohlin Theory
1. There are two countries, two commodities and two factors of production - labor and capital.
2. The relative endowments of labor and capital are different in two countries.
3. Factors of production are perfectly mobile within the country, but immobile between two
countries.
4. The techniques of production of identical goods are same in the two countries.
5. There are no trade barriers on movement of goods between the two countries.
6. The transport costs are assumed to be nil.
7. The consumer tastes and preferences in both countries are identical.
8. All resources are fully employed in both nations.
9. International trade between the two nations is balanced.
10. There is perfect competition in both commodities and factor markets in both nations.
11. Both commodities are produced under constant returns to scale in both nations.
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Environmental elements may be included in this model in two ways:
a) By considering the environment as a factor of production, or
b) By changing the assumptions of the model.
Environment as a factor of production
The environment can be introduced into the model as one more factor of production, in addition to
the traditional factors of capital and labor. Thus, countries with greater environmental wealth can
develop a comparative advantage that will allow them to specialise in pollution-intensive goods,
given their relatively greater capacity to assimilate these. The comparative advantage arises when
the cost of environmental pollution or natural resource degradation is not accounted for.
In fact, countries that specialise in the production of pollution-intensive goods as a result of having
abundant environmental resources run the risk of exhausting the assimilation capacity of those
resources in the absence of environmental policies. Moreover, the environmental degradation
caused by the export of relatively more polluting goods reduces trade revenues for the countries that
produce them, because these would equal the sum of the benefits gained directly from trade minus
the indirect losses resulting from environmental degradation.
Changes in assumptions of the model
The environmental aspect can also be included in the H-O Model by changing some of its
assumptions. Two interesting cases are changes in the assumptions relative to the uniformity of
technologies and the absence of externalities.
a) Technological differences - The “technological uniformity” assumption can be changed
in two ways:
1. By assuming that there are differences between sectors in the productivity of the technologies, or
2. By assuming that the technologies vary between countries.
In the first case it is assumed that the same technologies are used in all the countries, but that their
productivity varies from one sector to another; in other words, with the same quantity of inputs, the
sector with the most productive technology obtains higher production. In the second case it is
assumed that the technologies used in each country are different, which implies that with the same
quantity of inputs, more production is obtained in the country with the most productive technology.
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In the first case, the technologies differ between sectors; in the second case, they differ between
countries.
In the second case, a country could specialise in producing goods for which it does not have a
comparative advantage derived from a similarity in technologies. For example, the environmental
factor can be more productive in one country than in another, if the difference in technology allows
a unit of environment to generate a greater quantity of production than in another country. In a
situation like this the countries could change their specialization, which in the absence of adequate
environmental regulation could promote the deterioration or exhaustion of natural resources.
b) Externalities in production - In this case, it is assumed that there are environmental externalities
that can negatively influence the productivity of capital and labor. These externalities can be
corrected by means of specific environmental policies. By introducing an environmental policy into
the model, costs to producers generally increase due to the investment required to internalize
environmental costs The price of the product will then tend to increase. The consequences of
environmental policies will vary according to whether a country imports or exports an affected
good. If the environmental policy is applied abroad via tariffs, then the international price of the
good whose production is polluting will increase. The wellbeing of a small, open economy that
exports this product will improve, despite the environmental harm caused by a greater production of
that good, whenever a pollution tax is levied on national producers to help compensate the
environmental harm caused by the production. By contrast, if the country imports the good, a hike
in the international price will benefit it when:
• Reduction of national production of that product is promoted via governmental assistance to
other, less polluting sectors of the economy, or
• There are other more polluting sectors than one that produces the good in question, in which case
diverting resources toward the less polluting sector will improve the country’s environment.
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ENVIRONMENT
The term environment has been derived from a French word “Environia” means to surround. It
refers to both abiotic (physical or non-living) and biotic (living) environment. The word
environment means surroundings, in which organisms live. Environment is the sum total of
conditions that surrounds us at a given point of time and space. It is comprised of the interacting
systems of physical, biological and cultural elements which are interlinked both individually and
collectively. Environment is the sum total of conditions in which an organism has to survive or
maintain its life process. It influences the growth and development of living forms.
In other words environment refers to those surroundings that surrounds living beings from all sides
and affect their lives in total. It consists of atmosphere, hydrosphere, lithosphere and biosphere. It’s
chief components are soil, water, air, organisms and solar energy. It has provided us all the
resources for leading a comfortable life.
Components of Environment
Environment mainly consists of atmosphere, hydrosphere, lithosphere and biosphere. But it can be
roughly divided into two types such as (a) Micro environment and (b) Macro environment. It can
also be divided into two other types such as (c) Physical and (d) biotic environment.
(a) Micro environment refers to the immediate local surrounding of the organism.
(b) Macro environment refers to all the physical and biotic conditions that surround the organism
externally.
(c) Physical environment refers to all abiotic factors or conditions like temperature, light, rainfall,
soil, minerals etc. It comprises of atmosphere, lithosphere and hydrosphere.
(d) Biotic environment includes all biotic factors or living forms like plants, animals, Micro-
organisms.
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TRADE AND ENVIRONMENT
World trade expansion has raised the issue of the relationship between trade and the environment.
The first is that expansion of trade may produce environmental damage, either directly, if new
export opportunities encourage polluting industries to expand their operations and/or increase
pollution associated with transport of goods, or indirectly, as conventional gains from trade raise
national incomes and consumption. A related second concern is that some countries will use weaker
environmental protection as a way of increasing their international competitiveness. A third issue is
that individual countries seeking to maintain high environmental standards may be restrained by
GATT/WTO rules from using trade policy for this purpose. Finally, GATT/WTO rules may inhibit
international cooperation to reduce environmental threats by restricting the use of trade sanctions to
enforce multilateral environmental agreements.
Trade as a Threat to Environmental Quality
Many environmentalists view expanded trade (globalisation) as a threat to environmental quality.
The threat is perceived to arise through one or both of two channels. The first and more direct
channel is the effect of trade expansion on the composition of output in each country. Specifically,
freer trade may increase the ability of dirty industries to expand where environmental regulation—
or enforcement of environmental standards—is relatively weak. This relocation of dirty production
to less-regulated sites is presumed to increase pollution in exporting countries and worldwide.
Environmental regulation is an important component of total production cost, i.e., that countries
with the lowest environmental standards are therefore likely to have comparative advantage in dirty
industries. To the extent that increased trade means goods travel longer distances to markets,
pollution associated with transport may also rise.
A second and less direct channel through which globalisation itself may affect the environment
arises through the usually favourable net impact of expanded trade on economic growth and per-
capita income. If environmental externalities such as pollution are roughly proportional to output,
higher output necessarily translates into higher total pollution.
The Effects of Trade on the Environment
The effects of trade on the environment have been classified in different ways.
1. Combination effects
Combination effects (mixed effects) are environmental impacts derived from the change in the
relationship between products produced and consumed that occurs as an outcome of international
trade, maintaining the scale of economic activity constant. Combination effects can be positive or 9 | P a g e
negative, depending on the relative impact that changes in production in each sector might have on
the total stock of environmental. This means that combination effects capture the environmental
impact of the readjustment of the sectors that comprise the Gross Domestic Product (GDP),
occurring as a result of international trade. e.g. If international trade causes a reduction in
agricultural production with respect to non-agricultural production and if the agricultural sector
pollutes less, then, the environmental impact of the combination effect of products is negative; by
contrast, if the agricultural sector pollutes more, the environmental effect is positive.
2. Effects of scale
Effects of scale refer to the environmental impacts derived from changes in the scale of economic
activity as a result of international trade, keeping constant the combination of goods produced.
Increased international trade increases the scale of economic activity in all sectors; therefore, the
environmental impact of the effects of scale is always negative Combination and scale effects
assume that the impact of environmental externalities and other externalities in production and
consumption is maintained constant, as well as the impact of changes on policies and on the
technologies used in production
3. Effects of negative externalities
The effects of externalities capture feedback effects on production and consumption that occur as a
result of the environmental externalities and other externalities caused by production and
consumption These feedback effects generate more environmental impacts in addition to those
produced by the combination and scale effects. In the model proposed by Abler and Shortle), it is
assumed that only environmental externalities exist and that these are stronger in the sector that
pollutes the most. Under these conditions, the environmental impact of the externalities occurs in
the same direction as the environmental impact of combination and scale effects. Nevertheless,
other types of externalities may occur in production, due to the effects that some sectors have over
others that are not captured by the price system; moreover, externalities may also occur in
consumption, such as the generation of solid wastes and emissions. All these externalities generate
environmental impacts that are not reflected in the combination and scale effects.
4. Technological effects
Technological effects refer to the impacts that trade has on the environment through the creation
and adoption of new products, new productive processes or new technologies for reducing pollution
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5. Policy effects
Policy effects refer to the environmental impacts stemming from changes in environmental policies
and other public policies that occur as a result of international trade. In other words, the increase in
international trade prompts the introduction or re-directing of policies and these in turn have
environmental impacts. This argument refers to the effects of trade on policies and not on
environmental changes or changes in international trade that occur in response to environmental
policies.
Comparative Advantage and Environmental Externalities
We can use economic theory to analyse some of the gains and losses associated with environmental
effects of trade. The theory of comparative advantage tells us that both trading partners gain from
trade through specialising in the goods that they can produce most efficiently. But this basic theory
does not consider environmental externalities that may be associated with the production or
consumption of goods. Consider Figure 1, which shows the welfare effects of an imported good,
using automobiles as an example.
The supply curve S takes
into account private
costs, whereas S’ shows
social costs including
both private costs and
externalities. P* is the
domestic price in the
absence of trade,
whereas Pw is the world
price, which will also be
the domestic price under
conditions of free trade.
Q* is the quantity
produced domestically with no trade, while with free trade Q1 is produced domestically and (Q2 -
Q1) is imported, for a total domestic consumption of Q2.
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Domestic producers of automobiles lose the shaded area A, since they now sell fewer cars at a
lower price. Domestic consumers gain areas A+B, since they can now buy more cars at the same
lower price. The net gain from trade is therefore (A+B) - A = B.
But this leaves out any environmental externalities associated with trade. If the production of
automobiles causes environmental damage, then by lowering production the country gains cross-
hatched area C in reduced environmental costs -- costs which are shifted to countries producing cars
for export. On the other hand, if environmental damage is associated with the consumption and use
of automobiles, lowering the true marginal benefits from consumption, then trade increases the
environmental costs of consumption by the shaded area D. Even though one group (automobile
producers) loses, the gains to consumers outweigh these losses. But once we introduce externalities,
we can no longer be so sure that there are net gains from trade. It depends on the nature and size of
the environmental damages C and D.
Environmental Effects of Expanding Resource Exports
Environmental effects must
also be figured into the
analysis of the effects of trade
on an exporting country. This
is shown in Figure 2.
Here we use timber exports as
our example. In the ordinary
analysis of trade without
externalities, timber producers
gain areas A’+B’ since with
trade they can produce and sell
more timber, at the higher
world price Pw. Domestic consumers of timber lose A’, being able to afford less timber at the
higher world price. The net gain to the country is B’. The external costs associated with higher
timber production – which could include land and watershed degradation as well as user costs,
option values, and ecological costs – are shown by the area of C’.
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Expanded trade tends to increase the scale of production for the world as a whole, meaning that the
total volume of pollution and environmental damage is likely to increase. Trade also necessarily
involves energy use for transportation, with resulting air pollution and other environmental impacts.
There can also be indirect environmental effects of trade, for example when peasant farmers are
displaced by larger-scale export agriculture onto marginal lands such as hillsides and forest
margins. Specific kinds of trade, such as trade in toxic wastes or endangered species, have obvious
environmental impacts.
Environmental Kuznets Curve
Environmental Kuznets Curve (EKC) asserts that environmental damage increases in the early
stages of growth, but diminishes once nations reach higher levels of income . According to this
theory, after passing through a "dirty" stage of development, nations will put effort into "cleaning
up" and may also shift to less-polluting production methods. More open trade will therefore
accelerate the process of achieving both economic growth and a cleaner environment
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According to the EKC hypothesis, the relationship between economic growth and environmental
degradation is an inverted U (0); it proposes that demand for better environmental quality increases
with increasing per capita income.
Several explanations have been offered for the relationship proposed in the EKC hypothesis from an
economic theory point of view, including:
a) The displacement of externalities, through the re localization of the economic activities that
generate them (shiftable externalities);
b) Changes in the composition of economic activities
c) Greater technological efficiency;
d) The impact of improvements on environmental regulation;
e) The presence of changes or differences in trade policy regimes
A study by Grossman and Krueger found it to be effective for a limited number of air and water
pollutants. But other important environmental pollutants, such as nitrogen oxides, carbon monoxide,
carbon dioxide, methane, and tropospheric ozone, were not included, nor were municipal wastes or
measures of ecosystem degradation such as species loss, soil degradation, or groundwater depletion.
According to a World Bank study, carbon dioxide emissions and municipal wastes continued to
increase with economic growth. And even for those pollutants which seem to conform to an EKC
the "turning points" are high enough, ranging from $2000 to $12,000 in income, to imply a
considerable increase in pollution for most of the world's developing nations before any
improvement would be noted. According to one EKC study, the estimated global "turning point" for
sulfur dioxide would not come until 2085, by which time global emissions would be 354 percent
above 1986 levels; suspended particulate matter would peak in 2089 at 421 percent higher
emissions, and nitrogen oxides in 2079 with 226 percent higher emissions.
Another review of EKC studies suggested that “using different indicators, more explanatory
variables than income alone, and the estimation of different models, the EKC results are generally
not reproduced.
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N EED FOR CONSTRUCTIVE E NGAGEMENT IN THE T RADE AND
ENVIRONMENT AGENDA
There are at least four reasons why it is in the interests of the developing countries to engage
proactively at the national and international level in the trade and environment debate in order to
ensure that environmental concerns are properly addressed in the WTO and that trade liberalization
and environmental protection efforts reinforce each other.
1. Social welfare could be maximised if both trade and environmental goals are strengthened
2. An effective trade and environment approach at the WTO would help maintain momentum for
trade liberalisation and restore confidence in the organization.
3. By dismissing the need for this debate, many “win–win” opportunities remain unexplored,
including those that could potentially benefit exporters in developing countries;
4. It is preferable to try to influence the debate rather than to have the difficult issues resolved
through the dispute settlement mechanism.
Enhancing social welfare
Environmental protection efforts seek to increase social welfare. More progress towards the
fulfilment of this common objective could be made by linking trade and environment and realising
the synergies created by their interaction. On the contrary, if trade liberalisation proceeds in
developing countries without regard for its effects on the environment, there is a high probability
that some of the economic gains from trade will be consumed, and in some specific sectors or
products the environmental costs will perhaps turn out to be higher than the economic gains. In
other words, although poor countries may gain some material advances from trade liberalisation,
they will simultaneously have losses from environmental harms.
Supporting trade liberalisation
Environmental destruction threatens the ongoing commitment to trade liberalisation—and to the
WTO in particular— especially in the developed nations. Trade liberalisation might not be
irreversible and the question of what it takes to maintain support for such an agenda deserves
considerable attention. The coalition in favour of free trade is increasingly vulnerable, especially in
developed nations where there is a growing public perception that the costs of trade liberalisation
could end up outweighing the benefits. There is a growing sense of nervousness, especially in the
United States and several European countries, about the unintended consequences of globalisation,
especially for the environment and domestic wages.
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The potential for win–win opportunities
The third core argument for developing nations not opposing the trade and environment debate
relates to the potential for some trade and environmental objectives to overlap and, in fact, reinforce
each other. The most classic example is the elimination of subsidies in agriculture, energy, fisheries,
and timber. Not only do subsidies distort prices and disrupt trade, but they also cause environmental
harms. In the case of fisheries, which is the sector that has recently received more attention in the
WTO, some experts have estimated that the world’s fishing fleets have nearly two and a half times
the fishing capacity required to harvest fish stocks in an economically optimal and environmentally
sustainable manner; in many cases, what keeps the boats afloat is the subsidies, which are in open
violation of the existing international trade rules
But there are many other areas that offer opportunities for win–win situations for both trade and
environmental objectives. Ecolabelling, for example, represents a clear intersection between market
opportunities and environmental protection because it relies on market forces to promote
environmentally friendlier products. Unfortunately, in the WTO context developing countries have
focused so heavily on the potential discriminatory implications of labelling schemes that they have
blocked further progress on the specifics of an environmental initiative that could benefit some
exporters. A more effective way to approach concerns about ecolabelling schemes would be to
propose specific steps for developing country participation in the selection of the criteria for the
schemes themselves. Developing countries could win by addressing their trade-related concerns,
and also win by taking advantage of “green” opportunities abroad. Under the current approach they
lose because, by polarising the debate, their concerns have less chance to be taken seriously, and
they lose again because delaying progress on ecolabelling hinders potential business opportunities.
Pressure on the dispute settlement mechanism
The fourth reason for developing countries to join the effort to advance the trade and environmental
debate is that it is preferable to try to influence the debate rather than the issues being decided
through decisions from the Dispute Settlement Mechanism. Trade and environment experts have
argued that, especially in the absence of a new trade round where some issues could be negotiated,
the responsibility for resolving conflicts in these two areas will continue to be placed on the trade
body’s already overburdened dispute settlement system.
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STRATEGIES FOR SUSTAINABLE TRADE
A World Bank review of trade and environment issues finds that “many participants in the debate
now agree that
a) more open trade improves growth and economic welfare,
b) increased trade and growth without appropriate environmental policies in place may have
unwanted effects on the environment.”
“Greening” Global Environmental Organisations
At the global level, a major reform proposal would be to set up a World Environmental
Organization (WEO) which would counterbalance the World Trade Organization much as national
environmental protection agencies balance departments of finance and commerce. Another
approach would be to "green" existing institutions, broadening the environmental and social
provisions of GATT's Article XX, and altering the missions of the World Bank and International
Monetary Fund to emphasise sustainable development objectives.
The idea of a World Environmental Organization may seem visionary, but there is a good argument
for its establishment. According to Sir Leon Brittan, former Vice President of the European
Commission: “Setting environmental standards within a territory may be fine, but what about
damage that spills over national borders? In a rapidly globalising world, more and more of these
problems cannot be effectively solved at the national or bilateral level, or even at the level of
regional trading blocs like the European Union. Global problems require global solutions.”
A World Environmental Organization could serve as an umbrella for the implementation of existing
multinational environmental agreements, as well as promoting further agreements consistent with
global sustainable development strategies. Global public goods such as biodiversity, protection of
the ozone layer,
climate
stabilisation,
and the
protection of
oceans and
water systems,
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would be the responsibility of the WEO. A WEO could also play a role in the negotiation of trade
agreements on
agricultural subsidies, seeking to redirect of farm subsidies to soil conservation and development of
low-input agricultural techniques. As global CO2 emissions continue to rise, trade in the energy
sector may need to accommodate a substantial carbon tax or tradable permit scheme. Global
agreements on forest and biodiversity preservation are also likely to involve specific trade
restrictions, tariff preferences, or labeling systems. In all these areas, the existence of a powerful
advocate for environmental interests would have a major impact on the shaping of trade treaties and
regulations.
Local, Regional, and Private Sector Policies
Reserving powers of resource conservation and management to local and regional institutions is
important to the sustainable management of resources. Also, it is often difficult to make a match
between centralised World Bank or institutional financing, even if "greened", and the local
institutions that are crucial to effective implementation of resource conservation and environmental
standards. Most environmental policies are implemented at the national level, and it is important to
maintain national authority to enforce environmental standards.
In regional groupings such as NAFTA, that involve no supranational rule-making body, trade
agreements could give special status to national policies aimed at sustainable agriculture and
resource management. NAFTA rules currently give precedence to international environmental
treaties (the Basel Convention on hazardous wastes, the Montreal Protocol on ozone depleting
substances, and CITES on endangered species). This principle could be expanded to all national
environmental protection policies, and effective sanctions for environmental violations could be
established.
In regional trade and customs unions such as the European Union where elected supranational
policy-making bodies exist, these bodies must take responsibility for environmental and social
issues to the extent that their legitimate democratic mandate allows. Transboundary issues are a
logical area for supranational bodies to be responsible for environmental rule making. Where they
are empowered to intervene in national policy-making, the process must be oriented towards
"harmonising up" rather than "harmonising down" standards. This means that countries within the
common market must retain the power to impose higher social and environmental standards where
they see fit.
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Certification and labeling requirements for sustainably produced products help consumers make
informed purchasing decisions. Germany’s “green dot” system for recyclable and recycled goods is
one example. Private, non-governmental organisations have also set up certification systems for
goods such as coffee and timber. To be effective in a globalised world, however, certification
systems must be international. This requires support both at the national level and from corporations
and international agencies.
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ENVIRONMENTAL POLICY RECOMMENDATIONS
When the market fails to allocate resources, as occurs when there are negative environmental
externalities, the Government must exercise its regulatory role to correct this omission. Externalities
arise due to several reasons, including: a lack of information about the costs and benefits of
regulation; the search for revenues by pressure groups that use the political process for their own
benefit; the public nature of losses, which means that those who lose do not unite to oppose policies
that affect them; and, finally, failures in the implementation of instruments or governmental
regulatory measures, a situation that may ultimately turn out to be more costly than the externality
itself.
Direct regulation
This refers to environmental policy mechanisms through which:
a) Polluters are obliged to develop environmental behaviours and actions that are considered
socially desirable;
b) Controls are established to enforce those behaviours.
This desirable behaviour and mandatory compliance are defined in national laws or international
agreements. The mechanisms for ensuring compliance with mandates are generally established in
regulations.It is the State that defines, applies and oversees environmental policy
Table 1 lists the most common instruments used for direct regulation, as well as some of their
advantages and
disadvantages.
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Market regulation
This refers to instruments that directly affect the prices of goods whose production generates
pollution or the prices of inputs used in the production of those goods. These instruments seek to
change the behavior of economic agents, making them pay for the environmental costs associated
with production. The main instruments used for this purpose are taxes on emissions and subsidies
for emission reductions, along with tradable emissions permits and deposit-reimbursement schemes.
Table 2 lists some of these instruments, along with some of their main advantages and
disadvantages.
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Legal Approach
This section examines the instruments that allow the economic agents involved in an environmental
problem to resolve that problem by themselves, through the legal system, without the intervention
of an environmental authority. The main legal instruments used for settling environmental disputes
are property rights and the rules of environmental responsibility or liability
Property Rights
The absence of property rights over environmental resources generally results in their excessive
use. This phenomenon is known as “the tragedy of the commons,” since resources that belong to no
one end up being used by everyone, resulting in their overexploitation. Granting property rights is
one way to prevent this situation. In the case of a resource that is affected by pollution, property
rights can be assigned to those who pollute the resource, or to those who are affected by that
pollution. According to one well known result in economic theory, known as the Coase Theorem,
regardless of who is granted property rights, the same optimal result will always be reached in
which the interests of both the polluters and those who have been polluted are balanced.
However, for the property rights system to function properly, at least three conditions are required:
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a) Property rights must be well defined, enforceable and transferable;
b) There must be a reasonably efficient and competitive system so that the interested parties can
meet and negotiate how the property rights will be used;
c) There must be a full array of markets, so that private property owners can capture all the social
values associated with the use of environmental assets.
Environmental Liability Rules
Environmental liability rules or laws seek to hold polluters responsible for the damage resulting
from their actions through the payment of compensation to the affected party. Thus, the expectation
of having to pay compensation (the polluter pays principle) for damage caused is an incentive for
polluters to modify their behaviour. Environmental liability rules seek to reduce levels of non-
compliance with environmental policy by raising the cost of “bad behavior.” There are two criteria
for determining liability
a) Negligence: the polluter is liable for the damage caused only if the actions that resulted in
damage are not in compliance with the established standards.
b) Strict liability: the polluter is liable for the damage caused regardless of the care taken to avoid
the damage. The second applies mainly to extreme situations in terms of damage, if this occurs.
The purpose of environmental liability laws is not simply to compensate individuals after they have
been affected. It is also - and more importantly - to force potential polluters to consider their
decisions more carefully. By starting from the premise that they will be liable for damage caused to
others, companies will be forced to internalize effects they might otherwise ignore.
Voluntary agreements
Voluntary agreements are not strictly environmental policy instruments; rather they are instruments
of environmental management for companies. However, they can serve as a mechanism for
supporting the implementation of environmental policies and defining standards in that area.
Under this approach, the polluting entities undertake to improve their environmental performance,
without a law or regulation requiring them to do so, and without any governmental economic
incentives. This commitment is expressed in voluntary agreements signed by companies.
In fact, governments may promote such initiatives through positive incentives (e.g. subsidies,
sharing implementation costs, etc.) or even negative incentives (e.g. delaying the regulation of the
participants, etc.). Furthermore, companies may decide to embrace these systems before the
authorities impose mandatory measures to force them to reduce pollution.
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Voluntary agreements often arise in response to pressure from consumers or communities, from
competition, from regulatory measures or taxes. Voluntary agreements can offer an individual
solution as well as collective action. In individual solution agreements, the externalities are resolved
by private means based on property rights, without government intervention. In collective action
agreements, the economic agents cooperate to obtain higher earnings;
Businesses are encouraged to participate in programs of this nature for many reasons: because it
allows them to project an environmentally responsible (“green”) image; because consumers are
more willing to pay for environment-friendly products; because better environmental management
helps them improve their competitiveness; or because they avoid the costs of public regulation.
At the same time, the government also benefits, because by showing greater flexibility in pursuing
its goals, it fosters efficient results, and this, in turn, promotes a proactive attitude in the industries
regarding environmental problems and our shared responsibility in resolving them.
These agreements also reduce the amount of time that governments must invest in designing and
implementing a policy for reducing pollution and emissions.
Voluntary environmental agreements offer the following advantages:
1. GREATER FLEXIBILITY WITH RESPECT TO THE FULFlLLMENT OF GOALS
2. LOWER COSTS FROM A PUBLIC POINT OF VIEW
3. CAN BEA PPLIED TO MANY ENVIRONMENTAL PROBLEMS
4. ARE USEFUL FOR TRYING OUT NEW APPROACHES
There are several kinds of voluntary agreements
1. UNILATERAL INITIATIVES: initiatives of a business or industry without direct intervention by
the government; for example, ISO 14000 Standards.
2. BILATERAL AGREEMENTS: agreements negotiated between the business sector and the
government; for example, agreements regarding CO2 emissions
3. Voluntary programs promoted by public initiative government-designed programs that promote
the voluntary participation of businesses and industries; for example, environmental quality
initiatives, such as the “cleaner production” program that is being applied in Chile to encourage
small and medium-sized businesses to take advantage of the benefits of less polluting production
methods.
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Criteria for evaluating environmental policy instruments
Different criteria may be used to evaluate environmental policies and environmental policy
instruments, such as:
a) economic efficiency (cost – benefit analyses);
b) cost effectiveness analyses;
c) equity;
d) incentives to promote competitiveness;
e) administration feasibility and cost.
Cost-benefit analyses
Cost-benefit analyses help determine the economic efficiency of environmental policies and policy
instruments, i.e. their capacity to obtain emission reductions that would balance the costs of those
reductions with the damage that the emissions cause. As the benefits generated by these policy
instruments increase, with respect to the costs of their application, economic efficiency increases.
Cost-effctiveness analyses
Cost-effectiveness analysis offers an alternative for situations in which only cost information is
available. According to this criterion, out of two available alternatives, the one that achieves the
established environmental protection goal at the lower cost should be selected. Cost-effectiveness is
a necessary but insufficient condition for economic efficiency; a policy can be effective in costs but
not be efficient. Therefore, economic efficiency is the most important condition. However, due to
the limited availability of information about the benefits of the environmental improvements, the
criterion for cost effectiveness is more easily implemented
Social equity
This refers to the equitable distribution of the costs and benefits of environmental protection
policies among the different groups that comprise society. Equity and efficiency
are two socially desirable objectives; however, there is no agreement on the weight each one should
have. In some cases both objectives complement one another, but not always.
Administration feasibility and cost
Effective environmental programs require institutional infrastructure and resources for their design,
implementation, evaluation, and enforcement monitoring. Therefore, the administration feasibility
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and cost of the instruments must be considered when choosing between different approaches.
Administration feasibility and costs depend on factors such as
• The amount of information required to implement, reassess and periodically revise the instrument.
• The amount of information required to monitor enforcement;
• The use of incentives for non compliance I
• The cost of sanctioning non compliance
• The capacity of the agencies responsible for administering and supervising the implementation of
the policy
Other Criteria
• Relocation of Polluting Activities: One desirable feature of environmental policies is that, in the
long term, they promote economic activity in places with lower environmental risks.
• Promotion of Competitiveness: Environmental policies should ideally promote the development
and adoption of technologies that are less resource-intensive and less hazardous from an
environmental point of view.
• Environmental Effectiveness: We must consider whether the application of the instrument
achieves the environmental objective in the time specified and with the desired certainty.
• Flexibility: The instruments should be adapted to technological changes, the availability of
resources and market conditions.
• Legal Consistency: the instruments should be consistent with the institutional framework in force,
the environmental policies and the applicable international agreements and principles in the
country where they will be applied.
• Acceptability: The instruments should be understood and accepted by the affected parties, and be
politically viable.
Environmental Policies And Competitiveness
The effect of environmental policies on competitiveness can be seen from two perspectives: from a
conventional point of view in which major environmental requirements reduce competitiveness; and
from a standpoint that emphasises the importance of environmental regulation as an instrument for
increasing competitiveness.
The conventional vision focuses on the conflict that arises between the environmental gains derived
from environmental regulation and the economic costs that compliance with those regulations
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entails. It is argued that major environmental requirements reduce competitiveness because they
generate an increase in costs that is not compensated for environmental gains, since the latter are
perceived at a social level and not at the business level. However, many studies confirm that the
cost of environmental regulations tends to be a very small portion of the average costs of industries.
The reduction in the amount of goods produced is equally insignificant, although it should be noted
that this reduction could be significant at a sectoral level.
The alternative vision emphasises the synergy that exists between environmental regulations and
competitiveness. According to this viewpoint, while promoting environmental
improvements, businesses can economise on inputs, justify productive processes, take advantage of
residues and differentiate their product (e.g. develop an exclusive product) and with this gain
competitiveness. Compliance with the strictest environmental standards can lead to cost reduction
processes and can even generate private economic benefits.
The Competitiveness of Businesses
Several studies have shown that businesses considered to be “environmental leaders” do not
necessarily pay a price —in terms of reduced benefits— for having embraced the environmental
regulations in force. Furthermore, these companies can often recover costs in the market:
1. A considerable number of consumers are willing to pay higher prices for products that have some
form of environmental certification;
2. The companies that comply with recognised environmental management standards (e.g. ISO
14000) appear to enjoy certain competitive advantages, such as lower guarantees for backing loans,
and better access to clients concerned about their own environmental reputation.
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REVIEW OF LITERATURE
Since its adoption in 1947, the General Agreements on Tariffs and Trade (GATT) requires its
members to give equal treatments to exports from all member countries and prohibit members from
discriminating between locally produced and imported products. GATT/WTO provides an
opportunity within which its member governments may negotiate over market access. GATT
interprets market access as a competitive relationship between imported and domestic products This
arrangement between two different countries involves reduction of import tariffs on a particular
product hence altering the competitive relationship between imported and local products Reduction
of import tariffs provides a larger market access to foreign producers and provides an assurance of
better market access through improved price competition However, domestic market access could
be altered by a foreign export subsidy or by changing market conditions at home or abroad. The
GATT conducted eight rounds of multilateral trade negotiations before it was succeeded by the
World Trade Organization (WTO) in 1995. Geneva concluded in 1947, Annecy 1949, Torquay
1951, Geneva 1956, Dillon 1961, Kennedy 1967, Torkyo 1979 and Uruguay 1994 (Rose 2004). The
Uruguay round agreement negotiation and signing happened when a group of seventy seven
countries were in a state of confusion due to debt obligations and the changes of former Soviet
Union as well as the end of cold war in world of politics.
Free Trade and Globalisation Fallacies
According to Shafaeddin (2003) the philosophy behind universal trade liberalization suffers from
two fallacies; universality and uniformity. Universality is a situation where free trade is supposed to
benefit all countries regardless of their level of development, industrial capacity, technological
capacity and other structural characteristics. On the other hand, uniformity implies that for each
country, all industries and products should be subjected to the same level of tariff. A good example
of disagreements between the WTO member countries is the failure of Seattle meeting to arrive at a
consensus. Dissatisfaction with trade liberalization and globalisation was evident at the Seattle
meeting which took place in the midst of street demonstrations by environmentalist, developing
countries labor organisations, human rights activist and non governmental organisations (Bhagwati
2001).
Contradictions of GATT/WTO Rules in Agriculture
One of the major contradiction is that while the GATT/WTO rules require that the government
intervention in trade be reduced and eventually eliminated (free from political power), there is no
mention of eliminating or controlling the increasing monopoly or oligopoly power of firms involved
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in international trade . In addition the capital is to be free to move freely across the boarders, labour
and other factors of production do not enjoy the same benefit. While international trade was to be
free, free trade did not apply to agricultural goods because they were not covered by GATT
agreement until the Uruguay Round. According to GATT rules, international trade in manufactured
goods should be subjected to reduction of tariffs and other trade barriers. However, this does not
apply for the labour-intensive products. Agricultural products and labour intensive goods were of
major export interest by developing countries. Shafaeddin (2003) reported that textile and clothing,
which falls into labour-intensive product category accounted for 60% of the total export of
manufactured goods from developing countries in 1997. Agricultural sector regulation wasraised at
the Tokyo Round but it was strongly opposed by the European Community. Processed agricultural
products had been the major subject of disagreement in GATT panel. FAO had attempted to come
up with regulations on disposal of surplus agricultural products by developing the concept of Usual
Marketing Requirement (UMR).
The United States, European Economic Commission/ European Union and Japan have intensively
intervened in production and trade in agricultural products through their support and stabilization
programmes. United States in particular have programmes on wheat, corn, cotton, soy beans, rice,
wool, barley, oats and sugar among other products. On the other hand, the EEC has intervened on
trade of agricultural goods through Common Agricultural Policy (CAP) mostly inform of price
support and subsidies. United States and European farmers have continuously received subsidies
payment through CAPs from their government. Similarly, tariffs and quantitative restrictions
applied to agricultural goods by many developed countries during the post war period have
continued with no international trade regulation. Governments in most of the developed countries
have protected agriculture through tariffs, quantitative restrictions, prices and direct income support
to producers and input subsidy. Developing countries have been under pressure through WTO rules,
World Bank and bilateral financial arrangements to liberalise their industries on a time scale that
critics called premature. Critics charge that this has resulted to destruction of their existing
industries without any significant replacement. The long term implications include high rate of
unemployment, lower income, social deprivation and marginalisation. Most developing countries
have developed simple processing techniques for their primary products; however, developing
countries have been locked in production and exports of primary products.
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World Trade Organization Agreements on Agriculture (WTO-AOA)
The WTO agreements on agriculture have been a big debate that was started in the year 1986 and
only finalised in 1994. The goal of inclusion of agriculture in Uruguay Round was to establish a fair
and market oriented trading system in agriculture through elimination of trade barriers and trade
distorting support in agriculture. The Uruguay Round culminated to the first multilateral agreement
dedicated to agricultural sector (WTO 2007).The provision of WTO agreement on agriculture
focuses on three major themes; market accessibility, domestic support and export subsidies as
illustrated in Table 1
Market Accessibility: Requires WTO members to reduce tariffication of all non-tariff barriers
and progressive reduction of tariffs over specified number of years categorised into developed
and developing countries. Before the Uruguay Round was adopted, a few agricultural imports
were restricted by quotas and other non Tariffs measures. Under WTO-AOA the quotas and
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other measures were converted to Tariffs and this process is called Tariffication (WTO, 2007).
Domestic support: WTO member states are required to reduce agricultural subsidies that distort
trade as specified in Table 1. This applies to all subsidies and other programs including those that
increase or guarantee farm gate prices and farmers incomes.
Export Subsidies: The agreements on agriculture require members to reduce export subsidies
unless if the subsidies were specified in the members list of commitments. Developed countries
agreed to cut their export subsidies by 36% over a period of six years between 1995-2001 while
the developing countries were allowed a 24% within 10years (WTO 2007).
These agreements allow countries to support their rural economies through policies that
do not cause any distortion to the trade. According to (Murphy 2001) the implementation of
AOA has left the developing countries with decreased agricultural export revenues while the
developed countries’ market for agricultural and textile industry remained heavily protected.
Franscisco and Glipo (2002) reported that 2/3 of the total 38% of the global imports in 1999,
came from trade between European Union member states themselves. On the other hand the
prices of the agricultural products in the world market have been decreasing.
GATT/WTO and Environment
Environmental and labor groups argue that WTO and GATT single most mission is to:
Serve the interest of the exporters over labor and environmental policies.International economic
integration may pose a threat to the government by failing to resist raising the labor and
environmental standards that it would otherwise apply to the local producers in order to enhance the
competitive position of the producers in the international market place. Bagwell and Staiger (2001)
argue that the consumer gain that comes from free trade is not the liberalisation force harnessed by
GATT/WTO but instead the WTO is driven by exporters’ interests. Bagwell and Staiger (1999)
suggested that when a country is confronted from greater import competition because of adoption of
a new domestic standard that is tougher than applies abroad, it should be allowed to raise its bound
tariff as much as necessary to curtail that import surge. Rose (2004) study on the role of WTO on
increasing trade, concluded that there is no empirical evidence to justify that GATT/WTO has
played a vital role in encouraging trade. Bilateral trade cannot be reliably linked to membership of
WTO or its predecessor the GATT. Rose (2004) study demonstrated that membership in the
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GATT/WTO is not associated with enhanced trade by illustrating that GATT/WTO members did
not have significantly different trading patterns than non members.
According to Falkner (2002), any successful sustainable development strategy has to
strike a balance between the interest of trade and concerns for the environment. The WTO has
received several accusations of insensitivity to environmental problems . The
debatable nature of trade and environmental relationship is marked by the failure of WTO to
introduce a formal environmental mandate into the international trade and the collapse of 1999
WTO ministerial meeting in Seattle
WTO and GMO Issues
One of the most controversial environmental concerns is the emerging trading interests of
states and corporations on Genetically Modified Organisms (GMOs) . Resistance to release of
GMOs particularly in Europe has led to accusations by the GMO- exporting countries of unfair
trade restrictions particularly in United States, the World’s largest exporter of products. On the
other hand, farmers in North America and other large developing countries like Argentina and
China have embraced GMO crops and are actively developing more technologies for adoption.
Cartagena Protocol on Biosafety was adopted to establish international rules for trade in genetically
modified organisms and reinforce the rights of the importing nations to reject GMOs imports on
environmental and health grounds
Marketing of GMOs in developing countries has been extensively done by the developed nations
particularly United States. The justification for using GMO has a solution to food security has
mainly been emphasising that majority of the population living in rural areas in developing
countries are food insecure. Most of these rural populations are dependent on agriculture as source
of income and for subsistence farming and therefore anything that has a potential to increase food
production and income is a priority.Similarly, the urban poor communities in developing countries
support anything that might lower the prices for the food products or increase their nutritional value.
WTO provisions that affect national policies
The Uruguay Round established the three pillars upon which international trade negotiations rest: a)
market access; b) the reduction of export subsidies; and c) domestic support. These pillars must also
be the starting point for the definition of national policies. Domestic support measures are classified
in two categories:
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a) measures that countries are not required to reduce; and
b) measures that countries are required to reduce over time
Measures subject to reduction commitments
The measures that are exempt from reduction commitments, including measures to correct
environmental externalities, are classified in four categories: a) “Green Box” measures; b) “Blue
Box” measures; c) Special and Differentiated Treatment measures for developing countries (SDT);
and d) De Minimis exemptions.
Green box measures: these include subsidies that are totally decoupled from prices and production
levels, and do not distort trade or production, or that have minimal effects on those activities. This
support must be provided through government-funded programs; in other
words, costs must not be transferred to consumers by increasing the prices of products. Such
measures may be adopted by developed countries and by developing
countries, and include:
• Support services, such as research, pest and disease control, training dissemination, inspection,
marketing and promotion services, and infrastructure;
• Public food stock for food for food security purposes.
• Domestic food support
• Direct payments to producers for e.g. Assistance in cases of natural disasters, environmental
programs and regional assistance programs.
Blue box measures: these include direct support, partially decoupled from prices and from
production, which the Agriculture Agreement of the Uruguay Round does not oblige to reduce and
is considered to create relatively minor trade distortions. Direct payments made to producers in the
context of programs to limit production are exempt from commitments to reduce domestic support,
if these are based on surface areas ( or, in the case of livestock on a fixed number of head of cattle)
and fixed yields and are applied with respect to 85% or less of production levels.
Special and differentiated treatment (STD) measures: direct or indirect assistance measures,
excluded from reduction commitments, and aimed at promoting agricultural and rural development.
These form an intrinsic part of the developing countries’ programs and include:
• Investment Subsidies, generally available to the agriculture of developing countries.
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• Subsidies for agriculture inputs, generally available to low income or resource poor producers in
developing countries
De minimis exemptions: These refer to any support granted to a specific product that does not
exceed 5% of the total production value
Measures prohibited or subject to Reduction
The measures that countries are required to reduce or that are prohibited fall into two categories: a)
“Amber Box” measures; and b) “Red Box” measures.
Amber Box Measures: These include all instruments that must be significantly reduced or avoided,
as they are considered to create significant trade distortions. For example, price support measures,
and subsidies based on yields or on the volume of production. Many countries, including the United
States and the European Union, seek to transfer programs that currently belong to the “Amber Box”
to the “Green Box”
Red Box Measures: these include all instruments that are prohibited because they create very
severe trade distortions; for example, variable import quotas, quantitative limitations.
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CASE STUDIES
WTO and Philippines Agriculture
Agriculture contributes 20% of the Philippines GDP. In addition over 50% of the population is
dependent on agriculture for their livelihood . Philippine joined WTO when the Philippine senate
agreed to ratify GATT-Uruguay round in December 1994. They committed themselves to all other
agreement embodied in Uruguay round including Agreements on Agriculture (AOA) which allowed
them to an initial bound rate of 100% for sensitive products like corn, sugar, onions and garlic.
However, these had to be reduced to 40%-50% in 2004. Philippine joined WTO with very
ambitious promises like creating 500,000 jobs annually; economic growth rate of 6% per year; and
reduction of poverty after joining WTO.
Decline in Agricultural Productivity in Philippines
Philippines agricultural sector did not show any improvement under liberalised trading regime
seven years after joining GATT/WTO. In the year 2003, nine years after Philippine accession to
WTO, Philippines were reduced from the status of agricultural exporter to a net food import. Before
joining WTO (1990-1994) trade in agriculture had registered a surplus of $ 1.3 Billion while four
years after joining WTO (1995-1999) had accumulated a trade deficit of $ 3.5 Billion. Between the
year 1995-2000 the average growth rate for the agriculture gross value added was 1.38% lower than
1.62% in the year 1991. Franscisco and Glipo (2002) and Glipo (2003) reported that Philippines
membership in WTO resulted to decline of Philippines food security, deteriorated livelihood of
small farmers and agricultural workers and exacerbated long running social inequities. The decline
in gross value added demonstrates declining output of the agriculture and hence its capacity to
supply the population with adequate food, ability to generate opportunities besides the capacity to
compete in the world market. Franscisco and Glipo (2002), reported that Philippines rice production
suffered a significant decline between 1997 to 1988 with a negative 24.1% for the year 1988.
Similarly, the same trend was noted in other crops like corn production with a negative growth rate
in 1995, 1988 and the year 2000.
Franscisco and Glipo (2002) highlighted some of the causes for the falling agricultural prices as
insufficient agricultural support and investment and decline in hectarage devoted to agriculture. The
importation of cheaper agricultural products together with increased smuggled goods led to flooding
of Philippine’s market hence decreasing the prices of the domestic products specifically rice and
corn. Contrary to Philippines government expectation, agricultural export did not register a
significant increase six years after joining the WTO as illustrated in Table 2.
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Table 2: Value of Agricultural exports, 1994-2000
Value of Agricultural Exports, 1994-2000
Year Export in Million Dollars
1994 2,072.02
1995 2,499.63
1996 2,306.64
1997 2,337.51
1998 2224.67
1999 1,760.14
2000 1,982.73
The value of agricultural export declined by 25% between 1997 and 1999. The promise of increased
market accessibility under WTO turned the country from a net exporter to net importer of
agricultural commodities. Philippine’s government did not meet the anticipated benefits under
WTO membership. The WTO-AOA aim of reducing barriers in trade and elimination of trade
distorting subsidies and support in agriculture did not make a significant impact on Philippines’s
agricultural trade. Instead the government agricultural support in the form of price support remained
low, credit research and development and infrastructure development continued declining.
Franscisco and Glipo (2002) argued that WTO-AOA worked against Philippines agriculture
because the country was unable to compete with the highly subsidised industrial agriculture of the
world economic powers. Philippines agriculture is dominated by small scale agricultural production
of traditional crops and cash crops like Rice, corn and coconut oil. Similarly, the level of
technology is also very low as compared to other developed countries which can afford highly
mechanised system. This leads to low efficiency and low productivity a typical problem in all other
developing nations. Therefore, the issue of fair trade within Philippines’s context does not make
sense because the country is not in a position to engage in fair market competition. According to
Franscisco and Glipo (2002), Philippines dependency on cheap and heavily subsidised imports has
contributed to the country’s inability to achieve food security. The increased level of imports posed
a serious threat to the countries’ food security situation. It led to accumulation of large trade deficits
in Agriculture, In a period of six years following GATT ratification, the balance of trade in
agriculture raised to US$ 1 Billion in 1999 as compared to consistent trade surplus in 1970’s and
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1980’s. Table 2 shows the Philippines balance of trade in agriculture from the 80’s to 90’s. It is
apparent that Philippines was turned from a food exporter to a net food importer after its accession
to WTO.
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CRITIQUE
Through out this entire paper, the WTO has been criticised for failing to accomplish its intended
goals. My critique will be based on the implications of WTO in Agriculture with particular
reference to the case studies. WTO Agreement in Agriculture has been a victim of critique by many
other authors (Wise 2004). The most popular evidence of WTO disagreements was during the WTO
ministerial meeting on September 2003 at Cancun where agricultural trade liberalisation was a
major bond of contention. It has been argued that Northern countries are subsidising their producers
with over $ 300 Billion per year (Wise 2004). While this idea of giving subsidies has been reported
to cause a significant amount of export dumping in the developing world the WTO has failed to
coordinate the member countries to address this sensitive issue.
Wise (2004) argues that subsidised agriculture in the developed world is one of the greatest
obstacles in economic growth in developing countries. In 2002, developed countries spent US$300
million on crop price support, production payments and other forms of programs. World markets
are flooded with surplus crop that are sold below the cost of production. Developing countries are
shut out of the world market because they cannot afford to subsidise their farmers while the
developed countries’ agricultural trade remain highly subsidised. Prosperous countries give US$50-
550 billion annually to developing nations as a foreign aid. If developed nations would reduce
subsidies and eliminate trade barriers such as import tariff trade would support domestic producers
in developing countries.
From the literature review, it appears that the AOA are tailored in favour of developed countries.
While the developing countries are given a longer period for implementation, the developed
countries are given a better concessions through provision of blue and green boxes which are both
categories of exemption under the subsidy reduction regulation. Under the WTO -AOA rule these
kind of subsidies are allowed if they are intended to meet environmental and social objectives.
Developed countries have often used these boxes to replace the lost production support and export
subsidies subjected to reduction under WTO rule as illustrated with the US case study. In general
the implementation of the WTO at global level benefited only the developed countries as opposed
to developing countries. According to World Bank (2003) report, the projected potential benefits of
agricultural trade liberalisation before the Cancun meeting highlighted warfare gains and reduction
of poverty as one of the priorities. If both developed countries and developing country agricultural
tariffs were to be reduced to 10% and 15% respectively, the report projected an additional world
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income by over $500 billion by 2015 with a $350 Billion going to the developing countries (World
Bank 2003) Similarly this report projected a reduction of people living under $2 dollar per day by
144 million. Philippines’ case study reviews that this anticipated benefits of agricultural trade
liberalisation is not bound to benefit the developing countries. Philippine’s government is unable to
achieve its food security even after accession to WTO. This demonstrates that there is need for
more localised actions at the country level. WTO should allow all countries to take protective
measures to avoid agricultural exports dumping from other countries below the cost of production.
To protect food security, countries should be able to protect any key food crops without having to
prove that dumping is taking place. Philippines’ shift from a net exporter to a net importer is also
another indication that the WTO promise of the countries increase in export volume and better
prices is questionable. Philippines’ government should conduct a review of WTO commitments in
agriculture and revisit the country economic productivity to make the necessary policy changes.The
government should be able to resist the pressure applied by the world economic powers and give
priority to recovering national food security situation. Since agriculture is the backbone of the
economy for most developing countries, the WTO regulations should allow countries to make their
own decisions on protecting the overwhelmingly number of agricultural labor force who are mostly
the peasant farmers. In Philippines’ case, although agriculture contributes only 20%, agricultural
sector employs over 50% of the labor force. Philippines food security situation should be given a
priority to achieve self sufficiency. Dependence on imports food and other imports is certainly very
risky from a sustainable development perspective. American Agricultural subsidies can be criticised
in the sense that the subsidies goes to the richest farmers and to very few crops. This concentration
of the subsidy on relatively few commodities is not good in liberalised trading system where only
very few people are given the benefit of economics of scale.
On the flip side it has been argued that protection in agriculture can be environmentally damaging.
Yu (1994) reported that the high food prices maintained by the European Community (EC)
Common Agricultural policy (CAP) has distorted trade due to export subsidies and put many
species in danger of extinction. The same report also not that the farmers have put environmentally
valuable wetlands into production. The US the farm policy have had the same disastrous effect on
wetlands and marginal areas. A good example is how the rise in sugar prices led to increase in sugar
plantation in Florida. Trade liberalisation in Agriculture has led to massive deforestation in
developing countries in order to expand their agricultural export production. China’s case study
demonstrates that WTO does not have capacity to influence decision making for its members.
China’s policy makers continue to use several strategies to continue corn exports and block imports.
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Although China as a member of WTO has a bound to fulfil her WTO obligation of reduction of
import tariffs and increasing imports, there is no follow up mechanism set up by the WTO structure
to ensure that each member implements its obligation. China’s corn import remained minimum
since its entry into WTO. In conclusion the practice of export dumping has led to deterioration of
the livelihood of small holder farmers in developed countries and directly threatening the food
security situation of the developing nations. AOA has turned these countries into net food importers
and further undermining their food security and sustainable rural development goals as illustrated in
Philippines case study.
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CONCLUSION
The trade – environment link is a two-way relationship: trade policy has environmental implications
and environmental policy has trade implications. Trade policy – in principle– helps to stimulate
economic growth, which can lead to an increased demand for goods that produce pollution, but also
to greater demands for a cleaner environment. By bringing about changes in production volumes
and in the composition of goods produced in the economy, trade policy can alter the scale and
nature of environmental degradation problems. And, by generating changes in the localisation of
productive activities, environmental policy can also contribute to changing the spatial distribution
of the sources of environmental degradation.
At the same time, by affecting domestic and international prices (in order to internalize
externalities), environmental policy affects the terms of exchange, thereby producing changes in the
volume and composition of trade flows between countries. Environmental policy can also help
create new markets, which in turn gives rise to movements of goods and services between countries,
for example, markets for goods that would probably be produced mainly by developed countries,
such as cleaner technologies; markets for environmental services that would almost certainly be
provided by developing countries, such as fixing carbon dioxide and protecting biodiversity; and
markets for goods produced through more environment-friendly productive processes, such as
organic agriculture.
Differences in environmental policies can also prompt the relocation of productive activities from
one country to another. For example, a country with few environmental regulations may encourage
the relocation or installation of polluting activities; on the contrary, one with appropriate
environmental regulations will attract activities in sectors that must comply with environmental
quality standards in their production processes, due to changes in consumer demand.
In the last decade, the trend toward open markets and trade liberalisation has fueled concerns in
both areas. The sectors concerned with protecting the environment fear the damage that may be
caused by opening up trade and international investment flows. However, those that favour trade
liberalisation are concerned that environmental on Agriculture protection regulations will function
as a non-tariff barrier that will interfere with free trade, with the aim of protecting national
producers from international competition. These divergent positions underscore the fact that there is
an ideological-conceptual dimension to the relationship between trade – environment. This leads us
to the question: what are the effects of international trade –and particularly, of increased trade
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liberalisation– on the environment? The answer to a question of such scope –as is to be expected–
has involved opposing theories and ideological points of view. However, beyond the theoretical and
ideological aspects, the answer to this question is, essentially, an empirical matter. In this case, it is
also difficult to obtain conclusive results, even among economists. The world is possibly not as
simple as suggested by the basic model of international trade, which is traditionally used as a frame
of reference in empirical studies; in addition, the political and institutional context is important, as
is the production structure of the countries.
Another major element in the discussions on trade and environment is the possibility of using trade
policies for environmental purposes and environmental policies for trade purposes. For example,
hard-line environmentalist groups would most likely favour the first option; by contrast,
uncompromising defenders of free trade would probably oppose any type of environmental policy
that could potentially interfere with trade, including legitimate policies to correct environmental
externalities. They would advocate the subordination of environmental policy to the objectives of
trade policy.
The vision of sustainable development in the design of public policies overcomes this argument by
recognising that environmental policies should pursue environmental objectives and that trade
policies should pursue trade objectives; however, the trade objectives should not compromise the
environmental goals and vice-versa. Furthermore, the vision of sustainable development proposes
that both types of policies should contribute to achieve the sustainable development of agriculture
and rural life, in pursuit of competitiveness, equity and social inclusion and the sustainable
management of natural resources.
A country’s environmental policy should contemplate an appropriate combination of instruments,
including market based instruments, regulations and negotiations based on consensus with the
relevant stakeholders. Environmental policy must have clear objectives in order to facilitate its
monitoring and evaluation, and foster dialogue between the government, the productive sectors and
other parties concerned with the environment. To ensure that trade agreements are compatible with
the environment and with environmental policy objectives, it is essential to strengthen citizen
participation, the institutional framework and national and regional legislation. At the same time, it
is important to facilitate access to information and promote the necessary technical and financial
assistance to promote agreements and execute actions towards achieving sustainable regional
development. In addition, it is necessary to design and implement methodologies for evaluating the
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environmental aspects of trade agreements, in order to ensure the complementarity and efficiency of
environmental and trade policies and to maximise social well-being.
Another important action is to promote the application of “positive measures “, instead of restrictive
measures, to support developing countries in their efforts to establish more rigorous environmental
standards and to help them achieve the objectives agreed in the context of multilateral
environmental agreements. These positive measures could be aimed at alleviating the sectoral
vulnerability of developing countries; strengthening the competitiveness of small businesses; and
mitigating the effects of the MEAs on trade and development. The emergence of an anti-
globalisation movement in the last few years - in which environmental concerns are an important
battle standard - and growing interest in the development of mechanisms to promote free trade
(which captured public attention during the Symposium organised at the Cancun meeting)
underscore the need for greater on Agriculture dialogue between environmental policymakers and
trade policymakers. Undoubtedly, this dialogue must increase significantly in the coming years,
especially in the light of recent events such as the difficulties encountered in Cancun to achieve
significant agreements. Undoubtedly, the discussion on trade and the environment must be a two
way process.
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