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Environment and World Trade

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ECONOMICS

WORLD TRADE AND ENVIORNMENT
ISSUES AND POLICIES

SEPTEMBER 2015

BY VIDUR KANODIA

HR COLLEGE OF COMMERCE AND ECONOMICS

MCOM – I

DIVISION – M

ROLL NUMBER – 28

Objective

This paper provides an overview of trade, environmental, and related public issues and policies. It discusses the pollution problem, the recent global warming trend, the attempts of world’s various levels of institutions such as the UN, the WTO, regional, national, and other organizations to solve the global trade and environmental issues. It also discusses a number of basic theoretical issues and empirical findings such as the free-rider problem, tragedy of the commons, theory of second best, relative efficacy of price and quantity control, carbon leakage, border carbon adjustments, cap-and-trade system, pollution haven hypothesis, optimal social discount rate and the environmental Kuznets curve. Some computable general equilibrium models are reviewed and several notable WTO environmental and health-related trade dispute cases are analyzed, including the tuna-dolphin, shrimp-turtle, eco-labeling, beef- hormone, and GMOs cases.

Introduction

Trade liberalization can have substantial ramifications for the global environmental policy regime. Lowering trade barriers and opening new markets can boost economic growth and development, which may help or harm the environment. On the one hand, growth and development tend to increase resource and energy demands, degrade natural resources, and bring forth greenhouse gas (GHG) emissions that contribute to global warning. Trade can also lead to the pollution haven phenomenon since countries may relax their environmental standards to gain a comparative advantage in producing pollution-intensive products. On the other hand, trade may help the environment. Bigger markets spur technological innovation and diffusion, which can reduce the intensity of GHG emissions from growth and development. Trade enables a country to cut its pollution-intensive domestic production and switch to imports that are produced with less-pollution-intensive methods.

Moreover, trade creates higher national incomes that provide financial capabilities in their emission abatement efforts. In principle, trade widens the scope of potential joint benefits among countries and can thus be a potential facilitator of global climate negotiations. Likewise, environmental policy can have significant ramifications for trade policy. For example, a climate policy that raises the costs of energy-intensive goods will affect a country’s economic competitiveness. To protect such sectors from international competition, a country may use other policies to raise the prices of the competing imports or to reduce the costs of its exports. This can run afoul of WTO rules. National policies addressing GHG emissions or other environmental concerns may likely conflict with trade rules since these policies may affect domestic and imported products differently. The intertwining nature of environmental and trade policy regimes suggests that tougher environmental standards can also be a potential facilitator of stronger trade disciplines.

There are some basic differences between the global trade policy regime and the global environmental policy regime. The global trade regime mainly addresses removing the barriers erected by mercantilism or protectionism. It often seeks to disable or change trade policy instruments at the national level. However, the global environmental regime frequently involves externality issues such as endangered species, transboundary pollution and global warming, and is thus chiefly addressing the problem of market failure. Because of their distinctive motivations, the targeted outcomes in the two regimes are likely to be different. Although both regimes seek cooperation among nations, trade liberalization is generally in each country’s own interest, and ultimate voluntary cooperation is more likely. In contrast, the climate regime requires a high degree of inter-governmental cooperation in order to achieve a global environmental goal. Because of externalities, free riding is likely in the environmental regime. Although the two regimes carry different mandates, the goals of liberalizing trade and raising environmental quality are not necessarily inconsistent. How to coordinate the two regimes is a pressing issue for policy makers.

An interesting case of the interactions among trade, the environment, and related public policies is the U.S. ethanol program. In order to increase the domestic supply of oil and push toward biofuels the U.S. instituted its ethanol program by subsidizing corn production, which greatly benefited Corn Belt farmers. The program, however, is not efficient since production of corn requires a lot of energy, increases smog pollution, and consumes a vast amount of water. It is less efficient than the sugarcane ethanol program that has been successfully developed in Brazil. January 2012 marked the beginning of the end of the U.S. import tariff on foreign ethanol, previously at a rate of 54 cents per gallon, which was meant to prevent cheaper Brazilian ethanol from entering the U.S. market. Also expiring was the ethanol subsidy paid to oil companies to encourage their demand for corn ethanol. In addition, the U.S. government bears the cost of subsidizing crop insurance. As a result of heavy subsidies, corn has become the largest agricultural crop in the U.S. With approximately 40% of the crop diverted to ethanol, the U.S. exported 397 million gallons of ethanol overseas in 2010 while simultaneously importing foreign oil and subsidizing domestic oil production. The Congressional Budget Office found that reducing carbon dioxide emissions with the use of ethanol costs at least $750 per ton of carbon dioxide, which is significantly more expensive than other methods.

While some studies have shown small savings in fossil fuels from the use of ethanol, others have found that producing corn ethanol actually consumes more energy than the energy output from its final product. Critics further charge that the corn ethanol program raises the price of corn for all consumers and create significant hardship for poor countries that rely on corn as a staple for consumption. There have been a number of studies providing insightful analyses on various aspects of trade and the environment.

Pollution and the Earth Temperature: Global Warming Trend

Industrialization and economic growth have increased the use of energy and natural resources. As a consequence, atmospheric concentration of CO2 levels has increased, causing a major concern of anthropogenic global warming. In September 2013, the United Nations
Intergovernmental Panel on Climate Change (IPCC) released its Working Group report titled ‘The Physical Science Basis’ (IPCC 2013). The key findings of the report are as follows:

1. It is likely that 1983–2013 was the warmest 30-year period in the past 1400 years and virtually certain that the upper ocean warmed from 1971 to 2010.

2. Total radiative forcing of the earth system, relative to 1750, is positive, and the increase in CO2’s atmospheric concentration is the most significant driver.

3. Arctic sea ice and the Northern Hemisphere springs now cover have continued to recede, and both the Greenland and Antarctic ice sheets have been losing mass over the last two decades.

4. With high confidence, the rise in sea level since the middle of the 19th century has been larger than the mean rise level of the prior two millennia.

The IPCC report asserts that it is extremely likely that human influence has been the dominant cause of observed warming since 1950. This influence has principally originated from the burning of fossil fuels, causing an increase in the concentration of GHGs in the atmosphere. Another human influence has originated from sulfur dioxide emissions that are a precursor to the formation of sulfate aerosols in the atmosphere. The report further predicts that:

1. By the end of the 21st century, the increase in global surface temperature is likely to exceed 1.5C relative to the 1850 to 1900 period for most scenarios, and is likely to exceed 2C for many scenarios. 2. Future surface temperatures will be largely determined by cumulative CO2 so that climate change will continue even if CO2 emissions are stopped.

3. It is very likely that Arctic sea ice cover, Northern Hemisphere spring snow cover, and global glacier volume will continue to decrease, and global mean sea level will continue to rise at a rate exceeding that of the past four decades.

Recently, the Global Land-Ocean Temperature Index published by NASA GISS Surface Temperature Analysis (NASA 2013) also suggests an upward trend in global temperature beginning from 1880. The IPCC, in its latest Working Group Report (IPCC 2014) details where the science of climate change stands, the potential effects facing the world without curbing greenhouse-gas emissions, and the options available for reducing those risks. The report asserts that in order to avoid a dangerous threshold of climate change, temperature rise must be kept below 2 degrees Celsius, relative to pre-industrial levels. It is estimated that consumption growth of the global economy will only be reduced by 0.06% per year if immediate and strong measures are taken.

This is not a high price to pay since consumption growth is expected to increase between 1.6% and 3% per year in the coming decades. The report further warns that if the needed large and rapid cuts in greenhouse gas emissions are delayed through 2030, it will be much more expensive and perhaps impossible to keep warming below 20C. In November 2014, IPCC further issued a report calling for a 40 to 70% reduction in emissions by 2050 from the 2010 level, with a goal of achieving no temperature increase by then in order to avoid the far-ranging and disastrous consequences of climate change.

There have been heated debates on whether or not global warming exists, and if so, whether it is due to anthropogenic activities. For example, NCPA (2013) publishes long-period data and states that ‘Over the past 400,000 years, there has been a series of ice ages lasting 100,000 years, on the average, interrupted by warm periods lasting about 10,000 years. During ice ages, the temperature drops by as much as 21_F, sea levels fall dramatically, glaciers expand and most living things are forced to migrate toward the equator. During periods of relative warmth, sea levels rise and glaciers retreat. We are currently at the tail end of the warm period.’ (NCPA, 2013, p. 12) NCPA (2013) also publishes global temperature and CO2 charts and states that ‘for the past 400,000 years, temperature and CO2 levels have varied together. However, the Earth’s temperature has consistently risen and fallen hundreds of years prior to increases and declines in CO2 levels’. (NCPA, 2013, p. 13) It also asserts that over long periods of time, there is no close relationship between CO2 levels and temperature.

In spite of the evidence on global warming, there remain many points of contention on policies and costs. Critics have argued that special interest groups such as chemical manufacturers, oil and mining producers, timber companies, real estate developers, and electric utilities have anti-environmental motives. Furthermore, there are many scientists who reject global warming entirely.

United Nations Environment Program

The UN’s leading program governing the global environment is the United Nations Environment Program (UNEP). It was established in 1972 and is headquartered in Nairobi, Kenya. Its first conference, the UN Conference on the Human Environment, was held in the same year in
Stockholm. Through a strategy of influencing decision making, UNEP supports the implementation of conventions and funds environmentally related development projects to nurture sustainable development at the local, national, regional, and global levels. It also exerts its independence and authority to examine how economics, trade, and finance interact with the environment. It partners with many international institutions to steer their agendas toward climate change. Two such institutions are IPCC and UNFCCC.

Intergovernmental Panel on Climate Change (IPCC)

The IPCC was founded in 1988 by UNEP and the World Meteorological Organization (WMO) to provide the governments of the world with the most recent scientific, technical, and socio-economic assessment for understanding the risks of climate change. At present, there are 195 member countries in the IPCC and all of them are members of either the WMO or UNEP. As an intergovernmental and scientific research body, the IPCC delivers regular Assessment Reports which are regarded as the most authoritative global scientific resource on the issue. It does not conduct its own original research but instead relies on thousands of volunteer scientists and other experts to review existing research results and compile its reports. The IPCC Second Assessment Report published in 1995 served as a scientific handbook for policy makers in the adoption of the Kyoto Protocol in 1997.

United Nations Framework Convention on Climate Change (UNFCCC)

In an effort to further provide an international platform for meetings and discussions on environmental matters, the UN organized the United Nations Conference on Environment and Development (UNCED) (also known as the Earth Summit) in June 1992 in Rio de Janeiro. The Conference produced an international treaty—the United Nations Frame- work
Convention on Climate Change (UNFCCC)—a legally non-binding agreement originally signed by 154 nations to voluntarily reduce greenhouse gas concentrations in the atmosphere to a level that would not cause interference with the climate system. The treaty began its enforcement in 1994. Currently, the UNFCCC has 195 members (including the EU). It established an intergovernmental negotiation process called Conferences of the Parties (COP). All parties to the convention have met annually since 1995 to assess progress in dealing with climate change. WTO’s Committee on Trade and Environment

In response to increasing concerns about the compatibility between WTO rules and trade obligations set in multilateral environmental agreements (MEAs), the WTO reiterates its standpoint that it is not an environmental agency. Its main objective is to foster international trade and open markets but its rules permit members to take trade-restricting measures to protect their environments under specific conditions (WTO 2010). One unique institutional venue within the WTO is the Committee on Trade and Environment (CTE). As a forum for dialogue on trade and the environment, the Committee incubates ideas for moving the discussion forward but does not actually negotiate trade rules. The General Council is the WTO’s highest-level decision-making body. It consists of committees dealing with specific subjects, including the committee administering the Technical Barriers to Trade Agreement that reviews how some environmental regulations affect trade.

The WTO has wielded its power when it comes to trade-related health, safety and environmental issues. For example, in 2001, it adopted the Doha Declaration that affords member states flexibility in circumventing patent rights for better access to essential medicines. Each member state has the right to grant compulsory licenses and the freedom to determine the grounds upon which such licenses are granted. Another example is its rejection of Canada’s opposition to France’s import restriction on asbestos and asbestos-containing products. This decision was based on GATT Article XX. Later in this paper, more trade dispute cases involving environmental- and health-related issues will be discussed.

Analyzing the role that trade can potentially play in both negotiating and operating a post-Kyoto global climate policy regime, Whalley (2011) argued that trade widens the range of jointly beneficial outcomes and can be a potential facilitator of an agreed upon global climate regime. The issue of climate change and the environment should be viewed as an addition to the pre-existing global economic policy nexus of trade, investment, and finance, rather than as a stand-alone policy negotiation. Now that climate has been added to the global policy bargaining set, trade policy can be used as an instrument for the implementation of a global climate regime since trade provides a mechanism for achieving an internalization outcome for the global externality represented by climate change. Thus, there is an opportunity for a potentially more efficient outcome.

Environmental General Equilibrium Models

There are numerous environmental general equilibrium models that incorporate environmental variables into all sorts of theoretical and empirical general equilibrium models. For example, Karp (2011) uses a Heckscher Ohlin type of environmental general equilibrium model to analyze the environmental policy effects on the equilibrium values of the variables. Chow (2011) presents a simple and elegant environmental general equilibrium model that can be adapted to both static and dynamic scenarios with a single or multiple countries. Since empirical results can help guide policy making, in this section we choose to focus on computable environmental general equilibrium models. Since climate change plays an important role in the environmental problem, most of the empirical studies have concentrated on the linkages between trade and climate change. Truong (2010) provides a detailed review on the theoretical and empirical aspects of the linkages. One approach is to use econometric models to establish partial statistical relationships between certain environmental or climate change variables such as temperature, humidity, precipitation, wind velocity, etc. This is, however, partial equilibrium in nature. A more powerful approach is to use computable general equilibrium (CGE) models. This approach can account for the complex interrelationships among trade, economic activities and climate change issues by linking different sectors of an economy, different agents, different economies in the world, and even different generations. Below we only select a few for discussion.

GREEN Model

The OECD General Equilibrium Environmental (GREEN) model was developed in 1991–1992 to examine economic impacts of climate change mitigation policies aimed at reducing CO2 levels. It is a global dynamic applied general equilibrium model that examines the relationships between depletion of fossil fuels, energy use, energy production and emissions from CO2. Some limitations of the model are that the only GHG considered is CO2, and that benefits from abatement policies are not considered.

The model is simulated from 1985-2050 covering firm decisions, household decisions, investment decisions (as a residual), government decisions such as taxes and expenditure, various policy instruments (carbon tax, energy tax, tradable permits) and foreign trade. The
GREEN model subsequently led to the development of the Linkages model.

ENV-Linkages Model

The ENV-Linkages model is a CGE model developed by the OECD. It is a recursive dynamic neoclassical model, based on rigorous micro foundations, and is used to analyze the impacts of environmental policies in the medium- and long-term time horizons. It links economic activity to emissions of GHGs across several sectors and regions and is built on a database of national economies. Some features of the model include: all production is assumed to operate under cost minimization and perfect markets; Technologies are CRTS with nested CES production functions in a branching hierarchy; and the Armington specification is used. The ENV-Linkages model uses a database developed by the Global Trade Analysis Project (GTAP) to link emissions directly to the use of energy by consumers and producers. Mitigation options are therefore fully endogenous in the model. Land Use, Land Change and Forestry (LULUCF) are also major sources of carbon emissions, but in the current version of the model, LULUCF emissions are taken exogenously so that each simulation uses a specification of these emissions as well as reductions.

The model takes a representative consumer who allocates disposable income in a static consumption/savings framework. Households receive income by supplying the factors of production to firms and are subject to income taxation. Transfers between households and governments are considered. Regarding production, all firms minimize the cost of producing their goods. Output is given by a nesting of inputs, including energy inputs, primary factors and sector-specific natural resources. Each production stream has an identical structure but contains differing elasticities of substitution between inputs and differing technology parameters. Different types of energy are also substitutable depending upon the type of capital used. Emissions considered are CO2, industrial gases (SF6, PFCs and HFCs), methane, nitrous oxide, livestock (manure management), chemicals (non-combustion industrial processes), and ser- vices such as landfills. Sectoral outputs and prices are determined using the zero-profit conditions once firms choose the optimal combinations of inputs. An energy production sector is also considered, where the representative energy producer chooses between alternative technologies to maximize profit, e.g., fossil-fuel based, hydro, wind, and solar, just to name a few. Two carbon capture and storage technologies are highlighted in the model and a learning- by-doing adjustment process is used. Foreign trade is allowed, making use of the Armington specification. In each region, total import demand for each good is allocated across trading partners according to the relationship between their export prices. The governments collect taxes and may provide subsidies. Their expenditures are linked to real GDP where the governments’ deficits are taken as exogenous. Some fiscal instruments are endogenous in order to meet the government budget constraint. The model can simulate carbon pricing policies through a national or international emissions trading scheme or through carbon taxes. Different levels of international collaboration can also be chosen along with flexibility in the choice of participating regions, sectors or type(s) of gases which the policy targets. The model can be used to analyze the implementation policies such as the Clean Development Mechanism or different types of mitigation policies like BCAs, removal or addition of sectoral taxes/subsidies, etc. The model lacks features such as forward- looking behavior and endogenous capital mobility.

The model equations corresponding to the computer code are based on common indices that can be found in Chateau et al. (2014). The calibration method used for the model has an advantage by not depending upon a steady- state assumption, although this makes it considerably more complex. There are three stages to the calibration.

In the first stage, a number of parameters are calibrated using elasticity values from the historical year 2004. This is referred to as the static calibration.

The second stage consists of simulating the model to match historical trends over the 2004–2007 time period and static calibration is performed again along with a renormalization of all variables to 2007 USD.
In the third stage, running the model dynamically and allowing its parameters to adjust endogenously while keeping fixed the key variables obtain the projection for 2008–2050.

Results of the model and answers to questions it addresses are summarized in the OECD Environmental Outlook to 2050 report.

GTAP-E and GDyn-E

Beginning in 1993 the Global Trade Analysis Project (GTAP), an international research network comprised of policy makers and researchers, has conducted quantitative analysis of international policy issues. GTAP generally concerns itself with multi-region, applied general equilibrium analysis of global economic issues. The standard GTAP model is a multi-region, multisector CGE model, with perfect competition and CRTS. Bilateral trade is considered invoking the Armington assumption, just as in the previously discussed models.

Burniaux and Truong (2002) introduce energy substitution into the standard GTAP model as an extended version and call it GTAP-E. They also introduce a carbon tax and international trading of emissions rights. The model is simulated with the implementation of the Kyoto Protocol. McDougall and Golub (2007) further add several new features including a new production function and consideration of trading blocs when dealing with emissions trading.

GTAP-E is static and uses a top-down approach which starts with a detailed description of the macro and inter- national economy and derives from there the demand for energy inputs in terms of the demand for various sectors’ outputs through aggregate production or cost functions. The GDyn-E model still has a few limitations; for example, (1) CO2 emissions from fossil fuels are the only emissions considered, (2) investment is only considered at the regional level as opposed to sector specific, and (3) the electricity sector has a limited role in the model although it is the largest GHG emitter at the global scale. These shortcomings will be addressed in future versions of the model.

GEM-E3 Model

GEM-E3 is an empirical model that allows for comparative analysis of policy scenarios in a GE context. It is a multi-regional, multi-sectoral CGE model which links the macro-economy with the environment and energy systems. It considers 38 different regions and 31 sectors under the assumption of perfectly competitive markets. Some other model features include a discrete representation of power-producing technologies; the option to introduce energy efficiency standards; semi-endogenous learning-by-doing effects and the formulation of an emissions permit system, among others. It can make projections of many variables such as inputs/outputs on a country or regional basis, national accounts balances, public finance, balance of payments, employment, consumption, energy use and supply, and GHG concentration of GHG at 450 ppm with a 50% chance? What policies are needed, and what will be the costs and benefits to the economy?

Technological progress is accounted for via the production function based on R&D expenditure and spillovers. The model takes on a dynamic aspect in the sense that its projections are not static and change over time, via technological progress, agents expectations and capital accumulation. The GEM-E3 model is calibrated to a base year and then a reference-case scenario is determined for policy analysis comparison. Scenarios are then computed by changing exogenous variables that potentially may change in the future and then welfare analysis is used to measure the relative impacts of the changes.

Other Models

We have briefly discussed several models analyzing the implications of mitigation policies in the CGE framework. Partial-equilibrium models are also used to examine policies as well. The Energy Modeling Forum (EMF)19 has produced almost 30 special reports dealing with climate change and various policy measures. Among them, EMF 29 examines the impact of border carbon adjustment under unilateral climate policy through the use of 12 different models.

Environmental and Health-Related Trade Disputes

Environmental laws increasingly dictate how countries should structure their economies (for example the Kyoto Protocol enforces massive changes in investment and production decisions). Trade laws add constraints on how a country conducts its foreign trade. Some regulatory mechanisms may be desirable solutions to climate change but may not be compatible with trade laws. In developing new policy measures, governments must walk a fine line to ensure both sets of laws are in conformity. There are, however, many gray areas that have triggered trade disputes in the areas of environmental and public health issues. In this section, a few notable cases are discussed below.

The Tuna-Dolphin Case

The tuna-dolphin case is perhaps the most notorious recent trade dispute. In 1991, a GATT panel declared that a U.S. ban on imported tuna caught without utilizing dolphin-safe techniques was inconsistent with GATT regulations. This case was resolved through negotiations, yet remains significant because the panel’s legal analysis created a precedent for later conflicts between environmental codes and world trade rules. 19EMF was established in 1976 at Stanford University. It produces research via ad hoc working groups regarding special topics or specific issues dealing with climate change and pollution abatement. The research examines both national and international issues.

Tuna fishermen who used purse seine fishing nets accidentally killed scores of dolphins. The U.S. passed the Marine Mammal Protection Act to create standards for the American fishing fleet and for countries trawling for yellowfin tuna in sections of the Pacific Ocean. The Act obliged the U.S. to prohibit tuna imports from countries that failed to use dolphin-safe methods required by the U.S. standards. In 1991, Mexico protested the ban and requested a WTO panel to review the case. It claimed that the ban violated GATT’s Article XI that forbids quantitative restrictions or embargoes on the goods from other member countries. Mexico observed that dolphins did not qualify as an endangered species and there was no international accord prohibiting the use of purse seine nets. Eleven other countries later joined and appealed to the panel, all supporting the Mexican stance. The U.S. claimed that the prohibitions were defensible under GATT Article III that permits the enforcement of domestic regulations at the border and also under Article XX that permits trade rules defending health and safety as well as upholding conservation.

The GATT panel rejected the U.S. arguments. It ruled that the trade prohibitions called for by Article III concern only products and not the process by which the product was created. This difference is called the product-process doctrine. Since tuna captured by dolphin-safe practices was the same as tuna captured by dolphin-endangering practices, the panel saw no legal reasons for distinguishing between them. The U.S. was viewed as discriminating against products based on process and production methods (PPMs)—in this case, the contentious fishing method. The U.S. could not appeal to Article XX(b) because the human, animal or plant life or health was not within the authority of the U.S., and GATT regulations disallowed a country from taking trade actions to implement its own standards in another country—a concept known as extraterritoriality. Furthermore, the Article XX defense was unsuccessful since the ban was not proven to be necessary because other options in accord with GATT, such as multilateral negotiations, had not been pursued.

A subsequent case filed by the European Community in 1994 known as Tuna-Dolphin II resulted in a similar ruling with respect to Article III but put forward a different construal of Article XX, authorizing the supervision of environmental resources that are not within the supervising country.

Under the old GATT regime, a panel ruling was not sanctioned until accepted by the GATT Council. Mexico did not appeal the panel ruling and the U.S. impeded the acceptance of the Tuna-Dolphin II panel ruling. The tuna dispute was settled in 1992 when the U.S., Mexico, and eight other tuna-fishing nations endorsed an international agreement regulating the circumstances of tuna fishing. Incidental dolphin deaths from tuna fishing dropped drastically thereafter, according to the National Oceanic and Atmospheric Administration (NOAA). The US import embargo ended in 1997, ending the seven-year dispute. The import ban was therefore exchanged for an international treaty which has been more successful at rescuing dolphins than a unilateral import prohibition.

In 2008, Mexico filed a complaint against the U.S. dolphin-safe labeling standards, arguing that the standards were inconsistent with the GATT agreements. In 2011, the WTO panel ruled against the U.S. on a number of grounds, including U.S. standards not being universally applicable to all other countries’ tuna-fishing methods and thus constituting discrimination against Mexico. Finally, in 2012, the Appellate Body further ruled against the U.S. Dolphin-safe labeling standards (WTO, 2012).

The Shrimp-Turtle Case

In 1989, Congress banned shrimp imports that were caught using methods that might have endangered sea turtles. Exceptions were to be made only for countries that the State Department had endorsed for having programs to prevent accidental turtle deaths and for countries whose fishermen trawl only in areas where no such turtles exist. In December 1995, the U.S. Court of International Trade declared that the law was universally applicable. In September 1996, India, Malaysia, Pakistan and Thailand, all being affected by the ban, filed a case with the WTO and contended that shrimp imports should be permitted regardless of the capture process. A dispute settlement panel ruled against the U.S. on the grounds that the prohibition violated Article XI which bans such an import restriction. The U.S. appealed the decision. In October
1998, the Appellate Body ruled that, although the U.S. shrimp certification process was consistent with the rules contained in Article XX(g) that allowed trade restrictions relating to the conservation of exhaustible resources, the measure nonetheless was incongruent with the nondiscrimination condition. The Appellate Body also declared that the rules were neither obvious nor predictable and that the U.S. had collaborated on a pact to protect sea turtles in the
Western Hemisphere, but had not endeavored to collaborate with countries in the Indian Ocean. The WTO did not oblige the U.S. to remove its restriction on shrimp imports but required it to simply add the restriction in a nondiscriminatory fashion. Critics claimed that the WTO decision destabilized the U.S.’s attempts to compel foreign shrimp trawlers to use turtle excluder devices
(TEDs) that protected endangered sea turtles from accidental drowning. The ruling did not intrinsically concern the law, but instead the approach with which the U.S. put the law into practice. The ruling also made it possible that Article XX exceptions could take into account the production process in formulating trade-related environmental rules.

Eco-labeling System

Eco-labeling is a scheme that distinguishes environmentally sound goods and services by attaching particular symbols of environmental quality to them. For instance, a carbon label indicates the level of carbon emitted over the whole or a part of a product’s life from raw material extraction to production, distribution, and disposal. Since 1992, the EU has implemented a voluntary eco-labeling system in a wide range of products and services throughout all member states as well as in Norway, Liechtenstein and Iceland. In North America, a similar labeling system is mandatory for automobile and home appliance manufacturers, represented as the Environmental Performance Label and the Energy Guide Label, respectively. This labeling system quantifies pollution or energy consumption by way of index scores or units of measurement, and makes it transparent to consumers.

The WTO law does not allow countries to discriminate among like products. Obviously, the purpose of eco- labeling schemes is to precisely differentiate among like products on the basis of environmental criteria. Are all eco-labeling measures against trade rules? One may contend that WTO’s Technical Barriers to Trade (TBT) and Sanitary and Phytosanitary Measures (SPS) both allow necessary trade restrictions to protect public health and national autonomy in technical regulations so long as there is scientific justification. For example, the WTO does not prohibit a country from setting restrictions on importing foreign apples which have been proven to bear a higher level of pesticide residue than that permitted by domestic standards. Most trade experts suggest that an important technical distinction between product-related process and production methods (PR-PPMs) as well as non-product-related process and production methods (NPR-PPMs) should be taken into account in order to judge the legality of eco-labeling measures.

Thus, foreign apples with more pesticide residue will be regarded as PR-PPM products since some people might want to handle and consume them differently. Products produced with different emission levels of greenhouse gases can be regarded as NPR-PPM products. It is commonly believed that NPR-PPMs are not covered under the TBT or SPS Agreements but the non-discrimination principle contained in Articles III and XI of GATT can be applied to NPR-PPMs as well. Therefore, eco-labels that describe the characteristics of a good that apply equally to domestic and imported products are unlikely to conflict with the WTO rules. Any compulsory labeling regulations governing NPR-PPMs that result in de facto discrimination against foreign producers would violate the WTO rules.

The Beef Hormone Case

Another instance of concern is the European Union’s ban of six growth-promoting hormones in beef, including imports of beef products in which the hormones have been used. The U.S. Food and Drug Administration and comparable organizations in about twenty other countries have permitted hormone use in beef production. Only one of the six hormones is a known carcinogen when ingested in large amounts.

Before 1981, some countries in Europe allowed hormone use while others did not. To decide on a common procedure, the European Commission established a panel of twenty-two distinguished European scientists to study the issue. The scientists determined that the hormones were safe as growth-promoting substances when used in accordance with sound veterinary practices, and they recommended that the European Parliament should not prohibit the hormones. However, the Parliament rejected the recommendation, asserting that the available scientific information was incomplete.

In 1987, the U.S. initiated a dispute settlement under the Tokyo Roundon Technical Barriers to Trade. The EC prevented the creation of a technical experts’ group, which for practical purposes terminated the review. In 1996, the U.S. and Canada filed a WTO complaint on the basis of successive studies endorsing hormone use. In 1997, a panel ruled that the EU prohibition infringed on its obligations under the SPS since it was not based on scientific proof, risk assessment, or appropriate international criteria. Later, an appeals panel observed that although a WTO member had the prerogative to select the level of health protection as it saw fit, the EU prohibition was not rationally supported by available scientific evidence and therefore failed to fulfill the SPS. The EU fell short of implementing the WTO proposal to conform to the SPS, and the U.S. and Canada were authorized to invoke punitive measures of 100% duties on EU exports. Some claimed that since the EU is not as productive as the U.S. in beef production, its ban of growth hormones in beef is a disguised protective measure. Some however argued that without knowing the long term consequences of growth hormone on human health, the EU is simply adhering to the precautionary principle.

Global trade regulations can be compatible with national policy to protect public health. The U.S. prohibited imports of livestock and meats from Europe in 2001 because of concerns regarding mad cow and foot and mouth diseases, and the action was consistent with WTO regulations. However, public health can sometimes be used to rationalize rules that are intended only to defend special interests. International mediators have made efforts to endorse health and safety regulations even if they hamper trade, but have also opposed regulatory protectionism. However, these two situations can be very difficult to distinguish. The U.S. Department of Agriculture estimated that questionable foreign regulations cost the U.S. about $5 billion in agricultural, forestry, and fishery exports in 1996.

GMOs and Other Environmental Related Trade Disputes

A genetically modified organism (GMO) is an organism whose genetic material has been altered by genetic engineering techniques. As of 2011, the U.S. leads other countries in the production of GM crops. As of 2013, roughly 85% of corn, 91% of soybeans, and 88% of cotton produced in the U.S. are genetically modified. The advent of GM crops has been touted as a second Green Revolution.

Arguments supporting GM food are generally based on the following grounds: there is broad scientific consensus that GM food poses no greater risk than conventional food; it can increase the yields and variety of plants that are herbicide and insecticide resistant and thus raise the farm sector’s income; it can use less water and other harmful chemical agents in its production and thus reduce harmful effects on the environment; and its increased yield can greatly help poor countries.

Opponents, however, have expressed the following concerns: risks of GM food have not been adequately identified and managed; the objectivity of regulatory authorities and the rigor of the regulatory process are subject to question; the risks of contamination on the non-GM food supply and the flow of gene to animals and bacteria have not been adequately controlled; the ultimate effects of GMOs on the environment are not yet understood; and the concentration of corporate powers in the supply chain such as patents on plant seeds may harm farmers and consumers. One key issue concerning regulators is whether GM crops should be labeled. GM crops that are not substantially equivalent to their conventional counterparts are required in all countries to have labeling. Labeling for those products that are substantially equivalent to their conventional counterparts is regulated differently among countries. Labeling can be either voluntary or mandatory above a threshold GM content level. GM food labeling is voluntary in Argentina, Canada, Hong Kong, South Africa and the U.S. In Europe, all food (including processed food) or feed that has higher than a 0.9% threshold level must be labeled. Australia and New Zealand both have thresholds at 1%, Japan at 5%, while China is the strictest with no threshold level. Currently, 64 countries require labeling.

In the 1990s, a series of unrelated food crises such as mad cow disease caused consumer apprehension about food safety and eroded public trust in government oversight of the food industry. In 1998, the EU suspended approvals of new GMOs pending the adoption of revised rules on marketing and labeling of biotech products. Prior to 1997, the U.S. exported about 4% ($300 million) of its total corn export to Europe. Since 1997, however, the U.S. largely stopped exporting bulk commodity corn to the EU because such shipments contained genetically modified varieties not approved by the EU.

Different labeling standards can cause trade disputes between exporting and importing countries.23 In May 2003, the U.S. and twelve other countries filed a formal complaint with the WTO on the EU’s violation of the trade rules by blocking imports of U.S. farm products through its ban on GM food. The plaintiffs argued that the EU’s regulatory process was far too slow and its ban was unreasonable in light of scientific evidence showing that GM food poses no greater risk than the conventional food. The case was heavily lobbied by U.S. biotechnology giant Monsanto, the U.S.

Subsequently, the approval of new GMOs began in May 2004, but some member countries have elected the opt-out provisions. In 2006, the WTO belatedly ruled that the pre-2004 restrictions had been violations, though this ruling carried no effect at all since the EU’s moratorium had already been lifted.

The disputes may be rooted in the comparative advantage and disadvantage among countries in different products. Special interest groups will continue playing their roles in policy making. It might be possible for trade negotiations to consider trade-offs in accepting stricter rules for some products while loosening rules for others. But this will have to be bound by WTO’s basic non-discrimination and national treatment principles. Choi (2010) showed that an import quota on a GMO product will raise the price of the traditional non-GMO substitute. This will reduce consumers’ welfare if there are no real health issues involved. He further showed that in the long run, the real beneficiaries of the trade restriction are landowners, not the producers of the traditional product. Thus, in the absence of concrete scientific evidence, the EU’s ban on GMOs serves to enrich landowners, contrary to its professed intent.

As the world becomes more environmentally conscious, the number of disputes brought to the WTO concerning environmental and health issues is bound to increase. For example, on May 23, 2013 Argentina requested a WTO panel to discuss the EU regarding the biodiesel industry. The
EU, in measuring compliance with the targets of the EU member states, must consider sustainability criteria for renewable energy—specifically regarding the use of biofuels and bioliquids. It has been deemed that, in order to be considered sustainable, biofuels and bioliquids must, among other criteria, result in a saving of at least 35% of greenhouse gas emissions from fossil fuels. Argentina considers the threshold of 35% arbitrary in the sense that it appears neither scientifically justified nor based on any recognized in-ternational norm or standard. Argentina is an exporter of soybean biodiesel, which saves only 31% of GHG emissions and thus does not comply with the EU sustainability criteria.

Key Suggestions

Overall, this paper suggests the implications that it is not just the simple problem of correcting the global externality issue, but there are many complicated factors that must be taken into account in determining the optimal trade and environmental policies. For example, without having a correct theoretical foundation on the optimal social discount rate, the question of intergenerational burden sharing cannot be adequately resolved.

Also, the issue of equitable burden sharing between the developed and the developing countries will depend on how the economic welfare is measured and compared between the two groups of countries. It is hard to avoid normative judgment on the universal value of human life in considering the equitable sharing question, though the current policies are mainly based on the cost-efficient market mechanism.

Since the environmental problem is often global in nature, it is inevitable that policies that are optimal from the global perspective may not be optimal for individual countries. Determining the appropriate balance is a difficult task. There is still much room for cooperation and coordination among the UN, the WTO, and other organizations.

Concluding Remarks

This paper has discussed various aspects of trade, the environment, and related public policies. In light of the magnitude of the climate change challenge and the environmental damage arising from economic development, growth, and globalization, there is a need to clarify which institutions are the most appropriate for dealing with which problems, and how best to coordinate various institutional policies.

It has further discussed in some depth various institutional engagements in setting the relevant policies, from world institutions to regional organizations, individual governments, and civil societies. Due to the presence of global externality and cross-border effects, as well as the huge income in- equality between developed and developing countries, there is an inevitable problem of equitable burden sharing in solving trade and environmental issues.

The paper has also discussed various basic theoretical issues and empirical studies, including the free-rider problem, the benefit of collective action, market failure, the tragedy of the commons, the theory of second best, the relative efficacy of price vs. quantity control, carbon leakage, the border carbon adjustments, the cap-and-trade system, the pollution haven hypothesis, the optimal social discount rate, and the environmental Kuznets curve. The paper has also provided an overview of many computable environmental general equilibrium models.

Several notable WTO environmental and health-related trade dispute cases were discussed. These cases serve to illuminate not only the WTO’s desire to promote unimpeded trade, but also its desire to allow an individual country jurisdiction over its own environmental and health standards. Still, some critics have charged that WTO regulations encroach upon a nation’s sovereignty over national environmental, health, and safety statutes.

Bibliography (References)

Brander, J.A. and M.S. Taylor, "International Trade and Open-Access Renewable Resources: The Small Open Economy Case," Canadian Journal of Economics, Canadian Economics
Association, August 1997, vol. 30(3), pp. 526-52.
Available at http://www.nber.org/papers/w5021

Brander, J.A. and M.S. Taylor, "International trade between consumer and conservationist countries," Resource and Energy Economics, Elsevier, November 1997. vol. 19(4), pp. 267-297.
Available at http://www.nber.org/papers/w6006

Copeland B.R. and M.S. Taylor, "Trade, tragedy and the commons," American Economic Review, June 2009, vol. 99(3), pp. 725-49.
Available at http://www.nber.org/papers/w10836

M. Scott Taylor, "Buffalo Hunt: International Trade and the Virtual Extinction of the North American Bison," American Economic Review, vol. 101(7), December 2011, pp. 1-36.
Available at http://www.nber.org/papers/w12969

Karp, L. and Armon Rezai, “Trade and Resource Policy with Overlapping Generations”, University of California Berkeley, July 2013.

Grossman G.M, and A.B. Krueger, "Environmental Impacts of a North American Free Trade Agreement," in P. Garber (ed.), The Mexico-U.S. Free Trade Agreement, Cambridge, MA: MIT Press, 1993, pp.13-56.

Copeland and Taylor (2003), Chapter 2, 4, 5, 6, 7

Levinson, A. and M.S. Taylor, "Unmasking the Pollution Haven Effect," International Economic Review, vol. 49(1), February 2008, pp. 223-254.
Available at http://www.nber.org/papers/w10629
Cherniwichan, Jevan, Trade Liberalization and the Environment: Evidence from NAFTA and US Manufacturing. March, 2014.

Copeland B.R. and M.S. Taylor Cherniwichan, Jevan, “Environmental Regulations and International Competitiveness: a review of recent evidence” Paper prepared for the Environment Canada Research Network, October 2013.

Rui Wan, “The Pollution Haven Hypothesis Revisited: Consumption generated pollution from durable goods” Job Market Paper, November 2013.…...

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