GATT Trade Rules and the Environment.

Author: Mikesell, Raymond F.

Source: Contemporary Economic Policy. 11(4): 14-18. 1993 Oct.

Abstract

The alleged conflict between the General Agreement on Tariffs and Trade (GATT) trade rules and the protection of the environment by GATT members is examined. The principal objective of the GATT rules on non-tariff trade restrictions is to eliminate government interventions that promote the commercial interests of domestic producers and consumers in a way that discriminates against foreign producers and consumers in either domestic or international markets. This objective fundamentally does not conflict with protecting GATT members' domestic environment or the global environment. The GATT should explicitly recognize the objectives of environmental protection and natural resource conservation, either by an amendment to the GATT articles or by resolution of the GATT Council. GATT members, in the interest of protecting their national and the global environment, should be free to impose restrictions on imports or exports so long as the interventions conform to certain conditions.

Full Text

I. INTRODUCTION

This paper focuses on the relationship between trade rules contained in the General Agreement on Tariffs and Trade (GATT) and the proposed North American Free Trade Agreement (NAFTA), and the ability of the signatories to these agreements to protect their own and the global environment.

The public debate on this question involving the major conservation organizations, on the one hand, and the GATT secretariat and the U.S. trade representative, on the other, often gives the impression that free trade and the environment are conflicting objectives. The position of this paper is that a viable set of trade rules can establish the essential conditions for competitive international commerce without seriously impairing the ability of nations to protect the environment.(1)

One can concentrate on the GATT trade rules since most rules alleged to conflict with trade restrictions on behalf of the environment also apply to NAFTA. First, consider exactly how the GATT rules cone strain members from applying trade restrictions, or from taking other actions that affect international trade in the interest of the environment. A recent GATT secretariat report (GATT 1992) asserts that GATT rules do not prevent a country from protecting its own environment against damage from imported products, so long as the measures taken do not discriminate between domestic and imported products. However, the report states that restricting imports alleged to be harmful to the domestic environment must be based on "scientific evidence" of such harm, in order to prevent countries from banning harmless imports for reasons of protection. Some environmental organizations have rejected this condition as interference with domestic policy. More importantly, however, the report asserts that the GATT rules prevent members from making access to their own markets dependent on the domestic environmental policies or practices of the exporting country.

This constraint would apply to protecting the global commons (for example, ozone depletion) and to avoiding "unfair" competition from goods produced in other countries under low or nonexistent environmental standards.

Environmentalists believe that the GATT trade rules should permit restrictions on trade in endangered species and in products, such as chlorofluorocarbons (CFCs), that adversely affect the global environment. According to the secretariat report, in the absence of a change in theGATT rules, or a waiver of the specific GATT obligation (requiring a two-thirds majority vote), future dispute panels might interpret GATT rules so as to deny trade restrictions for these purposes. The report does point out that members can apply restrictions on domestic sales of endangered species without regard to the source of the product. Domestic regulations could deal with some of the conflicts between actions taken in the interest of the environment and GATT rules. For example, simply prohibiting domestic sales or ownership could effectively restrict imports of ivory, rhinoceros horns, or pandas. However, using this means to restrict imports of tropical forest lumber or wood products from countries that are wantonly destroying their forests presumably would require banning domestic trade in all tropical wood.

II. TRADE RULES AND THE PROTECTION OF THE GLOBAL COMMONS

Over the past decade, the GATT's dispute settlement process has adjudicated only five conflicts over trade restrictions in the interest of environmental protection alleged to be in violation of GATT rules. Three of these cases had to do with fish products. The best known concerned the U.S. ban on imports of yellowfin tuna from Mexico on the grounds that Mexican fishermen violated the U.S. Marine Mammal Protection Act, which limits dolphin kills. The Mexican government argued that the U.S. embargo on yellowfin tuna violated GATT rules. The United States countered that article III of the GATT permitting national treatment allowed the embargo, since the U.S. act applies to both U.S. and foreign fishing practices relating to dolphin catches. However, the GATT panel found in favor of Mexico because GATT rules do not permit a member to ban imports merely because the exporting country pursues environmental policies different from its own. The GATT secretariat report argued that permitting such actions would greatly weaken, if not destroy, the GATT. Members might attempt to impose their own standards on other members, and this would lead to widespread retaliation with a consequent general breakdown of GATT rules. The GATT secretariat report (1992) includes a summary of the U.S.-Mexico tuna-dolphin dispute.

The GATT panel decision led the U.S. environmental community to charge that adherence to GATT rules would render nations powerless to oppose crimes against the global commons. If negotiated today, the GATT might well provide exceptions to the rules in the interest of protecting the global environment. For example, article XXI of the GATT provides a general exception to "traffic in arms, ammunitions and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment." Restricting exports of materials or equipment that would assist Cuba (a GATT member) in making a nuclear bomb is not a violation of the GATT, but restricting trade in products using CFCs, which could cause great harm to global welfare, may be a violation. The GATT also allows specific exemption to its rules for

"the products of prison labor" (article XX), which has to do with how the products are made. The point is that the GATT recognizes some international objectives that override adherence to basic GATT rules. Conservationists believe that environmental protection also should take precedence over trade rules.

III. CAN GATT MEMBERS PROTECT THE ENVIRONMENT WITHOUT TRADE DISCRIMINATION?

Can amending the GATT permit members to use trade intervention to protect the environment while at the same time provide a viable set of rules for promoting free trade? Before answering this question, one must review briefly the basic principles of the GATT. The GATT is not an agreement mandating free trade. It is mainly a system of trade rules--with many exceptions--based on the premise that governments should not intervene to promote the commercial interests of their producers or consumers in a manner that would discriminate against foreign producers or consumers in either domestic or international markets. Government intervention in this context includes not only

import restrictions, but subsidies to domestic producers and quotas or bans on exports in the interest of resource conservation.

Do circumstances exist under which rules against such discrimination would prevent GATT members from protecting their own or the global environment? A frequently cited case is that of a GATT member imposing restrictions on imports produced under environmental standards substantially lower than domestic standards. The grounds for the restrictions were that the country's domestic producers face "unfair competition" from imports. The CAT member could allege that domestic producers might move their operations to "pollution havens" overseas. Pearson (1987),

Leonard (1988), Walter (1985), and Tobey (1990) find little evidence that stringent environmental control measures push industries outside the United States. Nevertheless, environmental groups have used this argument against both the GATT and the proposed NAFTA. Some environmentalists have justified using countervailing duties on imports produced under low environmental standards on the grounds that not requiring producers to internalize their pollution subsidizes these products Article XVI of the GATT does permit members to impose countervailing duties on imports to offset subsidies paid to foreign exporters. However, the GATT secretariat finds that countervailing duties on imports for environmental purposes violates the GATT, since failure to internalize environmental costs is not an overt subsidy.

The argument for treating non-internalized adverse environmental costs as a subsidy does have a certain logic to it. However, the argument for imposing countervailing duties on imports in all such cases basically is an argument for trade protection rather than for protecting the environment.

Every country produces many commodities having external impacts that are not internalized, or at least not to the degree they are in other countries. If the GATT permitted its members to impose some form of compensatory import charge to offset every difference in monetary costs between domestic and foreign production, a viable multilateral trade agreement would be impossible. Labor conditions--such as health, safety rules, and retirement benefits--differ greatly among countries. Countries at a lower stage of development are likely to have environmental and safety standards less strict than those in developed countries. Trade and foreign investment tend to reduce these disparities, but an attempt to force conformity in environmental standards by means of trade discrimination does not appear to be an effective way to promote either trade or the environment. The GATT secretariat report argues that allowing members to impose trade restrictions against other members because of their environmental practices would mean giving developed countries the power to dictate environmental policies to developing countries. However, the rules should allow exceptions in cases where the practices pose significant harm to the global environment and are subject to an international agreement or U.N. resolution. In such cases, international concensus rather than differences between environmental standards in individual countries would be the basis for trade restrictions. GATT members also should be free to impose restrictions on imports produced under conditions creating trans-border pollution. This is in line with the fundamental right of nations to protect their own environment. Thus, a country should not be forced to buy copper from a smelter across the border that is polluting its atmosphere. However, countries whose exports are affected by these restrictions should have the right to object if they believe that the alleged environmental damage cannot justify the restrictions but that the restrictions merely provide commercial protection to domestic producers. The GATT dispute mechanism should decide such cases.

Environmental organizations have charged that GATT rules prevent members from taking actions to conserve their natural resources by restricting exports or by paying farmers not to produce crops in order to restore the soil. However, the GATT does permit members to make direct payments to farmers for soil conservation so long as the payments are not related to the production of specific crops. Also, article XX permits members to impose quantitative restrictions on exports in the interest of resource conservation so long as they proportionately restrict domestic consumption. Thus, bans on exporting logs in the interest of conservation presumably violates article XX of the GATT, unless domestic log consumers also face restrictions. In fact, Japan has complained that current U.S. restrictions on log exports violate GATT rules. The rationale for the GATT rule on exports of natural resource products is the same as that used by Adam Smith (1775) when he opposed the British practice of restricting exports of wool to foreign cloth and textile manufacturers. Such actions discriminate against foreign producers by increasing their raw material prices relative to those paid by domestic producers. Therefore, if the purpose of the U.S. curtailment of Northwest timber harvests is to conserve the resource and not to provide domestic lumber producers with a competitive advantage over Japan, the U.S. also should be willing to restrict domestic lumber consumption.

IV. CONCLUSIONS

The argument here is that restrictions designed to protect the environment and rules against trade discrimination do not necessarily conflict. The objective of environmental protection and natural resource conservation should be recognized explicitly in the GATT, either by an amendment to the

articles or by a resolution of the GATT council. Such recognition does not sanction trade discrimination so long as domestic and foreign producers and consumers are subject to the same rules. The GATT should contain a statement of the conditions under which trade intervention in the interest of the environment and natural resource protection would be in accordance with GATT rules, and the dispute settlement process should observe these conditions.

GATT members should be free to impose restrictions on imports or exports in the interest of protecting their national and the global environment so long as the interventions conform to the following conditions: (i) The restrictions do not have the intent or significant effect of discriminating against foreign producers or consumers in favor of domestic ones. (ii) The restrictions are in the interest of protecting the global environment, broadly interpreted to include the global commons (oceans, atmosphere and space), and wildlife threatened by extinction, where these global concerns are widely shared by other nations-as indicated by international agreement or resolution--and do not simply reflect unique and parochial views of the individual country imposing the restriction. (iii) The restrictions do not force trading partners to adopt burdensome and unreasonable environmental protection standards that may be similar to those of the country imposing the restrictions but that have no global or transborder pollution implications.

1. Among the principal environmental organizations that have been critical of both the GATT and the NAFTA are the Environmental Defense Fund, the Natural Resources Defense Council, and the Sierra Club. See, for example, Trade and the Environment (a Critique of the GATT secretariat

report), Sierra Club, Washington, D.C., April 1992 (processed); and text of a letter to Ambassador Carla A. Hills, U.S. Trade Representative, sent by Justin Ward, Senior Resource Specialist, Natural Resources Dense Council, Washington, D.C., January 13, 1992.

REFERENCES

Daly, H. E. and . B. Cobb, For the Common Good, Beacon Press, Boston, Mass., 1989.

General Agreement on Tariffs and Trade, "Trade and the Environment," in International Trade 1940-1991, GATT, Geneva, Switzerland, 1992,19-43.

Leonard, H. Jeffrey, Pollution and the Struggle for the World Product. Cambridge University Press, Cambridge, England, 1988.

Pearson, Charles S. (ed.), Multinational Corporations, Environment, and the Third World, Duke University Press, Durham, N.C., for World Resources Institute, 1987.

Smith, Adam, Wealth of Nations, Vol. II, Dutton and Co., New York, 1775 and 1910, 142-146.

Tobey, James A., "The Effects of Domestic Environmental Policies on Patterns of World Trade: Empirical Tests," Kyklos, 43:2, 1990, 191-209.

Walter, Ingo, "Environmental Control and Patterns of International Trade and Investment," Banca Nazionale del Lavoro Quarterly Review, March 1972, 382-383.

Raymond F. Mikesell, Professor, Department of Economics, University of Oregon, Eugene. This is a revised version of a paper presented at the Western Economic Association International Annual Conference, San Francisco, Calif., July 10, 1992, in a session organized by the author.