CIESIN Reproduced, with permission, from: de Miramon, J., and C. Stevens. 1992. Policy balance. The OECD Observer 176: 25-27.

Policy Balance

Jacques de Miramon and Candice Stevens

For the first time trade and environmental specialists at the OECD are jointly addressing a broad range of issues of common interest. The reasons are patent: environmental policies are having a more and more widespread impact on trade--and trade policies may affect the environment to a much larger extent than previously recognised. The Trade and Environment Directorates of the OECD have therefore combined forces to explore how to improve the compatibility of trade and environmental policies and, by prompting increased discussion and co-ordination among policy-makers in national capitals, how to head off potential conflicts before they arise.[1]

There are more and more environmental policies which are affecting trade flows, both directly and indirectly.[2] And there is an obvious risk of a clash of policies: while trade officials work to remove encumbrances to trade that might otherwise restrict economic growth environment officials are increasingly advocating the use of trade-policy instruments to buttress the objectives of environmental policy.

The indirect effects of environmental policies on trade have been the traditional area of concern. Environmental regulations and standards can form non-tariff barriers. Environmental charges and taxes can alter the competitiveness of firms. Environmental labelling schemes can turn into unfair trade practices, for example, if foreign producers are denied the national stamp of approval or face unjustifiable hurdles to obtain it.[3]

In general, environmental policies should be framed in ways that least distort trade in the pursuit of their objectives--but it is often difficult to sort out ecological intent from potentially protectionist aspects. For example, environmental rules on contaminants allowed in food products, minimum sizes for fish species and recyclable containers for beverages have all led to trade disputes.

One way to temper undue trade effects is to increase international policy convergence. The work of the OECD chemicals programme in harmonising chemicals testing and registration procedures illustrates how both environmental and trade goals can be furthered through co-operative international action.

A broad range of regulatory and economic instruments is now used to implement environmental policies in OECD countries, reflecting differing national environmental conditions and preferences--and discussions in international fora must take care not to weaken standards or jeopardise the right of an individual country to enact regulations that are appropriate in its national context. Nonetheless, the increased international compatibility of policies is also a desirable ecological goal, particularly for such issues as global warming, ozone depletion and the like. A 'harmonisation agenda' is now being discussed in the OECD to identify the most urgent areas for action and the most practical means to help environmental and trade policies converge.

Borrowing Policies

Perhaps the most controversial aspect of environmental policies is the trend towards using trade instruments as a more direct method of achieving environmental objectives. Environmentalists are advocating, for example, import and export measures as a way of implementing ecological agendas. It is sometimes obvious that a national environmental policy cannot be implemented if foreign suppliers are not subject to the same obligations as national suppliers. So products ranging from cars to chemicals can be required to meet the environmental product standards of the importing country. Yet trade measures are sometimes vested with broader ambitions and can be exploited by pressure groups, not least environmentalists (or producer groups claiming an environmental interest), to promote domestic environmental values beyond national borders or simply to advance sectional interests.

To the extent that they reduce trade, import measures are often seen as a vehicle for protecting the global environment and preserving the common stock of resources. Restrictions can be proposed inside an importing country to promote sustainable resource use elsewhere. A prime example can be found in the proposed bans on the import of tropical timber that is not sustainably produced, a measure seen by environmentalists as a means of preserving a natural resource vital to biodiversity and the stability of the global climate. But such bans can impose severe economic costs on exporting countries as well as disrupt the global trading system.

And export bans are being used as a mechanism for conserving natural resources at home. Some countries, OECD and non-OECD alike, have restricted the export of their forestry or fisheries products. Countervailing trade measures are sometimes proposed to equalise environmental costs and encourage higher environmental standards world-wide. And some commentators argue that low environmental standards in exporting countries are implicit subsidies to industry which should be countered by tariffs in importing countries.

Trade measures are also used to implement and enforce international environmental agreements--for example, the United Nations Convention on International Trade in Endangered Species (CITES), the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal, and the Montreal Protocol on Substances that Deplete the Ozone Layer.

But how effective are these trade measures in resolving pressing environmental problems? Are their effects on trade warranted or disproportionate? The OECD is discussing criteria to guide the environmental use of trade measures so that they both serve ecological ends and do the least damage to free trade. The availability of a set of criteria, yet to be developed and endorsed, would help policy-makers assess various contributing factors and decide on the most efficient mix of policy instruments to address a particular problem. Environmental policy-makers must be aware of the trade effects of their actions, their acceptability under international trade law and the importance, when devising policy, of weighing fully the trade disadvantages against the environmental benefits.

The Effects of Trade on Natural Resources

The analysis of the direct and indirect effects of trade policies on the environment is much less advanced than that of the impact of environmental policies on trade.

Ecological problems are best tackled directly, by environmental policies, but these are not always feasible or fully effective. Ecological 'qualities'--for example, clean air and water, biodiversity--are difficult to price, meaning that environmental values are not easily incorporated into markets. And with unpriced resources, trade--and trade policies--can have substantial impacts on the environment, both beneficial and adverse. For example, while free trade produces economic growth and the financial resources to address environmental problems, that very growth may put new pressures on the environment--through, for example, increased pollution.

Trade in hazardous wastes, dangerous chemicals and endangered species can harm eco-systems both inside and outside national borders. Tariff and non-tariff barriers can change relative prices and thus distort resource use. Subsidies can encourage environmentally damaging practices in agriculture and natural-resource sectors.[4] Inappropriate government intervention, through price supports, tax incentives or trade protection, can lead to excessive deployment of chemicals in agriculture, inappropriate land use or rapid consumption of forests and other resources.

Conceptual frameworks are being developed in the OECD to help understand this type of trade/environment linkage, with economic analysis aimed at uncovering the environmental effects of trade. One way to look at the potential impacts is in terms of scale, products and structure. Trade can have beneficial effects of scale in augmenting the funds to be spent on the environment but adverse scale-effects in increasing degrees of pollution and the consumption of resources. It can have advantageous product effects in diffusing environmental technologies around the globe, but adverse ones in trade in toxic chemicals and wastes. It can improve the structure of global production in line with comparative advantage, but can distort world production patterns if it fails to internalise environmental values. Particular attention is being given to the concerns of the developing countries, where their less comprehensive environmental policies can mean that the impact of trade is particularly severe. It can, for example, lead to forest depletion in countries which have no plans for sustainable management.

Some trade agreements have been singled out for close examination of their environmental implications. The environmental repercussions of free-trade arrangements, as well as of commodity and preferential trade agreements, are being reviewed. And no doubt the liberalisation of trade, both regionally and internationally, will have environmental impacts. But removal of distortions, such as non-tariff barriers and subsidies, should, on the whole, prove beneficial to the environment in correcting policies that now harm the environment.

Yet if liberalisation is not carried out in an environmentally sensitive fashion, it might nonetheless have some adverse effects on resource use, and it could also remove environmental and trade measures required to protect national environments. Environmentalists are concerned that the increase in growth that liberalised trade brings about will not be adequately offset by environmental safeguards. They are also worried that efforts to converge or harmonise standards may lower the degree of environmental protection.

The only international guidelines addressing the trade aspects of environmental policies are the OECD Guiding Principles Concerning the International Economic Aspects of Environmental Policies, which are now exactly 20 years old. The best-known of these is the 'Polluter Pays Principle', which encourages the internalisation of environmental costs and the nonsubsidisation of private environmental expenditures; government subsidies for pollution control costs are allowed only in certain specified cases or exceptions. There are also other Guiding Principles which address the harmonisation of environmental policies, the use of countervailing duties and export subsidies in relation to environmental policies, and the principles of national treatment and nondiscrimination in environmental regulations. The OECD is currently reviewing the applicability of the 1972 principles to the 1992 trade and environment debate.

The General Agreement on Tariffs and Trade (GATT), the primary body of international trade law, was drafted almost half a century ago, in 1948, with few references to the environment. The GATT Group on Environmental Measures and International Trade has been recently revived. One of the questions being discussed also in that group is that of the ability of the GATT to cope with current concerns. International law has to be assessed to establish compatibility and adequacy of linkages between the two issues. The transparency of policies, negotiation procedures, the resolution of disputes and international monitoring and enforcement must also be considered. The OECD is thus developing guiding principles of equal use to policy-makers in both trade and the environment.

Jacques de Miramon is the Head of the Division of General Trade Policies and Related Issues in the OECD Trade Directorate. Candice Stevens works on trade and environment issues in the OECD Environment Directorate.

OECD Bibliography


1. Joint Report on Trade and Environment (June 1991), 1992, available free of charge from the OECD Trade Directorate.

2. See Ebba Dohlman. 'The Trade Effects of Environmental Regulations', The OECD Observer, No. 162, February/March 1990.

3. See Jim Salzman, 'Green Labels for Consumers', The OECD Observer, No. 169, April/May 1991.

4. See Jean-Philippe Barde, 'The Economic Approach to the Environment', The OECD Observer, No. 158, June/July 1989.