Multilateral Environmental Agreements and the World Trade Organization by Jenny Bates (printable version)

PPI | Backgrounder | October 1, 1999
Multilateral Environmental Agreements and the World Trade Organization

By Jenny Bates

Executive Summary
Multilateral trade rules and (domestic) environmental policies are increasingly coming into conflict. World Trade Organization (WTO) rules concerning trade-restrictive environmental regulations allow even hard-won multilateral environmental agreements (MEAs) to be open to challenge. The world trade body thus needs to exempt MEAs meeting certain conditions from WTO challenge. Through such moderate steps, the international community can prevent a series of damaging "environmental" trade disputes, promote multilateral attempts to protect the environment, and begin to rebuild support for the WTO system within the environmental community.
The Case for Special Treatment of Multilateral Environmental Agreements at the World Trade Organization
Since the creation of the World Trade Organization (WTO) in 1995, several high-profile trade disputes have brought to light an emerging clash between environmental regulations and the system of multilateral trade rules. This clash is based on a fundamental disagreement over the appropriate role of trade restrictions in environmental policy. The global trade regime operates under the premise that restricting trade in order to protect the environment is, at best, a sub-optimal policy solution as trade restrictions do not strike at the root cause of environmental degradation. The fundamental cause of environmental harm is overproduction and/or consumption of products that pollute--not trade in those goods.¹ The optimal policy response is better direct regulation of activities that pollute. Therefore, except under certain limited conditions, WTO rules prohibit the use of trade restrictions to protect the environment.
In contrast, many environmental regulations include trade restrictions as part of the regulation. Thus, for example, WTO dispute settlement panels have recently ruled against two U.S. laws designed to protect dolphins and sea turtles, both of which included trade restrictive measures.² This clash between environmental regulation and the system of rules enshrined in the WTO is likely to intensify in future debates over biotechnology and genetically modified organisms. WTO rules could even be used to challenge multilateral environmental agreements (MEAs) where they include regulations that restrict trade.
Some commentators have argued that this ad hoc approach to trade and environmental policymaking is sufficient. They suggest that, since no MEAs have yet been challenged under the WTO, there is no major conflict of interest or legality between the two aspects of international law. Moreover, if a conflict between an MEA and multilateral trade rules ever were to arise, it could be settled through the WTO dispute settlement process.
Yet, waiting for a series of damaging trade disputes to build up a body of case law is a risky strategy. WTO dispute panel decisions do not have to be taken as a legal precedent by subsequent panels dealing with similar disputes. Hence, a set of international norms could take years to become established and could be undermined at any time by a divergent panel decision. Moreover, the dispute panels have a history of interpreting existing WTO rules narrowly when defining "acceptable" environmental policies that have an impact on trade. Hence, this process risks losing the support of even mainstream environmentalists, many of whom are already beginning to feel that WTO rules are undermining environmental objectives.
Perhaps more importantly, MEAs are notoriously difficult to negotiate and conclude. They usually cover a broad range of countries, and they tend to address pressing international environmental problems. Moreover, the trade restrictions they include are often strictly limited and highly specific (e.g., the Montreal Protocol bans the importation and exportation of chlorofluorocarbons (CFCs) and certain specified goods that contain them). Having a hard-won MEA challenged--and deemed illegal-- under vague WTO rules would thus be counterproductive. Indeed, the clash between environmental regulations and multilateral trade rules is already fueling a bitter and polarized debate between free trade proponents and environmentalists.
A better approach would be to endorse MEAs explicitly within WTO rules. This moderate proposal would be a first step toward reconciling trade and environmental objectives, would strengthen the international system, and would send a signal that proponents of open markets also are serious about wanting to address international environmental problems.

The Six Major Multilateral Environmental Agreements (MEAs)³

Convention on the Prevention of Marine Pollution by Dumping of Wastes and Other Matter (the London Convention), 1972

Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES), 1973

Montreal Protocol on Substances that Deplete the Ozone Layer, 1987

Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal, 1989

United Nations Framework Convention on Climate Change, 1992

Convention on Biological Diversity, 1992

The Intersection of Multilateral Environmental Agreements and the WTO
There are two distinct ways in which multilateral environmental agreements and international trade rules intersect. First, many MEAs include trade measures (usually trade restrictions) as part of the regulation of the MEA. For example, the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) regulates the export and import of specified endangered species through a permit system. Commercial trade of the most endangered species is banned.
Second, trade measures have also been used as sanctions to enforce compliance with an MEA. For example, the United States banned imports from Thailand to punish it for violating aspects of CITES. These two approaches are intellectually distinct and are thus treated separately. Trade Measures within a Multilateral Environmental Agreement
Contrary to common perception, the WTO system of rules does explicitly address the intersection of trade and environmental policy. Article XX of the General Agreement on Tariffs and Trade (GATT) outlines the general exceptions to WTO rules--the conditions under which trade restrictions are exempt from legal challenge. Under this Article, WTO members may adopt trade- restrictive measures for a variety of specified reasons, including measures:
i) necessary to protect human, animal or plant life or health; [and]

ii) relating to the conservation of exhaustible natural resources, if such measures are made in conjunction with restrictions on domestic production and consumption.⁴

Environmental regulations imposed under this article must not be "arbitrary or unjustifiable discrimination between countries where the same conditions apply" or "a disguised restriction on international trade." These qualifiers attempt to prevent a nation from imposing environmental regulations that are simply disguised protectionism.
At first glance, these clauses seem to outline general principles for environmental policymaking that would be compatible with multilateral trade rules. That is, trade restrictive environmental regulations, such as an import ban, must be necessary to achieve the desired environmental goal. Regulations should also apply to all producers of the good or service involved-- whether domestic or foreign.
However, there are several problems with these clauses in practice. First, they are difficult to define. When is a trade restrictive regulation "necessary"? When is an environmental harm so great that it warrants the indirect policy of restricting trade in a related good?⁵ In the cases brought to the WTO so far, dispute settlement panels have interpreted the term "necessary" to mean "least trade restrictive." Many environmentalists worry that such an interpretation means that no environmental regulation will be acceptable to a panel in practice.⁶ Second, the language does not refer specifically to MEAs. Hence, any MEA that includes a trade restrictive measure could potentially be subject to challenge (particularly by a WTO member not signed up to the MEA).
A better approach would be to exempt MEAs that meet certain criteria from challenge under the WTO system. There are several ways in which this could be achieved.

WTO members could adopt, as a general principle, the premise that MEAs are exempt from WTO challenge. This could be done through an amendment to the Final Act (the treaty creating the WTO) or through a legally binding WTO decision.⁷ However, this is the most controversial approach as it would place no conditions on the MEA. Implicitly, even environmental agreements signed by only two countries would be considered multilateral and thus exempt from challenge by third parties. Not surprisingly, most developing countries oppose such a broad-sweeping approach, seeing it as a way for developed countries to use environmental regulations as disguised protectionism.⁸

WTO members could draw up a specific list of MEAs that are exempt from challenge under the WTO. This follows the NAFTA model. Mexico, Canada and the United States agreed that trade measures imposed under certain specified environmental agreements would be exempt from challenge under NAFTA. This list would then be adopted as a WTO decision or as a side agreement to the Final Act.⁹ However, this list would need to be revisited every time a new MEA is ratified. Deciding which MEAs to include could also cause bitter divisions between countries.

WTO members could decide on a list of criteria that an MEA would need to meet in order to be exempt from challenge under the WTO. These criteria would include, among other things, a minimum number of countries as signatories, an open process of negotiation (allowing all countries to become signatories), some universality of environmental benefits and harms being addressed by the agreement, and a strong case supporting the necessity of a trade restriction. Such an approach would not only guide dispute settlement panels at the WTO, it would also guide future MEA negotiations as to the sorts of agreements that would be exempt from WTO challenge.

Trade Measures as Sanctions for Violating an MEA
Using trade restrictions (on related or unrelated products) to punish countries for violating multilateral environmental agreements is much more controversial. Making this legal would require fundamental reform of the WTO system and could open the door to creeping protectionism.¹⁰
The optimal solution here is for MEAs to include their own strong enforcement mechanisms. For example, the Montreal Protocol has an implementation committee to review claims of violations or non-compliance. This committee reports to a full meeting of the parties, which then decides what action to take (including providing assistance or suspending rights to technology transfer). The Montreal Protocol also makes use of a carrot in the form of the Multilateral Fund. This fund is largely financed by the developed countries and disburses money to developing countries that keep per capita consumption of CFCs and related products within defined limits. The funds are used to cover the additional or incremental costs of using a more ozone-friendly technology. Multilateral Fund money can also thus be withheld as punishment for non-compliance with the environmental regulations in the protocol.
Trade and Environmental Policy Where No MEA Exists
Using trade restrictions as a punishment for rogue environmental behavior by a trading partner is the conflict at the heart of much of the trade and environment policymaking debate. On the one hand, many environmentalists want to use trade as a stick to change the behavior of other countries. On the other hand, the system of rules enshrined in the WTO does not sanction such a use for trade policy. Indeed, WTO rules do not generally endorse attempts at extra-judicial regulation where country A restricts trade with country B in order to make country B adopt stricter environmental regulations or improved environmental behavior.¹¹
The optimal solution where there is a need to protect a global environmental resource is to negotiate a multilateral environmental agreement, with strong monitoring and enforcement mechanisms. Indeed, formally exempting such MEAs from challenge under the WTO would encourage countries to negotiate more MEAs, as those agreements would not be struck down or undermined by WTO rulings. Multilateral trade and environmental policy would thus be mutually reinforcing rather than in conflict.
Conclusion
Environmental policymaking and the international trade rules embodied in the WTO are already intersecting--and clashing. Those pure free traders who argue that trade and the environment should be kept utterly distinct ignore the reality of policymaking in a globalized and integrated economy. Yet, trade and environmental policy need not always be in conflict. Some moderate steps can be taken to address the inevitable intersection of trade and environmental policy at the international level.
Current global trade rules concerning trade-restrictive environmental regulation leave open the possibility of even well-designed MEAs being challenged through the WTO. Moreover, the narrow interpretation of existing WTO rules being read by successive dispute settlement panels undermines support for the WTO system in the environmental community. Clarifying the relationship between MEAs and WTO rules by exempting MEAs that meet certain conditions from WTO challenge would be one step in the right direction. Taking this step would indicate that the WTO system supports multilateral attempts to protect the environment, would encourage future MEAs in other areas, and would help rebuild support for the WTO system among mainstream environmentalists. All this would be achieved without adversely impacting free trade and the economic growth that it promotes.
Notes
1. This, of course, ignores the few cases where the international movement of goods itself harms the environment (e.g., increased use of fossil fuels by greater numbers of trucks).
2. The U.S. Endangered Species Act (for turtles) and the Marine Mammal Protection Act (for dolphins).
3. There are also some bilateral and historical treaties restricting trade in polar bears, whaling equipment, and certain fish. For a detailed list of all historical treaties involving trade measures see, "The Use of Trade Measures in International Regimes," November 1997, Steve Charnovitz, Director, Global Environment and Trade Study, Yale University.
4. Other exceptions include measures to meet emergency shortages of supplies or those to distinguish products made with prison labor.
5. Restricting trade also involves a welfare cost associated with a market distortion. In practice, several factors need to be considered. Is there a better direct regulation? What is the welfare cost of restricting trade? And what is the environmental benefit?
6. Some commentators have suggested that a neutral third party, such as the International Court of Justice, should arbitrate where disputes between MEAs and WTO rules occur since the WTO dispute settlement process is seen as being biased in favor of trade advocates and against environmental concerns.
7. An amendment to the Final Act requires a two-thirds majority of WTO members, whereas a decision only requires a simple majority.
8. Many developing countries are concerned that small groups of developed countries would use WTO-sanctioned MEAs to restrict imports from developing countries with different (lower) environmental regulations and standards.
9. Side agreements are only binding on those countries that formally adopt them and not on all WTO members.
10. Some commentators argue that permitting trade sanctions for MEA violations would open the door to trade sanctions for a whole host of other reasons--such as human rights, religious grounds, high domestic unemployment, etc. This would then "undo" the liberalization achieved since World War II under the GATT/WTO system.
11. Again, this is based on the premise that trade restrictions are an indirect, sub-optimal solution. A better, more direct approach would be for these countries to improve their own environmental regulation and to maintain mutually beneficial trade.

Jenny Bates is the trade and economics policy analyst for the Progressive Policy Institute.