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Global Environment

Harmonizing Environment and Trade Policies

I. The Basic Perspective on "Environment and Trade"

1. The Basic Understanding of the Issue

(1)Interaction between Trade and Environment

(a)The effects of trade on the environment

Being a medium to link national economies, international trade per se is rarely the essential source of environmental problems. However, it can have both positive and negative effects, directly or indirectly, on the environment through its function to link demand and supply at the international level. These environmental effects can occur in the exporting country, importing country, or in the areas outside the trading countries (e.g. in the high seas, in a third country, on a global scale).

First, let us look at the positive environmental effects of international trade. Generally, free trade can promote efficient allocation of resources worldwide and contribute to enhancing people’s living standards through the expansion of production and consumption activities. Therefore, by reducing the inefficient use of resources, trade can have a positive effect on the environment. Also, trade can generate financial resources, which are necessary for dealing with environmental problems, especially in developing countries.

On the other hand, in cases where an appropriate environmental policy is lacking, there can be negative environmental effects associated with increased transport, international movement of hazardous substances, etc. In such cases, effects that are more indirect can result from an increase in natural resource use and the emission of pollutants and wastes associated with the expansion of economic activities. Furthermore, international trade can lead to environmental degradation by weakening certain economic activities, such as agriculture and forestry, which have beneficial environmental conservation functions.

(b) The effects of environmental policies on trade

There are cases where a country’s environmental policy involves trade restrictions. For example, a country may ban the export of logs to conserve its forest resources, or restricts the import of hazardous products to protect the life and health of its people, animals, and plants. Another example is CITES (the Convention on International Trade in Endangered Species of Wild Fauna and Flora; also known as "Washington Convention"), which puts restrictions on free trade based on a multilateral environment agreement.

It is also pointed out that some environmental policy measures, such as eco-labeling and recycling requirements, may have trade-restrictive effects on free trade, although they are not direct means of trade-restriction. On the other hand, there are arguments that having considerably lax environmental standards in comparison to other countries amounts to giving implicit subsidies to the domestic industries (so-called "eco-dumping"), or that polluting firms may move to so-called "pollution havens," i.e. those countries whose environmental standards are considerably lower than other countries.

(2)The Key Concept for Reconciling Environment and Trade
    - The Principle of Sustainable Development

As we have discussed above, environmental and trade policies influence each other. The issue of environment and trade can be seen as that of how to minimize the negative effects of trade on the environment while maximizing the beneficial effects of trade. At the same time, the issue is how to reconcile conflicting requirements arising from environmental and trade policies respectively. The guiding principle in this process should be the realization of "sustainable development"(3) that was agreed upon at the UNCED.(4)

The present situation is worrisome. Economic activities based on the developed economies' model, characterized by mass-production, mass-consumption and mass-discharge, are spreading worldwide while a large number of people are still suffering from poverty, food shortages, and diseases in developing countries. "Sustainable development," which is based on a long-term vision, promotes the idea that development should go hand in hand with the protection and conservation of the earth's ecosystems with a view to ensuring the prosperity of humankind across regions and over generations. Recognizing this, countries agreed at UNCED to make every effort to build a society where environmental protection and economic activities exist in harmony.

In Agenda 21 adopted at the UNCED, the importance of promoting sustainable development through trade is emphasized (chapter 2). In the preamble of the Agreement Establishing the WTO, "allowing for optimal use of the world’s resources in accordance with the objective of sustainable development" is mentioned and trade can be seen as a means to achieve it. It follows therefore that even if trade should be restricted in certain circumstances in order to achieve sustainable development, it should not be seen as contradicting the multilateral free trading system. In future, trade should aim at the optimal, not full, use of the world’s resources in order to ensure sustainable development.

In this connection, it should be kept in mind that behind economic activities in the market lies a corresponding material cycle between people and nature. As part of economic activity, trade also affects the world’s material cycle in various ways through the movement of resources and energy. Although there have been few attempts to discuss the issue of trade in terms of material cycle so far, it may become increasingly necessary to take up this issue in considering "environment and trade."

(3) The Role of Environmental Policy

One important thing in implementing environmental policies is to take various measures, under the recognition that production and consumption activities of goods and services are inevitably linked to the generation of various types of environmental pollution, to internalize environmental costs, i.e. the costs that the society would incur if there were environmental pollution. with a view to reducing pollution to an appropriate level. It should be noted that the concept of environmental pollution here could also include the loss and reduction of environmental benefits (positive externalities) such as the reduction in biodiversity caused by the over-exploration of tropical forests. Measures to internalize environmental costs include: (a) regulatory instruments such as emission control; (b) economic instruments such as taxes, charges and fees, tradable permits, subsidies and deposit-refund systems; and (c) soft guiding measures such as eco-labeling.

If countries adopt an appropriate mix of these environmental policy measures to internalize environmental costs successfully, free trade based on the market mechanism will bring about trade benefits without causing excessive environmental loads, leading to positive effects on the environment by promoting more efficient allocation of the world’s resources toward sustainable development. It is in this sense that environmental protection and free trade can be mutually supportive.

As to domestic environmental policies, the WTO/GATT trade rules respect countries’ rights to adopt appropriate environmental policies, according to their respective circumstances, to protect their own environment. This basic principle should continue to be upheld firmly (see Annex 2).At the same time, it should be borne in mind that protectionism in the name of environmental protection often prevents efficient allocation of resources and destroys the mutual trust among countries, which is necessary for stable functioning of the international trading system, consequently damaging the prospect of attaining sustainable development in the world.

Thus, countries should formulate and implement appropriate policies according to their own situations in order to deal with their domestic environmental problems. There is a fear, however, that the world as a whole may not be able to make an appropriate response to global environmental problems such as global warming, destruction of the ozone layer and acid rain, if measures are limited to the national level, because some countries may take advantage by "free-riding" on other countries’ efforts. Therefore, it is important in the case of global environmental problems to formulate an appropriate framework for multilateral cooperation, thereby promoting harmonization of national environmental policies. Such cooperation may include trade restrictions as environmental policy measures.


2. The Implications for Japan

(1) "Environment and Trade" for Japan

It goes without saying that coping effectively with global environmental problems, which are threatening the very basis of human existence, is one of the top priorities for Japan no less than for other countries. At the same time, the maintenance of the multilateral free trading system remains extremely important for Japan, whose economic activities are so much dependent upon trade. Moreover, being heavily dependent on trade with the outside world for resources, including food, Japan has close mutual relations With the state of resources and the state of the environment in foreign countries.(5)

This means that Japan has a strong interest in helping to shape the rules that apply to "environment and trade." It is important for Japan to contribute actively to the development of rules that will allow both an appropriate response to environmental problems and the strengthening of the multilateral free trading system.

In doing so, it is important to firmly establish the idea worldwide that in promoting trade, each country should take sufficient environmental measures, taking into account its respective socio-economic situation. Recognizing this, Japan should (a) strengthen its assistance to countries with economies in transition so that those countries can enhance their capacities to deal effectively with their environmental problems, and (b) play a leadership role in promoting multilateral cooperation to cope with environmental problems.

(2) Asia-Pacific Perspective

Asia-Pacific region, particularly East Asia, is one that is experiencing rapid economic growth while grave concerns related to the worsening of the region’s environmental problems such as air and water pollution are being expressed. The primary motor for this region's economic growth is the export-oriented industrialization of developing countries and the boom in intra-regional trade.(6) For these reasons, the Asia-Pacific is the region where interlinkages of environment and trade are particularly relevant and need to be watched closely.

Direct foreign investment by Japanese firms as well as Japan’s import of products and semi-finished products have played an important role-with considerable amount of production capacity shifting from Japan to Asian countries-in deepening the mutually dependent relationship between Japan and other Asian countries.(7) At the same time, Asian countries remain a large provider of primary commodities to Japan. Japanese companies have many direct investments in those countries to extract and import natural resources.

Thus it may well be said that Japan, making use of the lessons it has learnt and technologies it has developed, should cooperate with developing countries in Asia because (a) there is a fear that rapid economic development will lead to a further worsening of environmental problems and (b) Japanese companies are playing a large role in the deepening of structural mutual dependency in the region. Asia is also the region to which technologies are actually being transferred from Japan in the form of intra-industry vertical trade as well as intra-company transfer. Taking these factors into account, Japan. through cooperation between the government and private sector, needs to make a positive contribution to the protection of the environment of this region and to take care not to give negative effects to the environment in its economic cooperation and development investments with those countries. As it is also of utmost importance that developing countries themselves be able to assess the state of their environment as accurately as possible, Japan should also extend assistance to them in terms of development of environmental data and monitoring in East Asia, dissemination of information, environmental education, etc. Japan has already taken initiatives of this kind, e.g. Eco-Asia’s Long-term Perspective projects, East-Asia Acid Rain Monitoring Network, and APN (Asia Pacific Network for Global Change Research). Efforts should be further strengthened in this respect. All these efforts are important for Japan, which is likely to be directly affected by the environmental degradation of the Asia-Pacific, in the process of deepening its relationship of mutual dependency with the Asia-Pacific region.

(3) Efforts Within Fora Such as APEC

One multilateral framework in which member economies are trying to promote trade liberalization in the Asia Pacific is APEC (Asia Pacific Economic Cooperation). This framework can be used to enhance mutual supportiveness between the environment and trade in this region. The future of APEC as a framework of regional cooperation remains to be seen, but it may well be characterized, at this stage, as a loose framework for policy consultation among members. China and Chinese Taipei, which are not yet members of the WTO, are members of APEC. Taking account of the messages of the meeting of APEC Environment Ministers held in March 1994 and the report of the APEC Eminent Persons’ Meeting, Japan needs to take active initiatives toward APEC so that policy dialogue on environment and trade can b e usefully pursued in this forum (see Annex 3).

With regard to regional efforts for environment and trade, beside the example of harmonization of environmental regulations and mutual recognition within the European Union, attempts have been made within the framework of NAFTA (North American Free Trade Agreement), which comprises the United States, Canada and Mexico and became effective in 1994, to make regional trade liberalization and environmental protection compatible and mutually supportive.(8)

In Asia, economies like China, Taiwan, Cambodia and Vietnam are currently applying for the membership in the WTO. It is hoped that their eventual participation in the WTO will contribute to their respect for and compliance with international rules on environment and trade.



3In the well-known report "Our Common Future "issued in 1987 by the World Commission on Environment and Development (widely known as "Brundtland Commission"), "sustainable development" is defined as -development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
4 In Programme Area B (Making Trade and Environment Mutually Supportive) of the Chapter 2 of Agenda 2l, one objective is "to make international trade and environment policies mutually supportive in favor of sustainable development. "Also, in the Marrakesh Agreement Establishing the World Trade Organization, "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" is mentioned.
5Japan’s share in the world’s trade in goods is large. According to Japan’s White Paper on International Trade and Industry in 1994, its exports were US$339.6 billion and its imports were US$233 billion in 1992. They account for 9.5% and 6.5%, respectively. of the world’s total trade in goods, which stood at US$358.6 billion. If we look at trade in terms of volume, Japan’s total export volume was 108 million tons (370% increase in thirty years) and its imports were 719 million tons (260% increase in thirty years), which together accounted for almost 20% of the world’s total maritime transport. It is noteworthy that import-export ratio in volume was nearly six to one.

Due to growing interdependency through trade in semi-finished products, the intra-regional trade ratio in East Asia increased from 30.7% in 1986 to 46% in 1992. East Asia here includes Japan,NIEs (Korea, Chinese Taipei, Hong Kong, and Singapore), ASEAN4 (Thailand, Indonesia, Malaysia, and the Philippines), and China. (Source: White Paper on International Trade and Industry in 1994)

7 The main mechanism that has caused this deepening of relations is known as the so- called "flying geese pattern of industrial development.- " It means the international movement of industries, especially manufacturing industries, from developed to developing countries. Following this pattern, changes have actually taken place in this region in terms of export countries, which possess a competitive edge in mature industries such as fiber, electronics, and electric appliances, from the U.S. and Japan to Asian NIEs and ASEAN countries. This pattern has already realized growing electronics and automobile industries in ASEAN countries.
8 APEC includes 18 members, which are ASEAN countries (Brunei. Indonesia. Malaysia, the Philippines, Singapore and Thailand), the United States. Canada, Australia, New Zealand, Republic of Korea, Japan, People’s Republic of China, Hong Kong, Chinese Taipei, Mexico, Papua New Guinea and Chile. APEC members represent about 40% of the world’s population, about 50% of world total GDP and about 40% of world total trade (the intra-regional trade being about 30%.). Its intra-regional trade in monetary terms is larger than that of the EU’s intra-regional trade.
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