Trade and Environment: A Business Perspective

Trade and Environment

Volume 4 Number 2

Trade and Environment: A Business Perspective Margaret Fllahen!-y

Introduction As 60% of the world’s 150 largest economic entities are multinational corporations (MNCs), international trade and investment decisions by MNCs play a major role in shaping worldwide environmental practices. The World Business Council for Sustainable Development (WBCSD) is a coalition of over 120 of the world’s leading companies which are committed to shaping those environmental practices to reflect high standards of environmental management, and the principles of economic growth and sustainable development. The WBCSD was formed on 1 January 1995 through a merger of the World Industry Council for the Environment (WICE) and the Business Council for Sustainable Development (BCSD). The WBCSD recently launched a Working Group on Trade and Environment, the work of which will rely on company case studies to demonstrate how trade affects the environmental aspects of commerce and how environmental regulation affects the international trading order. This article discusses areas within the trade/environment arena of interest to industry and outlines the main areas of focus for the Trade and Environment Working Group.

=The Main Issues Compatibility between trade policy and environmental protection has leaped to the top of the international policy agenda. The voices of pro-free trade advocate that environmental regulation will be used as a facade to conceal discriminatory or protectionist trade agendas, while other commentators argue that nations are avoiding protection of the environment by relying on the free trade provisions embodied in the GATT. The challenge that emerges for policy makers is to ensure compatible regulatory regimes in a manner that balances environmental objectives and economic goals. 0 Blackwell Publishers Ltd. 1995, 108 Cowley Road. Oxford OX4

To facilitate well-informed discussion, the WBCSD will aim to fill an important information shortfall. The need has been identified for quality input that reflects how and where trade policies operationally impact business. In 1994, WICE conducted an extensive survey of member companies to narrow the scope of these issues, to identify areas of priority concern for business and to clarify where case study research would be most useful. The following three areas have been identified: (1) the use of trade measures pursuant to multilateral environmental agreements; (2) regulatory instruments based on process and production methods; and, (3) the role of environmental standards in investment decisions.

Trade Measures Pumuant to Multilateral Environmental Agreements (JMEAs) The recognition that many environmental effects are transboundary has necessitated a search for global or regional solutions. As such, many governments rely on multilateral negotiated agreements as a means of addressing these environmental challenges. A multilateral approach to an environmental problem has practical advantages in assisting to mitigate a problem as well as political advantages. Multilateral approaches tend to demonstrate that an international consensus exists on a particular issue, which in turn helps minimize the instances in which a country can use environmental measures to serve its own domestic trade agenda under the pretext of environmental protection. International environmental agreements such as the Base1 Convention and the Montreal Protocol allow trade restrictions or trade bans to be imposed upon a noncomplying party or a non-signatory party as a means of enforcing provisions of the agreement. It is the use of these enforcement mechanisms within

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MEAs that highlight the potential conflict between trade policy and environmental protection mechanisms. International trade law is based on principles of open and free trade; GATT works to reduce policies or practices that distort or interfere with this objective. However, the use of trade restrictions as a means of achieving an environmental objective may run contrary to these goals. Accordingly, free trade principles may be in conflict with environmental protection measures that rely on trade restrictions as a means of accomplishing an environmental objective.

Cases submitted to the Dispute Settlement Panel of the General Agreement on Tariffs and Trade’ emphasize not only the overlap between trade and environment, but the potential for direct conflict between two bodies of international law: GATT and international environmental agreements. Many commentators have identified a perceived need to focus on issues of compatibility, urging that trade law be applied in a more environmentally accountable manner and that international environmental agreements more fully reflect the reality of free trade ramifications. It remains unsettled whether the GATT or an MFA would prevail in a situation where there is a conflict between treaties. Some specialists assert that the Basel Convention on the Control of Transboundary Movements of Hazardous Waste and Their Disposal2 and the Montreal Protocol on Substances that Deplete the Ozone Layer3 are ‘successive treaties’ to the GATT under Article 30 of the Vienna Convention of the Law of T r e a t i e ~therefore: ;~ as lex posterior, these agreements have priority over the GATT to the extent their provisions are GATT-incompatible when all states involved are parties to both the GATT and the later agreements; thus among such parties the GATT-inconsistent provisions basically constitute e x c e p tions to the GATT.5

However, other experts claim that the Montreal Protocol (of 1989) and the Basel Convention (of 1992) can trump the GATT (of 1947) via the ‘more recent treaty’ rule of international law. Yet, the World Trade Organization defeats such trumping by resetting GATT’s date to 1994. This allows the WTO to leapfrog over all environmental treaties that use trade measures, thereby requiring all such treaties to be judged by the WTO on their merit.6 MEAs have traditionally relied on positive incentives as well as negative inducements as a means of encouraging the participation of non-parties. Incentives can include access to technical assistance and negative pressures involve limiting or banning trade in the controlled product or substance with a non-party. MEAs are designed to be most effective with maximum participation. ‘It is important for countries that have an impact on the global environment not to remain outside the convention system and defeat the purposes 0 Blackwell Publishers Ltd. 1995.

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of the agreement.’7However, as discussed above, the CATTcompatibility of such trade restrictive measures remains to be tested. A recent GATT report8 identified 127 multilateral agreements on environmental protection, 17 of which have provisions restricting international trade. Recognizing some unsettled issues associated with MEAs and pursuant trade measures, the WBCSD has begun to assemble a series of cases that discuss terms of MEAs and how specific objectives may impact trade either as a restrictive measure or as a technological challenge. The cases will elaborate on the following questions: How are the objectives and specific terms of an international environmental agreement implemented at the individual company level? How can business ensure consistency between international trade law and multilateral environmental agreements?

Regulatory Instruments based on Process and Production Methods PPMs) Countries have the right to exercise sovereign authority over their own domestic environmental affairs, and international trade law has minimal effect on domestic regulations or standards. A country can regulate how a product is manufactured or produced within its own borders, for example, by setting emission or effluent standards. Furthermore, a country can restrict the import of a particular product based on quality or safety standards. However, a country generally cannot restrict the import of a particular product based on how it is made, produced or processed. The GATT rules prohibit contracting parties from distinguishing between products and like products based on production methods. This poses a significant and increasingly controversial challenge for the GATT in that any allowable restrictions on free trade must be based on only the product and not on the method of production. As such, a government violates the free trade principles of GATT when it attempts to impose import or export restrictions on goods manufactured or produced in an environmentally harmful manner. However, as government and industry work to minimize environmental impacts of production, trade restrictions based on PPMs may increasingly be invoked and subsequently subject to challenge. There are vital business interests on both sides of the PPM commercial chain; companies facing trade restrictions on their exports due to environmental production methods, and companies facing competition from imports produced in a less stringent regulatory setting. Although there has been extensive discussion on the significance of PPMs within the GATT and

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international law context, a clear industry perspective has yet to emerge. WBCSD cases will address the effect of process-based environmental standards, including an examination of how these regulations may hinder trade and how there may be potential for a less trade restrictive approach in achieving similar environmental goals. Specific questions include: How should business manage PPMs from an international trade perspective and as an internal operational challenge? Could regulations based on PPMs stifle technological innovations?

Role of Environmental Regulations in Investment Decisions Generally, multinational corporations maintain that the stringency of a country’s environmental regulations plays a relatively minor role in location decisions. Access to markets and raw materials, availability of skilled and competent labour, and predictable political regimes are more influential in investment and location decisions than environmental standards. Although empirical studies tend to s u p port this contention, the debate on environmental regulations affecting competitiveness - which may result in companies locating in regions offering less rigorous standards - continues to wager.g Cases categorized under this general topic illustrate factors which have influenced corporate decision making with regard to location decisions, and r e p resent different commercial sectors, thereby addressing variables which may be unique to a particular set of operational factors. Specific lines of inquiry include: How does business address the challenge of competitiveness and environmental protection in investments? Is environment a key factor in deciding where a particular operation is located?

Conclusion The cases and subsequent analysis of this research are intended to provide specific examples of how trade and environment policies are linked to business operations. A basic premise to this work will emphasize the fact that although countries and governments negotiate trade agreements, it is business that is ultimately responsible for the investment decisions, technology choices and management acumen which affect the environment. The second premise of this work is to demonstrate compatibility between principles of free trade and

Trade and Environment

environmental protection. Continued support for principles of sustainable development among governments and commercial enterprises is key to realizing this compatibility. This support must manifest itself within the trade and environment communities as well as within the private sector. Business implementation of voluntary initiatives such as the ICC’s Business Charter for Sustainable Development are important steps in an environmentally responsible direction. (Ed.: see Documents section of this issue of R€Cl€L). The international business community must play an active role in demonstrating their priorities and concerns for the benefit of the environment and the b e n e fit of economic development. It is important to recognize that a strong free trade agenda is essential for continued economic prosperity yet this does not mean that environmental performance need be compromised.1°

W Notes 1. Dispute Settlement Panel Report on United State Restrictions on Imports o f Tuna, 16 August 1991, 30 ILM 1594 (hereafter, Tuna-Dolphin); Thailand - Restrictions on Importation o f and International Taxes on Cigarettes, GATT Doc. DSlO/R 208-09 (7 November 1990); In the Matter o f Canada’sLanding Requirement for Pacific Coast Salmon and Hem’ng, Panel No. CDA-89-180741 (16 October 1989). 2. Basel Convention on the Control of Transboundary Movements of Hazardous Waste and Their Disposal, 28 ILM 649. In force May 1992 (hereafter, Basel Convention). 3. Montreal Protocol on Substances that Deplete the Ozone Layer, 30 ILM 539. In force January 1989 [hereafter, Montreal Protocol]. 4. See Article 30 of the Vienna Convention on the Law of Treaties, 8 ILM 679. 5. Betsy Baker, ‘Protection, Not Protectionism: Multilateral Environmental Agreements and the GATT’, Vanderb J T L, 26 (1993), 437 at 446. 6. Steve Charnovitz, ‘The World Trade Organization and Environmental Supervision’, Bureau o f National Affairs, International Environment Reporter, 17(2) (26 January 1994), at 89. 7. Edith Brown Weiss, ‘International Environmental Law: Contemporary Issues and the Emergence of a New World Order’, Geo L J , 81 (1983), 675 at 691. 8. GATT, General Secretariat of the Council, Press Communique GATT/529 (February 1992), as seen in Thomas J. Schoenbaum, MIL, 86 (1992), 700 at 799. 9. GATT contains an agreement on two sets of standards: Technical Barriers t o Trade (TBT), which regulates products, and Sanitary and Phytosanitary Measures (SPS), which regulates food safety and disease-spreading products. Both of these agreements are based on a principle which allows countries t o apply internationally

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agreed-upon standards to imports. For full analyses of TBT and SPS, see Steve Charnovitz, n. 6 above. 10. See Rappaport and Flaherty, Corporate Response to Environmental Challenges: Initiatives of Multinational Management (Quorum Books, 1993).

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Margaret Flaherty, M.S.,J.D., is Project Manager, ment, in Geneva, Switzerland.