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CHAPTER 7:
SUSTAINABLE DEVELOPMENT AND THE ENVIRONMENT
The issues of global survival ... dwarf the petty mercantile concerns
of the free traders. But the free traders got all the tools to ensure compliance.
... [W]e have the power to embarrass, and that's all. The imbalance between
effective ... trade rules and weak global environmental agreements would
not be fatal if the trade issues and environmental issues stayed neatly
in separate boxes. But the world is considerably more messy ... If corporate
interests fail to thwart an environmental regulation at the domestic level,
the GATT and NAFTA provide another route of attack. One man's environmental
regulation is another man's non-tariff trade barrier. [Elizabeth May, 29:1555]
The Economy-Environment Nexus
The environment happens to be our, as well as other species' life support
system, functioning as a resource supplier, waste assimilator and direct
source of aesthetic value. These functions are carried out in what can
be conveniently called a closed economic system in which everything is
an input into everything else. This is a simple fact flowing from the first
law of thermodynamics, wherein we cannot create or destroy energy; it can
only be converted or dissipated into some other form, and, therefore, all
natural resource exploitation activity ultimately ends up or remains in
the environment in the form of waste until assimilated. When we find the
appropriate balance between the harvest and natural regeneration rates
of our renewable resources and keep the consequent waste flows within the
assimilative capacity of the environment, it can be said that we have achieved
"sustainable development." Under these conditions, the natural
state of the environment can be maintained indefinitely for future generations
(who will hopefully not squander them).
Identifying and describing sustainable development in such a general
way is one thing, achieving it is quite another. For instance, market systems
obtain an efficient allocation of resources, man-made or environmental,
when the prices of all resources reflect their scarcity values, which would
include the costs related to the right to use our common life support system.
Put another way, the pollution costs of economic activities must be factored
into the pricing of resources, otherwise there is little incentive to economize
and tame our polluting ways. In general, a policy of free trade is better
able to complement the marketplace in achieving this allocative objective
- in fact, it extends it across the globe - as tariffs and non-tariff barriers
discriminate against the efficient use of resources, and, obviously, the
inefficient use of resources is neither friendly to the economy or the
environment.
Since economic activity first began, but particularly since the industrial
revolution, man has been able to exploit most natural resources on a grand
scale without directly paying for the life support functions undertaken
by the environment. We have been able to do so because the environment
is, in most situations, common property and free for the taking. The world's
economy has, therefore, benefited from an environmental subsidy, resulting
in the over-exploitation of natural resources and often leading to excessive
air, water and solid waste pollution, the breakdown of existing ecological
systems, the destruction of wildlife habitat and species extinction. Left
unchecked, the life support activity undertaken by nature will degrade,
possibly in certain locations to a point beyond repair or restoration in
our and many future generations' lifetimes.
Governments of all political stripes have, therefore, chosen to step
in and supplement the market in a variety of ways to achieve a better environmental
result, using command-and-control instruments (mandatory pollution abatement
technologies, regulated effluent discharge rates, toxic substances disposal
rules and direct funding of recycling programs) as well as market-based
instruments (transferable pollution permit or quota systems and tax-cum-subsidies).
On the international front, governments have committed to improving the
environment through several recently signed multilateral environmental
agreements (MEAs). Thus, in the name of protecting the environment, human
health and all life-forms, governments have interrupted the marketplace
and substituted private-sector value judgments of resource scarcities with
their own, with varying degrees of allocative success.
The nexus between the economy and the environment is unquestionably
complex and dynamic - ignorance abounds. Getting and maintaining a firm
handle on economic-ecological interaction has become a perennial social
concern. About all that can be said with some acceptable measure of confidence
is that organisms, humans included, are not only the result of, but are
also the causes of, their environmental habitats and their changes. From
an economic perspective, then, without accurate cost estimates of the environmental
damage inflicted by our behaviour, but more importantly by our industrial
activities, and more certainty on their linkages, the possibility of market
failure (i.e. the Exxon Valdez fiasco), on the one hand, and government
failure (i.e. the commercial East Coast cod fishery collapse), on the other,
will inevitably persist. Indeed, it is hard to put a finger on what institutions
best preserve the environment and its assimilative capacity without better
knowledge.
Trade and Environment Policies in Perspective
There is no inherent conflict between the trade policy objective of
efficient allocation of global resources and the environmental policy objective
of sustainable development. They are complementary in theory and when properly
put into practice. Indeed, apart from eliminating trade-distorting and
efficiency-impairing tariff and non-tariff barriers, trade institutions
have frowned on subsidies, particularly export subsidies, and have worked
progressively to reduce and eliminate them. These measures are widespread
in agriculture and fishing sectors, where excessive production capacities
have built up over time yielding adverse environmental impacts on soil
quality and fish stocks.
Liberalizing trade in environmental goods and services provides yet
another positive cleavage between international trade and the environment,
whereby a policy of free trade lowers the costs to governments of pursuing
quality improvements in environmental infrastructure. Investment liberalization
also makes it possible for firms from developed countries to export their
more environmentally-sensitive production processes and "state of
the art" managerial practices to developing countries that cannot
afford them.
Finally, trade liberalization fosters economic growth for developed
and developing countries alike. The wealth generated by having greater
access to foreign markets and more efficient production promotes the ability
of countries to develop and maintain sustainable development policies.
Wealth and environmental protection are clearly related - positively so
- as the wealthier countries have demonstrated by their willingness to
preserve nature as they have come to know it for personal health reasons,
as well as for its aesthetic beauty in the advent of the burgeoning eco-tourist
industry.
While nobody appearing before the Committee disputed these compatibilities,
some witnesses feared the "race to the bottom" scenario: domestic
environmental standards would be lowered or suffer lax enforcement in the
wake of companies shifting production locations and jobs to the jurisdictions
with lower environmental standards and lax enforcement. Though the Committee
has its doubts. The Committee refers to the Dun and Bradstreet study, which
found that 80% of the Canadian companies surveyed spent between 0-2% of
their budgets on environmental protection. A similar study, for the United
States Trade Representative found that pollution abatement costs average
about 1.1% of value-added for all United States industries, and 86% of
all industries have abatement costs of 2% or less.1
When one further factors in the observed industrial clustering phenomenon
(for example, the new high-tech companies in Kanata, Ontario, steel companies
in Hamilton, Ontario, and Pittsburgh, Pennsylvania, and film studios in
Hollywood, California) which likely stems from extant agglomeration economies
that appear to dominate pollution abatement cost considerations, the Committee
is not surprised that these critics could not provide any evidence of environmental
migrant companies.
Again, while no one disputed the compatibility between a policy of free
trade and sustainable development, there was also no shortage of criticism
levelled at trade experts with regard to their competency in handling complex
environmental policy matters. Even when sufficient information of the trade-environment
issues existed, trade experts invariably sided with trade priorities over
those of the environment whenever there was a conflict. Indeed, these new
trade deals provide industry with the added ability of challenging existing
environmental measures.
The first was a Venezuelan challenge against measures under the U.S.
Clean Air Act to reduce emissions for reformulated gasoline. The challenge
was brought by the Venezuelan government, but the real pressure to change
the regulation came from the subsidiaries of the same multinational oil
and gas companies that had failed to keep the regulation out in Washington.
The challenge to the WTO provided another route of attack. It succeeded,
and as a result U.S. air is dirtier. [Elizabeth May, 29:1600]
These actions, as opposed to claims of being supportive of environmental
issues, led many witnesses to the conclusion that the existing trade institutions,
most notably the World Trade Organization (WTO) and the North American
Free Trade Agreement (NAFTA), are not environmentally friendly.
Institutional Management of Trade and Environment Issues
Throughout the Committee's hearings there was considerable reference
to trade court rulings involving environmental issues, perhaps none more
forcefully expressed than the following:
[U]nder the World Trade Organization, we have seen the tuna-dolphin
case, the turtle-shrimp case, the beef hormone case, and under NAFTA the
raw log export case - Canada cannot insist on controls against the export
of raw logs to keep jobs in Canada and reduce stresses on our forests.
Under the FTA, the salmon-herring case similarly said that Canada could
not ban the export of unprocessed salmon and herring, even though it had
importance in conserving fish stocks and protecting jobs. [Elizabeth May,
29:1600]
By and large, this Committee does not quarrel with the decisions taken
by trade courts in these cases and takes issue with these criticisms. The
beef hormone, tuna-dolphin and turtle-shrimp cases involved a potential
non-tariff trade barrier disguised as a health or environmental protection
measure that was clearly an issue for the trade courts to sort out. The
beef hormone case depended, of course, on the corroborating scientific
evidence and the appropriate precautionary principle and, in the end, the
courts decided in favour of Canada and the United States and against the
European Union's import ban. The tuna-dolphin and turtle-shrimp cases again
involved a powerful country - this time the United States - that imposed
a ban on imports that infringed on a foreign country's sovereignty to establish
environmental standards appropriate to it. It must be remembered that the
quintessential issue for trade courts is not whether the activity in question
adversely affects the environment - almost all industrial and resource
exploitation activities adversely affect the environment - but whether
these specific fishing methods are distorting trade through non-conformity
with the environmental standards that the country has established and to
which it is contractually committed.
Furthermore, the Committee is not at all surprised that trade courts
sided against the two Canadian resource cases. The fact that these policies
were put in place to protect domestic jobs and value-added commerce, something
that was openly conceded, should have raised red flags. Banning the export
of unprocessed logs and fish may have been acceptable environmental policies
in the past when forest practices did not reflect "sustainable yield,"
let alone "sustainable development," principles and total allowable
catches, or TACs as they are called in fishing circles, did not accurately
reflect fish stock and recruitment estimates, respectively. However, within
the confines of today's state of the art resource management tools and
practices, these policies would obviously be viewed by trade courts as
purely protectionist, discriminatory and in violation of national treatment
commitments. These environments could clearly have been protected by other,
non-discriminatory means, as they are elsewhere in Canada and across the
world.
As a concluding comment on these cases, the Committee would have the
public understand that a trade court decision to strike down an environmental
or health measure deemed to be discriminatory and contrary to international
commitments is not the end of the issue. The offending party has three
courses of action and one course of inaction left open to it: replace the
discriminatory environmental measure with alternative non-discriminatory
measures; negotiate a compromise with the agrieved parties; simply revoke
the discriminatory measure; or it could do nothing, and retain the offending
measure while accepting retaliation of "equivalent commercial effect."
In two of these four options, there is no apparent, direct or indirect,
environmental or health implication; only in the case of a negotiated compromise
or in the failure to replace the measure is there an environmental or health
implication, but the sovereign government making this choice remains answerable
to its electorate - an important issue for environmental protection to
which the Committee will return below.
Mutually consistent policy instruments, of course, require coordination
between international trade and environment institutions, which appears
to be lacking, given some of the case references above. Although a satisfactory
explanation was advanced:
I think the difficulty we have with respect to three multilateral environmental
agreements, for example, which at first blush appear to have trade provisions
within them that are not in accord with the provisions of the GATT but
are not tested ... is that members of those environmental agreements do
not have a dispute settlement process within their own agreement. I'm thinking
of Basle, for example, which does not have its own dispute settlement process.
That is unfortunate, because if there is a disagreement between nations
at the end of the day and they are forced to go to the World Trade Organization,
for example, they will not necessarily be in front of environmental experts;
they will be in front of trade experts. [Gordon Peeling, 30:1705]
Virtually all environmentalists appearing before the Committee confirmed
this fact and complained about the lack of enforceability of MEAs.
The largest ever summit of world leaders took place in June 1992 in
Rio de Janeiro, with commitments made to protect global climate from disastrous
destabilization caused by greenhouse gases, to protect the world's genetic
and species and ecosystem diversity, to increasing global aid flows to
assist the developing world, and to the precautionary principle to ensure
the protection of health and well-being of humans and our life support
systems. But seven years after Rio, those multilateral environmental agreements,
or MEAs ..., are notable for the failure of many governments to honour
their commitments.
Meanwhile, since 1992, the World Trade Organization, which did not even
exist at the time of Rio, has achieved an impressive record of enforcing
its trade regime. The new implementing agency for the GATT, created through
the long Uruguay Round of multilateral trade negotiations, has been obeyed,
and where failure to meet its terms is suspected, trade disputes and effective,
swift, and merciless trade sanctions follow. [Elizabeth May, 29:1555]
As many witnesses suggested, there appears to be a lack of political
will to deal with environmental issues at the international level. Trade
courts put in place to enforce trade agreements should not be made scapegoats
when unenforceable MEAs fail to protect the environment; although an admittedly
less effective policy complement has emerged since the NAFTA:
That's why we look at sidebars. ... We think there are many benefits
that can arise out of these agreements and, indeed, out of the overall
promotion of trade liberalization. We think that with economic development,
the expansion of trade, job creation, the new generation of wealth, and
the ability of governments to capture additional rents. ... It all leads
to a strengthening of institutions, which can then play out in improved
environmental performance and enforcement of environmental regulations
and health, safety ... and we believe that those benefits outweigh the
cost. [Gordon Peeling, 30:1705]
The promotion of environmental and labour standards should be considered
as separate and distinct issues from the FTAA investment or trade agreement
and should be treated on a parallel track, i.e. as side-bar agreements.
[Gordon Peeling, 30:1615]
These "sidebars" can partially correct for the lack of enforceability
of MEAs and provide some balance between trade and environment objectives.
Some basic principles were advanced:
The NAFTA regime does indeed work in accomplishing the sustainable development
win-win of trade liberalization, combating protectionism in our major markets
abroad, and also providing ecological protection and enhancement. ... First,
we need to focus on preambular principles, the basic normative aspirations
of the regime itself. And here, ... it is worth noting that the core NAFTA
trade text ... affirms at the beginning that the overall goal, amongst
some others, of the NAFTA trade liberalization is the promotion of sustainable
development and the strengthening of environmental laws and protection.
Trade liberalization is a means to this higher end, so says the core NAFTA
text. Secondly, the core NAFTA text also affirms the primacy of multilateral
environmental agreements, some with trade-restricting provisions, over
the trade liberalization brought by NAFTA itself. And here, I think, we
have to carry that principle forward and look more sharply into the multilateral
realm. ... Thirdly, environmental enforcement is a complex topic. Canada
did succeed in the NAFTA architecture in saying we would not allow broad-based
trade restrictions to be used to enforce the environmental objectives of
the agreement. Mexico and the United States were unable to escape that
threat to the basic thrust of the trade liberalization regime. [John Kirton,
122:940-945]
Environmentalists, however, are not impressed with the current design
of these supplementary environmental agreements.
I have trouble seeing any concrete benefit that has yet been achieved
by the NAFTA environmental side agreement. In the time that the commission
has existed, it has issued two reports that have been of benefit by identifying
major polluting jurisdictions in North America ... Aside from that ...
one doesn't see much achievement. I simply don't think that's the way to
go, and I reiterate that if you read the agreements and see the provisions
of the agreement that bind government's capacity to set standards, that's
not going to be fixed by any kind of side agreement. [Michelle Swenarchuk,
30:1730]
If there is an incompatibility between trade and the environment, as
may have been borne out in the Venezuela-U.S. Clean Air Act and
the beef hormone cases, it lies with the policy instruments and supporting
scientific knowledge. The Committee recommends:
11. That the Government of Canada seek to ensure that adequate national
environmental standards and norms established in applicable international
agreements are respected throughout the Americas. That the Government of
Canada, in negotiating the terms of the Free Trade Area of the Americas
agreement, work towards clarifying the rules to uphold obligations under
multilateral environmental agreements and provide for better multilateral
disciplines governing trade-related environmental and health measures.
And
12. That the Government of Canada seek to ensure that trade officials
have access to the most up-to-date scientific environmental data.
The Committee was provided with conflicting advice on the rules that
should guide an FTAA environmental accord. On one hand:
Canada [should] strive toward the clarification of existing rules, and
I'm thinking here of the trade and environment interface. The transparent
development and application of environmentally based standards and other
measures should be the goal while, at the same time, they disallow unwarranted
discrimination or unilateral extraterritoriality with respect to production
processes. ... [T]he precautionary principle [is supported] where international
technical regulations or standards do not exist or are inappropriate, provided
that the alternative domestic regulations or standards fulfil an assessment
of risk and provided that this risk is based on sound science and technical
evidence, with the scientific information to be gathered within a reasonable
period of time. [Gordon Peeling, 30:1610-1615]
On the other:
[W]e will draw attention to two environment-related trade matters only.
The first concerns process and production methods, PPMs, which we believe
need to be included in WTO deliberations as a "new issue." PPMs
are presently not taken into consideration by the WTO. In other words,
an importing country cannot discriminate on goods that are manufactured
in an environmentally-destructive fashion. With its almost exclusive focus
on the physical characteristics of a good, the WTO is, we believe, at odds
with efforts to create rules of international commerce that encourage sustainable
production and consumption. The current WTO interpretation on PPMs seems
very much to protect producers rather than the public at large. We believe
the process and production methods used to produce a good to be a key environmental
concern that should in certain carefully defined circumstances be valid
grounds for restricting imports. [Simon Rosenblum, 122:1215]
Clearly, environmentalists would criticize the first set of opinions
above for maintaining the status quo in terms of the burden of scientific
proof, which is placed on those promulgating health and environmental standards,
as well as in adopting the much more narrow product characteristics basis,
rather than the full production-consumption cycle, for evaluating environmental
implications. However, the Committee is convinced that, if one were to
step back from all the confusing detail and reflect on the broader issues
at play, one would conclude that this approach provides greater administrative
flexibility for countries to pursue their own environmental priorities,
which may not be those of others. Consider the following situation which
is likely to be a sign of the times for the future in sustainable development
decision making:
Let's all just take a decision under the World Trade Organization ...
and ban the use of lead in gasoline. ... That bears a certain cost, and
if you were to look at some large southeast Asian nation ... their issue
for health is potable water for a population; they're incurring so many
deaths per annum. ... That is their health priority ... and lead in gasoline
is about 110 on their health issues list. How can they possibly move it
up? They don't have the financial resources, and it would be at the expense
of one of those other ... much more important issues. [Gordon Peeling,
30:1715]
Some witnesses clearly recognized the superiority of this approach:
On the issue of trade and national environmental responsibility, it's
our strongly held view that Canada's position ... must in no way undermine
the sovereign ability of nations to manage their own natural resources
and impose environmental regulations designed to protect these resources.
... The issue is one that requires a delicate balance. On the one hand,
environmental concerns should not be used as a protectionist measure to
impede or circumvent free trade provisions. On the other hand, harmonization
of national objectives through multilateral environment agreements must
take place in a manner that is cognizant of and integrated with the international
trade regime. [Colin Isaacs, 110:915]
The Committee agrees that greater flexibility in the establishment of
domestic priorities will not only prevent the use of environmental measures
as disguised trade protectionism, it will also bring higher standards for
the environment and we, therefore, recommend:
13. That the Government of Canada ensure that the rules governing
a Free Trade Area of the Americas agreement do not in any way impair the
Government's sovereign right to regulate in the public interest.
In the absence of political will to enforce MEAs, it appears that such
a regime will best resolve the conflict between trade and environmental
objectives.
1 NAFTA
Environmental Review Committee, North American Free Trade Agreement:
Canadian Environmental Review, Government of Canada, Ottawa, October
1992, p. 62; and Office of the United States Trade Representative, Review
of U.S.-Mexico Environmental Issues, Washington, D.C., February 25,
1992.