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Global Environment

Harmonizing Environment and Trade Policies

III. Coordination between Environmental Policies and GATT/WTO Trade Rules

1. Trade Restriction Measures for Environmental Purposes

In some cases, trade restriction measures play a significant role in addressing environmental problems. For example, one country may need to restrict imports of certain products that are hazardous to human health, plants, or animals in order to protect its own environment. GATT/WTO rules clearly permit such use of trade restrictions, although it is subject to certain conditions so that the trade restrictions will not be applied in a protectionist or discriminatory manner. Those conditions include: (i) measures should not be more trade-restrictive than necessary, (ii) they should be based on scientific grounds, and (iii) ensuring transparency through notification.

In contrast, unilateral trade restrictions of one country dealing with environmental problems beyond national boundaries have the effect of putting pressure on other countries to comply with its decisions and policies, even if the problems in question are issues of global environment, let alone those of domestic concerns of other countries. In particular, trade restrictions directed at developing countries, where many environmental problems stem from a lack of capacity to deal with them, are not always effective for environmental conservation, and there is a fear that they may jeopardize developing countries' own efforts for sustainable development. Besides, it is virtually impossible for countries with little economic influence to resort to unilateral trade restrictions in the first place. Therefore, in these cases, it is desirable that resolutions be primarily pursued through such measures as policy consultations, environmental cooperation, and formulation of multilateral environmental agreements (MEAs). When trade restrictions are necessary, efforts should be made to build multilateral consensus.

If we look at the causes of global environmental problems, there are some that can be attributed at least partially to trade, such as the issue concerning endangered species, and others of which trade itself is not a direct cause, such as global warming, depletion of the ozone layer, and acid rain. Even for the latter category, trade restriction measures are occasionally called upon to secure the effectiveness of MEAs.The Montreal Protocol on Substances that Deplete the Ozone Layer, which includes trade restrictions directed at non-member countries, is an example. In introducing such trade restrictions, however, the need for them and possible alternatives should be considered. In this connection, it is desirable that an effective and comprehensive package of policy instruments are formulated that includes not only trade restrictions but also financial support and technical cooperation, with a view to assisting developing countries in their efforts for sustainable development. The Montreal Protocol has provided such provisions.

2. Issues Concerning PPM-related Requirements

(1) PPM-related Requirements

Recently, increasing attention has been drawn to product requirements related to their processes and production methods (PPMs), with a view to reducing negative impact on the environment caused by production processes. These are called PPM-related requirements. Examples of this type of product requirement include product regulations that restrict products produced by certain facilities; timbers produced from forests under unsustainable management; tuna captured by such methods that also trap many dolphins; and computer chips cleansed with certain substances that deplete the ozone layer. In order to resolve environmental problems, it is generally most effective to remove their root causes. In this sense, PPM-related requirements are an important environmental policy instrument, as they address production processes in a direct manner.

On the other hand, when PPM-related requirements are combined with trade restriction measures, or when PPM-related requirements require foreign products to comply with domestic PPMs in the domestic market, they have a dimension of extraterritorial application of domestic rules, raising problems in relation to trade rules. OECD categorizes motivations for using PPM-based trade restriction measures into three types, namely, environmental motivations (environmental conservation), competitiveness motivations (protection of competitiveness of domestic industries), and value-based motivations (protection of certain values such as animal rights). While these motivations are often closely related and, thus, may not always be easy to distinguish one from another, it is not desirable that competitiveness or value-based motivations are justified in the name of the environment, when they actually have nothing to do with the environment.

(2) PPM Requirements and Trade Restrictions

There are two ways in which product PPMs affect the environment. One is that PPMs affect the physical characteristics of products, which generate environmental impacts at their consumption and disposal stages, e.g. timbers containing harmful insects due to the lack of heat treatment.The other is that PPMs do not affect physical characteristics of the products, but the production processes themselves generate environmental impacts. GATT/WTO rules permit possible use of PPM-based import restrictions in relation to the former case for one country to protect its own environment. In the latter case, in contrast, the general interpretation so far has been that PPM-based unilateral trade restrictions are not permitted. This interpretation is based on the understanding that the judgment of "like products," to which most favored nation treatment and national treatment are applied, is not affected by differences in the PPMs of products.(17)

In addition to the case where PPM-related requirements are combined with trade restrictions, similar problems may arise when foreign products are required or encouraged to comply with certain PPM-related requirements in the domestic market, for example, when environmental labeling standards include PPM-related aspects.

On the other hand, there may be a need to harmonize PPM-related requirements across countries when multilateral action is required to address global environmental problems effectively. Further, there is a possibility that PPM-based trade restriction measures are effective in multilateral environmental agreements (MEAs) in avoiding "free-riders." In the Montreal Protocol on Substances that Deplete the Ozone Layer, there is a provision that requires countries to consider the feasibility of restricting or banning imports from non-parties of products produced with, but not containing, controlled substances listed in the various annexes.(18)

3.Coordination between Multilateral Environmental Agreements and GATT/WTO Rules

Basically, GATT/WTO rules allow each country to adopt necessary environmental policy measures. However, the basic framework of the current trade rules does not sufficiently cover their relations with environmental problems, particularly those of global environment, as they were originally formulated in those days when the need to consider their environmental relevance was not at the front of people’s mind. Therefore, there is a need to recognize the significance of MEAs within trade rules, with a particular view to addressing global environmental problems.

One major problem in this context is the applicability of trade restriction measures to non-parties of MEAs. Judging from the fact that GATT has experienced no disputes in this respect so far, it may be possible to conclude that there is a general agreement that trade restriction measures to non-parties aimed at securing the effectiveness of MEAs are necessary in certain cases. However, there is no excluding the possibility that the WTO might challenge the legality of trade restriction measures to non-parties to be adopted in future MEAs. Therefore, with a view to securing legal stability, formulation of some kind of rules applicable to such cases is desirable.

There can be several ways of doing so. Drawing upon the provision of the GATT Article XX (h), which exempts inter-governmental commodity agreements from the general rules of the WTO if they are not disapproved by the contracting parties, one idea is to give a special status similar to that of inter-governmental commodity agreements to those MEAs that meet certain criteria to be developed in the context of GATT (see Annex 6). In effect, this method is similar to granting "waivers" on a case-by-case basis according to the provision of GATT, Article 25, but it will be more preferable in view of MEAs' clear status in GATT as well as legal stability and predictability. In such a case, consideration should be given to criteria for justifiable MEAs such as the nature of environmental problems in question, scope of participation, scientific basis, and the need for trade restriction measures. If an MEA is decided by WTO Contracting Parties not to be exempted from general rules in the above-mentioned procedure, individual waivers should be considered with respect to each trade restriction measure. Accumulation of such experiences will contribute to the general operation of modified Article XX.(19)

With regard to exports of those products that are domestically prohibited but are not prohibited in other countries such as developing countries (e.g. domestically prohibited pesticides, medicine that is expired), some rules have been developed to a certain extent within respective regulatory frameworks, such as those regarding waste disposal (the Basel Convention) and chemical management (the London Guidelines). However, a general rule has not yet been established. In 1989, GATT created a Working Group on the issue, which produced in 1991 a "Draft Decision on Trade in Banned or Severely Restricted Products and Other Hazardous Substances," but consensus could not be reached at that time. While the WTO Trade and Environment Committee has been engaged in re-considering the issue, there should be continued efforts to establish international rules that could include a scheme of Prior Informed Consent (PIC).

4. Harmonization of Environmental Standards (20)

(1) Types and Harmonization of Environmental Standards

From a trade policy point of view, proliferation of product standards among countries is not efficient, as it forces producers to produce diversified products depending on the requirements of respective countries. For this reason, the Agreement on TBT (Technical Barriers to Trade) has provisions to the effect that as long as there exist international standards, they should be used in principle unless there is a good reason for not doing so. Emission standards of automobiles are an example of environment-related product standards (though there is no international standard at present).

In a broader sense, procedures such as those for assessment of environmental risks can also be regarded as part of environmental standards. From a trade point of view, in particular, it is often useful to harmonize such procedures among countries.

By contrast, with regard to substantive standards such as emission standards, their harmonization is not necessarily required, as they are supposed to be different depending on the state of environment, stages of development, etc., of respective countries.(21)

(2) Environmental Standards and International Competitiveness

There is an argument that differences in environmental policies may, through different influences on international competitiveness, lead to "eco-dumping" or "pollution havens" as mentioned before. This concern sometimes gives rise to the demand for harmonization of environmental standards.(22)

According to various studies to date, there has been no evidence that differences in environmental policies have affected competitiveness, at least when looking at the whole economy at a macro level. Therefore, the above concern is not necessarily well founded. However, further study is needed in the future with regard to competitiveness of individual industries and so on.

Nevertheless, the state of environment and the environmental policies can justifiably vary from one country to another. Therefore, even though differences in environmental policies affect international competitiveness, this should not be regarded as a problem itself. Still there can be an argument that environmental standards (including their implementation) that are extraordinarily slack even when taking into account legitimate differences among countries are a serious problem.

However, because judgment of appropriateness in this regard is extremely difficult and can be subjective, it is not appropriate to resort to countervailing measures based on a unilateral decision of the importing country. In such a case, improvement of environmental policies and their implementation in the country in question should be pursued through policy consultations or financial and technical cooperation.

It should also be noted that technological innovation to meet environmental requirements occasionally has a favorable impact on competitiveness in the end through enhanced efficiency in resource utilization. Japan has the experience, along with Germany and some others, of succeeding in improving the international competitiveness of its industries, while adopting and maintaining leading environmental policies. In order to identify the conditions and the measures that have enabled Japan to do so, studies have recently been carried out. It will be useful to further deepen the studies and convey the results to the international community.

(3) Cases Requiring Consideration of Standards Harmonization

In view of the fact that environmental policies are implemented subject to the state of environment of respective countries, it is not necessarily required to harmonize substantive environmental standards among countries, except those for product standards or procedures related to environment.

However, when the environmental policy is addressed to global environmental problems, interests or concerns associated with the problems are often shared among the neighboring and other countries, and multilateral action including harmonization of substantive standards may be called upon.

Moreover, as for the domestic environmental problems of each country, too, there can be cases where it is desirable to harmonize substantive environmental standards. As has been confirmed by the OECD’s "Guiding Principles Concerning International Economic Aspects of Environmental Policies" of 1972, it is desirable to strive towards more stringent standards in order to strengthen environmental protection, particularly in cases where less stringent standards would not be fully justified by various factors including different pollution assimilative capacities of the environment in its present state, different social objectives and priorities attached to environmental protection, and different degrees of industrialization and population density. In this case, such approaches as setting minimum standards, gradual harmonization, and regional harmonization are worth considering.

In relation to procedural standards, ISO is at present engaged in undertaking international standardization of environmental management systems by private firms. In future, it will be useful to consider introduction of a mutual recognition system among the certifying bodies of respective countries.

5. Eco-labeling, Packaging and Recycling Requirements

(1) Eco-Labeling

Labeling is intended to provide product-related information upon which consumers can base their purchasing activities. It constitutes an instrument to guide firms and consumers in a certain direction. Labeling can be either mandatory or voluntary, single-issue oriented, or more comprehensive in nature, officially-managed or privately run. In any case, its purpose is to reflect consumer preferences upon production activities through the market instead of regulating production activities.

Eco-labeling is one type of labeling used for environmental protection purposes. Examples are found in many countries including Japan’s "Eco-Mark" system run on a voluntary basis by the Japan Environment Association. Differentiation of products through eco-labeling can contribute to the expansion of the market for environmentally friendly products ("Green Market"). Moreover, the introduction of eco-labeling itself helps raise the environmental awareness of consumers and private firms.

Eco-labeling systems generally reflect local environmental concerns such as in the cases of batteries not containing mercury and recyclable products, although they can also address global environmental problems. Also, eco-labeling sometimes considers PPMs of products, not the products themselves. For these reasons, it is necessary to make the system fair and rational on a basis of scientific evidence when implementing the eco-labeling system.

Concerning eco-labeling and Life Cycle Assessment (LCA), which is increasingly used as a basis of eco-labeling, ISO is currently carrying out standardization activities as to general principles and so on. It is desirable to standardize principles and methods, as much as possible, of eco-labeling and LCA, while taking into account respective situations of countries.

(2) Packaging and Recycling Requirements

Packaging requirements, which are a regulation of packages (including containers) according to product types, have mainly been used for safety purposes. In recent years, however, increasing use of such measures is being witnessed in EU countries and elsewhere for environmental protection purposes, such as regulating containers made of certain materials, imposing taxes and charges on disposable bottles, and requiring deposits when selling drinks with recyclable bottles.

Recycling requirements constitute a system by which firms are obliged to take back or recycle targeted wastes. For example, in Germany, firms are in principle obliged to take back all packaging wastes. In Japan, whether a can is made of steel or aluminum must be indicated and certain categories of firms are under obligation to promote use of recycled resources. Recently a heated discussion is taking place concerning the introduction of a new recycling system that includes the taking back of wastes by firms.

It is becoming increasingly difficult to secure final disposal sites of wastes in many developed countries including Japan, making waste minimization a big issue in those countries. At the same time, the promotion of recycling is a common challenge for developed countries, which are expected by the international community to change their consumption and production patterns into more sustainable ones. As it is difficult to leave waste recycling solely to the function of the market, mandatory measures such as recycling requirements are attracting increasing interest.

Besides recycling requirements, there is a high expectation for guiding instruments such as eco-labeling as well as economic instruments including waste collection charges and deposit-refund systems linked with packaging requirements. In many cases, these measures are used as a package.

From the global perspective, recycling contributes to the conservation of the global environment through more efficient utilization of resources. But the modalities of the recycling system often reflect specific domestic needs for waste treatment, giving the system a strong domestic flavor. Although each country is in a position to design its own environmental policies according to its respective conditions, it should give consideration to ensuring the fair and rational management of the recycling system as in the case of eco-labeling system. Because trade impact is possible, countries should also seek to ensure transparency through the provision of information, etc.

6. Dispute Settlement Concerning "Environment and Trade"

With respect to trade dispute settlement in the context of the WTO, the "Understanding on Rules and Procedures" as a result of the Uruguay Round includes new provisions such as those relating to "seeking information from an expert review group" or "disclosing statements of its positions to the public." It is important to take due account of environment-related expertise making use of these new rules. At the same time, there is a need to construct good cooperative relationships between the WTO and environment-related organizations, because the WTO, being a trade organization, is not meant to resolve environmental problems in general.

It is often said that environmental dispute settlement mechanisms are not well established in comparison with trade dispute settlement mechanisms. For example, the mechanism to resolve environmental disputes when a country suffers from environmental damage originating from a neighboring country is not necessarily established except for the case of the EU. This is an important point that can be related to the issue of retaliatory trade measures, and necessitates international discussion on how to settle and prevent environmental disputes among countries.


17Justifications are as follows:
(i)Differentiation of production methods from one country to another has been regarded as one of the sources of trade comparative advantage.
(ii)It has in fact an effect for countries with economic power to put pressure on other countries to comply with their environmental policies.
(iii)It is difficult for importing countries to identify the production methods of the products. Therefore, implementation tends to be subjective and protective.
(iv) Since there is diversification of conditions from one country to another in terms of states of the environment, social objectives, priorities for environmental protection, levels of industrialization, there is no assurance that PPMs that are environmentally desirable in one country are always simultaneously desirable in another country.
18 See Article 4.4.2. of the Montreal Protocol. However. it was determined at the Convention of Parties in 1993 that it would be unfeasible for the time being to apply the provision.
19 As for the treatment of MEAs under the GATT, a number of suggestions have been made in addition to the above-mentioned approaches. It is necessary to take account of the advantages and disadvantages of each option.
20In this context, environmental standards encompass such concepts as substantive standards, product standards related to the environment, and risk assessment techniques. It should also be noted that harmonization does not necessarily mean unification. In this regard, some OECD documents categorize harmonization into pre-market harmonization, mutual recognition. equivalency, and international standards.
21 In Japan. as well, the environmental quality standards of water related to living environment are not identical over all items and water areas, but specified in respect of individual water areas. With regard to emission standards there are clearer diversifications from one region to another. National emission standards related to SOx emissions to air vary from area to area. In addition, it is common in Japan that local governments require stricter regulations than the national ones based on their ordinances or pollution prevention agreements. Therefore, even within Japan there are diversifications of standards due to differences in regional situations.
22 It is envisaged that the background of the call for international harmonization of environmental standards (particularly that of emission standards) is in recognition that: (i) developing countries are not provided with environmental standards; and (ii) even though emission standards are provided, they are not so strict as those of developed countries. However, taking an example of the ASEAN countries, a number of them have already specified environmental quality standards and emission standards, and moreover, those standards are equivalent to or stricter than those of Japan, drawing upon standards of developed countries, which are generally strict. Besides standards themselves, attention should be paid to the problem of implementation due to inadequate capability of developing countries.
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