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lead.jpg (22302 bytes)    Volume 4 
   Number 2
   28 May 1999 

SIX EASY PIECES: FIVE THINGS THE WTO SHOULD DO — AND ONE IT SHOULD NOT
IISD's Trade and Sustainable Development Program


For the
WTO HIGH LEVEL SYMPOSIA ON TRADE AND ENVIRONMENT
AND TRADE AND DEVELOPMENT

The High-Level Meeting on Trade and Environment (15-16 March) is a response to widespread frustration in many countries and in civil society at the WTO’s failure to come to grips with the environmental dimension of trade liberalization. There is growing evidence that this failure is turning important segments of society, particularly in industrialized countries, against the trading system as currently organized, raising a serious obstacle in the road of further liberalization and posing questions that could stall or dim prospects for the so-called Millennium Round.

The High-Level Meeting on Trade and Development (17-18 March) is the result of a conviction, principally among developing countries, that political priority is systematically accorded to concerns that may well be of priority in rich countries, but which are lower on their list of concerns, though still present. It reflects the frustration felt by most developing countries that their chief concerns are routinely set aside to deal with issues closer to the hearts of Northern electorates. It also reflects disillusionment at the multilateral trading system’s failure to promote equity within and among societies, and thereby to help ensure that growth genuinely leads to development.

IISD is a Canadian-based international policy institute dedicated to the achievement of sustainable development. As such it is concerned both with the agenda of environment and of development in the WTO. On the occasion of these two historic meetings, IISD offers six ideas for consideration: five things to do—and one not to do.

 

1. Focus on Sustainable Development

The WTO Agreement opens with a ringing statement:

"Recognising that [the Member States’] relations in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment* and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development …"

While preambular language is weaker than the legally binding text that follows it in the agreements establishing the WTO, it nevertheless sets forth the vision and aspirations of the founders in establishing the "new and improved" successor to GATT in the wake of the Earth Summit in Rio. Unfortunately, the WTO has done little in its first four years to ensure that its actions match these aspirations, to ensure that trade liberalization leads not just to enrichment for some but to sustainable development for all.

The original mandate for the Committee on Trade and Environment (CTE) asked the Committee to

"…make appropriate recommendations on whether any modifications of the provisions of the multilateral trading system are required, compatible with the open, equitable and non-discriminatory nature of the system, as regards, in particular:

1) the need for rules to enhance the positive interaction between trade and environmental measures, for the promotion of sustainable development ..."

Establishing a Committee to debate the relationship between trade and environment shows that the WTO has accepted environmental concerns as a legitimate facet of the trade debate. But the limited technical nature of the Committee’s de facto mandate (examining only the impact of environmental regulation on trade, and not the reverse), and the near-total lack of progress in its four years of existence, suggest that the CTE in isolation is fundamentally incapable of adequately advancing the mandate for sustainable development in the WTO.

To make matters worse, the limited and inconclusive debate in the CTE is the only formal examination of any aspect of sustainability that has so far taken place within the regular work program of the WTO, and this has been confined to addressing environment rather than sustainable development. As IISD’s Winnipeg Principles for trade and sustainable development make clear, the distinction is important: sustainable development does seek environmental integrity, but holds as equally important the objectives of development and economic growth.

Sustainable development, not the easing of environment-related trade impacts, is the WTO’s preambular goal, and trade should represent an essential component of any move toward greater sustainability — to promote the rapid dissemination of more sustainable innovations, to avoid the support of unsustainable practices through protectionism, and to generate the resources needed to finance the transition to greater sustainability. But this requires a wider treatment of sustainable development concerns in many WTO bodies outside the CTE.

As argued in IISD’s 1996 WTO Assessment Report, sustainable development touches upon most organs of the WTO. The Organization’s work will, however, only promote sustainable development when the General Council regularly addresses the issue, requiring all subsidiary organs to submit reports on steps taken toward that goal.

 

The General Council of the WTO should commission the preparation of a "Sustainable Development Agenda" for the WTO. As a first step, the Council should authorize the Director General to establish a special high-level group of independent experts, modelled on the group of "14 wise men and women" that produced the Report of the High-level Advisory Group on the Environment to the Secretary General of OECD—"Guiding the Transition to Sustainable Development"—in November 1997. Such an independent group should prepare a report on the steps needed to achieve sustainable development in the multilateral trading system. An independent standing inspection panel (fashioned after the World Bank model) should be established with a mandate to produce a regular public report card that monitors progress toward this goal.

 

2. Focus on Sustainable Development in the South

The WTO’s most important contribution to sustainable development must come on the side of development and poverty alleviation. For this to occur, we must begin with the basic truth that economic liberalization, while necessary for sustainable development, is not sufficient.

Small developing economies in particular may be hamstrung by geographical, sectoral or institutional inflexibilities that cause liberalization to produce painful and protracted periods of transition. In these economies, experience has shown that economic openness must be properly staged, and accompanied by deliberate domestic policies to facilitate restructuring. Without such staging and accompanying measures liberalization may, at least in the short and medium term, actually work against growth, employment, poverty alleviation, and other components of sustainable development.

The measures traditionally invoked by trade negotiators to address such problems are either too blunt (simple transition periods for developing and least-developed countries) or rely on action from institutions which are not bound by WTO-negotiated promises of special and differential treatment.

 

The World Bank and the WTO should collaborate to design effective mechanisms of special and differential treatment, based on the clear lessons of five decades of development efforts. Such mechanisms, to be embedded in future negotiated commitments, should be flexible enough to take into account domestic realities such as levels of institutional and economic development, industrial structure and geography, and the resulting need for staging of trade obligations. And they should, where appropriate, involve inter-agency collaboration, and the participation of major private actors.

Even where trade liberalization succeeds in creating growth, the benefits of that growth are often poorly distributed. The structure of international product chains—the complex regimes which go from producers and processors through to point of sale—is such that larger rents are available to those who control the higher-value portion of chains, with gains from trade liberalization distributed accordingly. Product chains link countries in complex economic regimes, which reach deep into their social structure. Some countries are experiencing difficulty in drawing continuing benefit from their participation in open trade. It is time to reconsider the position of developing countries in global product chains, and how sustainable development might be promoted.

The WTO has traditionally argued that this is a matter best left to member states. But in the age of globalization, an organization responsible for trade can no longer escape responsibility for what occurs in international product chains. Escalating tariffs and a range of non-tariff barriers have long created impediments to the entry of developing country actors into high-value portions of these regimes. Such entry requires both innovation originating in developing countries and the reassessment of commodity markets.

Least developed countries are often heavily dependent on commodity production, but commodity prices have continued to decline and terms of trade have deteriorated markedly over the history of the GATT and WTO. Moreover, the price of commodities taken from the natural environment is usually subsidized at the expense of the environment itself. It is hard to conceive of sustainable development in these countries without stable commodity prices. These points were all made forcefully in UNEP’s recent Environment and Trade Report on global product chains.

 

The WTO, alone or in concert with UNCTAD, should undertake an assessment of the position of developing countries in global product chains, with particular attention to the least developed countries and commodity production. The WTO must recognize its responsibility for ensuring that trade-driven economic growth leads to sustainable development in all countries, and that it benefits both poor people and the environment.

 

3. A Standing Conference on Trade and Environment

The WTO—and indeed the other relevant intergovernmental organizations such as UNCTAD and UNEP—has been hindered by an insufficiently clear and forceful articulation of the environmental agenda with respect to the trade regime. This is attributable at least in part to the complex structure of international environmental management, involving a large number of regimes at many different levels of governance. The creation of a Standing Conference on Trade and Environment (SCTE), proposed by IUCN and IISD, would establish a forum in which the environmental interests in international trade might be articulated clearly and some initial priorities for action set. The SCTE is conceived as a light institutional structure—perhaps modelled on the Antarctic Treaty or the G7—not as a new international organization. It would gather the key environmental actors from government, convention secretariats, civil society and the private sector with an interest in trade policy, review policy objectives and proposals, and seek to formulate practical recommendations to be introduced to the WTO, to regimes for environmental management, and to other policy forums.

The SCTE would help fill the critical gaps in the WTO’s efforts to advance sustainable development. The issues that the CTE is addressing from a trade policy perspective, it would address from an environmental policy perspective, seeking to formulate realistic policy options which, if implemented, would contribute to greater harmony between trade and environment policy and help ensure that both contribute to sustainable development. Early issues on which SCTE efforts might help break the logjam in the CTE include the relation between the Multilateral Environmental Agreements (MEAs) and the trade regime, agreed criteria for application of Article XX exceptions, and many others.

There is no appetite at the international level for new bureaucracies, and even proposals for new forums for discussion are resisted. At the same time, without such an initiative it is difficult to imagine how environmental policy in respect of trade—currently dispersed among tens if not hundreds of organizations and processes—can gain the coherence necessary to influence trade policy positively, and to fully address the environmental concerns of the developing countries.

 

A Standing Committee on Trade and Environment should be convened. A short paper describing the SCTE and how it might work is available from IISD (see http://iisd.ca/trade/scte03.htm).

 

4. A WTO Agreement on Environment

Many of the conflicts that have emerged in the trade and environment debate concern environmental distinctions between otherwise "like" products in trade. Despite the unpopularity of the notion in trade policy circles, achieving sustainable development will nevertheless require a fair means of distinguishing between environmentally sound and environmentally destructive products in the marketplace, including on the basis of how they were produced. The ability to discriminate between products in this way is fundamental to giving market-based incentives that favour environmentally responsible production and consumption. The principle behind this type of discrimination is unassailable; the challenge is to develop a system of rules within which it could work without protectionist abuse.

Although securing an agreement within the WTO on acceptable grounds for discriminating between products on the basis of their environmental "footprint" would not be easy and must be regarded as a long-term aim, the lack of such an agreement is already causing difficulties. For example, experience in the dispute-settlement bodies suggests that determining the acceptability of such distinctions case by case entails several significant risks. The dispute-settlement process is burdened by decisions that require significant levels of environmental expertise. Decisions taken on a case-by-case basis will tend to attract repeated attention and conflict to the dispute-settlement process, even when they are correct. Ultimately, they may contribute to a significant weakening of the dispute-settlement process and the trade regime itself.

Paradoxically, a case-by-case approach creates incentives to develop discriminatory distinctions because they may escape scrutiny, because the dispute settlement process itself is time-consuming, and because the disputed measures can stay in place while the dispute is proceeding. This can, of course work both ways, as recent debate on the Appellate Body’s decision on the shrimp/turtle case has shown. Ultimately, though, the difficulty of an agreed structure of rules governing the use of environmental distinctions in trade may be outweighed by the risks of doing nothing.

 

The WTO General Council should consider the timeliness of a new WTO Agreement on Environment, and in preparation should invite the Secretariat to produce a paper examining options for such an agreement, possible contents of a negotiating text, and a timetable for negotiations, to be taken to the Ministerial Meeting in Seattle as a formal proposal. Such an agreement should aim to set out the rules governing discrimination among products on the basis of their environmental characteristics, as well as the rules needed to ensure that such measures do not constitute a hidden barrier to trade.

 

Continue Promoting Transparency and Participation

 

Since its establishment, and particularly in the last year or two, the WTO has taken significant and welcome steps to promote transparency and participation in its work, especially when compared with GATT, its predecessor. IISD urges that this process continue. There is still a long way to go before trade policy can be said to reflect a balanced compromise among the views of key stakeholders.

The WTO should look for appropriate ways to open its proceedings further. There is scope for creative professional input from civil society and other stakeholders, especially to the dispute-settlement process. And issues such as the 1999 review of Article 27.3 (b) of the TRIPs Agreement would benefit from input from organizations working on biodiversity, community knowledge and indigenous peoples’ priorities. Establishing better access to WTO documents, making the Committee on Trade and Environment somewhat more accessible, and creating events and forums where civil society and trade policy may interact are all welcome but insufficient steps.

It is wrong, however, for all the attention to be directed at the WTO when the principal problem lies at the national level, in the opaque processes that too often characterize trade policy development. In too many countries, national trade policy well reflects the interests of the commercial sector, but fails to take into account the interests of other groups in society. Now that the trade regime has extended its reach far beyond trade in goods, and now that trade has become so essential as a motor for economic growth, the formulation of trade policy should be correspondingly extended. National trade policy—and national positions taken at the WTO—should represent a careful balance among the legitimate interests of stakeholders in society. This is rarely the case.

 

The WTO should take further steps to improve transparency in its work, and should develop simple criteria and guidelines for domestic-level openness in developing national trade policy and positions. A process for preparing a working draft of such criteria and guidelines should be led by the International Centre for Trade and Sustainable Development, and should be available at the forthcoming Ministerial meeting of the WTO.

 

6. Do NOT Include Investment in the WTO

Despite the failure of the effort to negotiate one in the OECD, there is a need for a multilateral agreement on investment. Current patterns of foreign direct investment (FDI) are flawed; they concentrate too heavily in a few countries, and underfund the type of innovation, infrastructure and productive facilities that sustainable development demands. Clearly, the risks associated with investment in many developing countries exact severe financial penalties, and deprive many of the benefits of new technologies. A properly structured investment regime is needed to ensure that these risks become more predictable, that investment fosters sustainable development in a broader range of countries, and that it does not lead to undue environmental degradation.

The requirements of an investment regime are, however, structurally different from those for the liberalization of trade in goods or services. Productive investment has a long-term time horizon and can involve numerous changes over the lifetime of an investment, responding to new technologies, changing market opportunities and an evolving understanding of the consequences of an investment. A foreign investor acquires continuing rights in the host country, a kind of economic citizenship, and with these rights come obligations. The principles of most favoured nation and national treatment are insufficient to ensure that investment is handled fairly and equitably.

Furthermore, FDI, which is arguably trade related, is only a small part of a vast and complex system of marginally trade-related international capital flows and practices. Any attempt to bring institutional arrangements to bear on international investment would have to also deal with portfolio and speculative investment, inter-bank practices, hedge funds, derivatives, offshore investment havens, possible clearing houses, the lender of last resort question, and so on. The GATT/WTO structure is unsuitable for the development of the needed international investment regime, and its current strengths will be put at risk by attempts to extend it into this dynamic and conflictual area.

 

The international community should find a forum other than the WTO in which to negotiate a multilateral framework of rules governing international investment. An IISD paper setting out the arguments behind this recommendation is available.

 

Summary of Recommendations

1. Focus on Sustainable Development: The General Council of the WTO should commission the preparation of a WTO "Sustainable Development Agenda". As a first step, the Council should authorize the Director General to establish a special high-level group of independent experts, modelled on the group of "14 wise men and women" who produced the Report of the High-level Advisory Group on the Environment to the Secretary General of OECD. Such an independent group should prepare a report on the steps needed to achieve sustainable development in the multilateral trading system. An independent standing inspection panel (fashioned after the World Bank model) should be established with a mandate to produce a regular public report card that monitors progress toward this goal.

 

2. Focus on Sustainable Development in the South: The World Bank and the WTO should collaborate to design effective mechanisms of special and differential treatment, based on the clear lessons of five decades of development efforts. Such mechanisms, to be embedded in future negotiated commitments, should be flexible enough to take into account levels of institutional and economic development, industrial structure and geography, and the resulting need for staging of trade obligations. And they should, where appropriate, involve inter-agency collaboration, and the participation of major private actors.

The WTO, alone or in concert with UNCTAD, should undertake an assessment of the position of developing countries in global product chains, with particular attention to the least developed countries and commodity production. The WTO must recognize its responsibility for ensuring that trade-driven economic growth leads to sustainable development in all countries, and that it benefits both poor people and the environment.

 

3. A Standing Conference on Trade and Environment. A Standing Conference on Trade and Environment should be convened. A short paper describing the SCTE and how it might work is available from IISD (see http://iisd.ca/trade/scte03.htm).

 

4. A WTO Agreement on Environment. The WTO General Council should consider the timeliness of a WTO Agreement on Environment, and in preparation should invite the Secretariat to produce a paper examining options for such an agreement, possible contents of a negotiating text, and a timetable for negotiations, to be taken to the Ministerial in Seattle as a formal proposal. Such an agreement should set out rules governing discrimination among products on the basis of their environmental characteristics, as well as the rules needed to ensure that such measures do not constitute a hidden barrier to trade.

 

5. Continue Promoting Transparency and Participation. The WTO should take further steps to improve transparency in its work, and should develop simple criteria and guidelines for domestic-level openness in the development of national trade policy and positions. A process for preparing a working draft of such criteria and guidelines should be led by the International Centre for Trade and Sustainable Development, and should be available at the forthcoming Ministerial meeting of the WTO.

 

6. Do NOT Include Investment in the WTO. The international community should find a forum other than the WTO in which to negotiate a multilateral framework of rules governing international investment. An IISD paper setting out the arguments behind this recommendation is available.

 

REFERENCED READING

IISD. Trade and sustainable development principles (the "Winnipeg Principles"). Winnipeg: IISD, 1994.

IISD. The World Trade Organization and sustainable development: An independent assessment. Winnipeg: IISD, 1996.

von Moltke, Konrad et al. Global product chains: Northern consumers, Southern producers, and sustainability. UNEP Trade and Environment Series #17. Geneva: UNEP, 1998.

IISD/IUCN. "A standing conference on trade and environment: A proposal by the International Institute for Sustainable Development (IISD) and IUCN - The World Conservation Union." Available on IISDnet at: <http://iisd.ca/trade/scte03.htm>.

von Moltke, Konrad. An international investment regime? Issues of sustainability. Winnipeg: IISD (forthcoming).

 

IISD's Trade and Sustainable Development Program seeks to help harness international trade and investment as forces for sustainable development. In keeping with IISD's focus on North-South issues, the program has a special emphasis on the problems and concerns of developing countries in the trade and sustainable development debates.

 

International Institute for Sustainable Development

161 Portage Avenue East, 6th Floor

Winnipeg, Manitoba, Canada R3B 0Y4

Tel: +1 (204) 958-7700; Fax: +1 (204) 958-7710

E-mail: info@iisd.ca; Internet: http://iisd.ca