United Nations
Commission on Sustainable Development

Background Paper


              The relationship of environmental protection to
                international competitiveness, job creation
                              and development

                      Note by the UNCTAD secretariat

                               15 April 1996


                        Prepared by UNCTAD for the
                   Commission on Sustainable Development
                              Fourth Session

                      New York, 18 April - 3 May 1996
                                 New York


                                 CONTENTS

                                                                     Page

I.   INTRODUCTION                                                       3

     A.    Background                                                   3
     B.    Rationale for analysing competitiveness 
           effects of environmental policies                            4
     C.    Limitations of studies on competitiveness 
           effects of environmental policies                            7

II.  THE COMPETITIVENESS DEBATE                                         8

     A.    Competitiveness at the firm or sector 
           level and national welfare considerations                    8
     B.    The state of the debate                                      9
     C.    Cost-benefit analysis and reducing adverse 
           competitiveness effects                                     11
     D.    Environmental policies and employment                       12

III. EMPIRICAL EVIDENCE                                                12

     A.    Problems of empirical analysis                              13
     B.    Empirical evidence in OECD countries                        13
     C.    Factors identified in developing countries 
           as affecting competitiveness                                15

IV.  PRELIMINARY CONCLUSIONS                                           19



                              I. INTRODUCTION

                               A. Background

1.   At its third session, held in 1995, the Commission on Sustainable
Development invited UNCTAD: 

     "... to carry out an analytical study on the relationship of
     environmental protection to international competitiveness, job creation
     and development, with the input of Governments, regional economic
     integration organizations, the private sector and non-governmental
     organizations as well as other relevant regional and international
     organizations." 1/

2.   The present note, prepared by the UNCTAD secretariat under its own
responsibility, should not be regarded as a comprehensive summary of the
debate on environment and competitiveness linkages, but as a preliminary
identification of issues, in particular those requiring further analysis,
prepared with a view to inviting comments, information and inputs from
Governments and other concerned entities. 2/ It has not yet incorporated
comments from other international organizations which have undertaken work in
this area, such as OECD, 3/ UNIDO, FAO and others. 4/ It is expected that
the completed study will be presented to the fifth session of the CSD in 1997.

                B. Rationale for analysing competitiveness 
                     effects of environmental policies

3.   Initially, the rationale for studying competitiveness effects of
environmental policies was related principally to demands for "levelling the
competitive playing field". Concern was expressed that countries with
stringent environmental regulations could lose trade or investment to
countries where standards are less stringent or where enforcement is
difficult. Thus demands were made by industrial groups and NGOs (who feared
that competitiveness concerns could postpone the introduction of more
stringent environmental standards) to levy "green countervailing duties" on
imported products in order to compensate for the perceived competitiveness
effects. 

4.    It is now widely accepted that the case for such measures is very weak.
Firstly, to date, environmental policies do not seem to have had significant
impacts on trade and investment patterns, particularly in the case of
developed countries. Secondly, the implications for competitiveness of
differing environmental standards are no different in principle from those of
other policy differences across nations, including social or welfare policies,
and as acknowledged by the CSD at its second session, there are legitimate
reasons for differences in standards. Thirdly, it is now widely believed that
fears of "eco-dumping" or relaxation of environmental standards in order to
attract investments or gain export competitiveness are largely unfounded.
Empirical and analytical work of UNCTAD and OECD has been crucial in
clarifying these issues. UNCTAD's Ad Hoc Working Group on Trade, Environment
and Development joined OECD Governments in firmly rejecting "demands sometimes
made to introduce so-called "green countervailing duties", or other
protectionist or WTO-inconsistent trade measures, to compensate for negative
competitiveness effects, whether real or perceived, of environmental
policies". 5/

5.   Even though there is already a better understanding of the complex
relationship between environmental policies and international competitiveness
as compared to earlier stages of the debate, there is still an interest in
analysing the competitiveness effects of environmental policies. A main
concern, particularly in the developed countries, is about domestic
environmental standards and their competitiveness impacts, and the related
question of whether competitiveness concerns may prevent or postpone the
implementation of more stringent domestic environmental standards. Indeed, it
is possible that in the future more stringent environmental policies with more
pronounced competitiveness impacts will be implemented. Accordingly, fears of
future competitiveness impacts cannot be dismissed even if impacts at present
have remained relatively small. Also, as environmental cost internalisation
proceeds, some competitiveness impacts are bound to arise, since the very
purpose of environmental cost internalisation is to affect relative prices in
order to induce environmentally desirable changes in producer and consumer
behaviour. Another question of key interest in particular to developed
countries is to what extent high environmental standards can provide countries
with a competitive advantage in the growing market for environment-related
technologies, equipment and services. 

6.   In the developing countries, competitiveness concerns tend to focus on
the effects of environmental requirements emerging from external markets on
export competitiveness and access to developed country markets. Thus, reasons
for studying competitiveness include the following: 

     (a)   Environmental policies of major export markets can restrict
           developing country market access, which, as has been recognized in
           Agenda 21, is an important condition for achieving sustainable
           development;

     (b)   They may exacerbate other existing constraints such as lack of
           marketing skills, technology, and raw materials which have to be
           alleviated in order to gain export competitiveness;

     (c)   Compliance with external environmental requirements may be of
           limited environmental benefit to the developing country itself,
           but may nevertheless entail significant costs;

     (d)   It is necessary to identify policies which will promote
           competitiveness and to devise cost-effective environmental
           measures; and

     (e)   At early stages of economic development, a large share of economic
           activity is concentrated in relatively polluting sectors, thus
           making developing countries especially vulnerable to the
           competitiveness effects of external environmental policies.

7.   With regard to the trade and competitiveness effects on developing
countries of environmental policies in the developed countries, a number of
considerations arise from a policy perspective. First, it has been observed
that in many cases the effects of environmental policies on trade may be
similar to or exacerbate those arising from constantly changing conditions in
the marketplace, such as changes in technology, consumer preferences, price,
and availability of raw materials. 6/ Such effects can be seen as part of
the relationship between trade-related economic activity and environmental
policies and may be addressed in the wider context of development policies.
They may also be relevant in the context of technological and financial
cooperation and export promotion programmes. 7/ 

8.   From a trade policy perspective, however, two major issues arise: first,
whether environmental policies may discriminate against imports and serve
protectionist purposes; second, whether the policy instrument chosen results
in unnecessary restrictions on trade. It is therefore important to ensure that
certain trade rules and principles are taken into account in the design and
implementation of environmental policies which may affect trade. While a
number of principles are already well established, there may be a need to
build consensus on additional principles and concepts. 
 
9.    Consideration must also be given to the competitiveness and development
effects of policy harmonization, especially in the context of multilateral
environmental agreements (MEAs). Indeed, while yielding global environmental
benefits, MEAs have broad economic effects. The costs of standard
implementation may differ widely among parties to an MEA based on variables
such as the specificity of the standard, the availability and adequacy of
substitutes, the degree of patent protection of specified technologies,
existing environmental standards prior to the implementation of the
international standard, administrative costs and other factors. Standard
implementation in the framework of MEAs shows that the same environmental
standards may not have similar competitiveness effects across all countries
and across all situations. Thus, whereas in the case of domestic environmental
policies, most of the debate has focused on the competitiveness effects of
differing standards across countries, an analysis of the competitiveness
effects of standard implementation pursuant to MEAs can provide a better
understanding of the effects of factors such as levels of development on the
competitiveness effects of similar standards.

10.  The need for detailed information on the nature and extent of
competitiveness impacts of environmental policies stems from the fact that
appropriate design of policy instruments, as well as implementation of
enabling measures and Government support, may reduce adverse competitiveness
impacts. Identifying such adverse impacts beforehand would not necessarily
mean that the environmental policy objective should be given up. For example,
there may be environmental policies which have long-term negative
competitiveness effects, but which may nevertheless be implemented for
pressing environmental reasons. In such cases, alleviating measures may be
required if the society wishes to maintain the affected firms in operation
because of employment or other concerns. 8/

11.  Adequate knowledge of competitiveness impacts would help to prevent
unfounded fears of competitiveness loss from inducing calls for protectionist
measures, as well as from obstructing the introduction of environmental
policies.

               C. Limitations of studies on competitiveness
                    effects of environmental policies 

12.  It is sometimes argued that studies on the competitiveness effects of
environmental policies may be of limited use for a number of reasons: 

     (a)   Since there are many factors on account of which firms or
           industries may gain or lose competitiveness, and since it is
           difficult to isolate environmental from other factors, it is
           difficult, if not impossible, to draw any general conclusions; 

     (b)   The empirical evidence that exists to date is mostly anecdotal in
           nature, and more research is required; 

     (c)   To the extent that environmental requirements would be no
           different from other market forces, they would not require special
           consideration; 

     (d)   Since successful firms have a broad-based capacity to respond to
           market changes, including environmental regulatory processes,
           government would have no major role to play in mitigating
           competitiveness effects; and

     (e)   Since losses by less successful firms or certain sectors could be
           compensated by gains by others, competitiveness effects at the
           firm or sector level would be of relatively little concern.

13.  Others have contended that more policy-oriented analysis is needed for
the following reasons: 

     (a)   To identify factors that may mitigate adverse or strengthen
           positive competitiveness effects of environmental policies and
           that can be promoted through appropriate Government policies; 

     (b)   To avoid trade friction or the postponement of environmental
           policies on account of unfounded competitiveness concerns; 

     (c)   A trade-off may exist between responding to environmental
           requirements and meeting other market challenges such as quality
           requirements; 

     (d)   To stimulate innovative responses at the firm level through
           appropriate government policies or close cooperation between
           government and the private sector;

     (e)   Competitiveness effects of environmental policies could raise
           sector-specific issues, and sector-specific policies may be useful
           in finding cost-effective solutions to both sector-specific and
           more general environmental problems;

     (f)   There could also be scale-specific competitiveness effects of
           environmental policies warranting special consideration.

The above factors would indicate that the relationship between environmental
policies and competitiveness is indeed an important policy question, in
particular for developing countries.  

                      II. THE COMPETITIVENESS DEBATE 

              A. Competitiveness at the firm or sector level 
                    and national welfare considerations

14.  Discussions on competitiveness impacts of environmental policies are at
times blurred by failure to define the term competitiveness. What is normally
referred to is international competitiveness: that of firms, sectors or the
national economy. From the point of view of international trade rules and
principles, it may be appropriate to study competitiveness effects at the firm
or sector level, as technical standards and regulations or other non-tariff
measures are not expected to have generalised effects on trade. On the
contrary, it is expected that environmental regulations will only affect some
firms and some sectors.

15.  At the level of domestic policy-making, a broader analysis may be
needed. Whereas some firms may lose their competitive position, others may in
turn gain. Moreover, dynamic impacts between sectors and the social benefits
of environmental protection also enter the picture. It is contended that
international competitiveness is only one of the factors that Governments will
take into account in assessing the efficacy of environmental policies. In
considering various policy options, economic theory indicates that the set of
environmental, social and trade policies that in combination provide the
greatest welfare gain for the country should be adopted. However, while it is
essential to take the economy-wide macro view so as not to arrive at sub-
optimal solutions, information on competitiveness effects on all economic
agents is seldom available to Governments or other policy-making bodies. 

16.  Competitiveness effects may also differ between the short and the long
run. While in the short run the competitiveness effects of environmental
policies may be negative, in the long run they may be less significant or even
positive. Dynamic effects are more likely to be positive when there are more
possibilities for innovation. How considerations in the short run are eschewed
for benefits in the long run depends on the discount rates applied, which
necessarily differ between developed and developing countries. In any case,
complete information on short and long run competitiveness effects, in both
developed and developing countries, is desirable. Furthermore, this
information would help countries to learn from each other's experiences.

                        B. The state of the debate

17.  Lately, the view that environmental regulations necessarily harm
competitiveness has been significantly revised in the developed countries. A
dynamic approach to analysing the linkages between environmental policies and
competitiveness tends to emphasise the positive over the negative effects.
According to the "Porter hypothesis", well designed environmental policies can
improve competitiveness even at the firm level by inducing innovation or
creating incentives to increase efficiency. 9/ The European Commission notes
that "economic performance and environmental performance are not necessarily
incompatible. While achieving environmental benefits may in some cases entail
additional short-term costs, there are a wide range of "win-win" opportunities
in the design and implementation of environmental policies, which could
improve resource efficiency, competitiveness and employment. Indeed, high
environmental standards can create the conditions under which businesses
investing in cleaner, more efficient technologies could improve their
competitive position." 10/ However, another report by the US Office of
Technology Assessment maintains that "while pollution prevention can ease
conflicts between environmental protection and industrial competitiveness, it
does not eliminate it". 11/

18.  In its report on trade and environment to the OECD Council at
ministerial level, the OECD Joint Session of Trade and Environment Experts
states that "high levels of environmental protection in response to government
policy or consumer preferences can have positive effects on the
competitiveness of domestic producers and countries. They can spur
technological change, stimulate investment, improve production efficiency, and
promote new industrial sectors and new market niches. However, concerns over
the potential loss of competitiveness - whether real or perceived - are
sometimes raised, and can be an obstacle to Governments in strengthening
environmental protection. While research on the competitiveness effects of
environmental policies is still ongoing, the Joint Session has not identified
a systematic relationship between existing environmental policies and
competitiveness impacts." 12/

19.  In addition, it has often been proposed that environmental policies may
actually stimulate competitiveness by improving the prospects of sectors which
produce environmental goods and services (EGS). The global environmental
industry is estimated to be presently worth around $250 billion annually, with
a growth rate of 8 per cent. 13/ Increasing consumer demand for
environmentally friendly products in some sectors may also give a marketing
advantage to companies investing in environmental protection, although the
significance of the "green" niche market and the availability of price
premiums is difficult to predict. 14/ At the national level, gains like
these may compensate for losses of competitiveness elsewhere in the economy;
such changes may even increase national welfare. But in countries whose export
basket comprises only a few products, compensating opportunities may be
limited compared to diversified and dynamic economies. Moreover, since most
EGS are not traded internationally, it is difficult to estimate the export-
related competitiveness effects from growing environmental markets abroad.
International trade in EGS centres on relatively sophisticated manufacturing
goods, engineering and project management services, and technology licences,
in all of which developing countries do not have a comparative advantage.
15/

20.  Developing countries fear that external environmental policies could be
used for protectionist purposes and that compliance with such policies and
measures may entail additional costs. Furthermore, while the competitiveness
impacts of environmental policies may in the longer term be neutral or even
positive, many developing country producers fear that they may not be in a
position to overcome the short-term losses involved. 16/ In general, their
view is that environmental policies are most likely to be implemented
successfully and yield the maximum environmental benefits if they go hand-in-
hand with development policies. Thus, both the policies required and the
responses generated in developing countries may be significantly different
from those in the developed countries.

21.  Developing countries, particularly the least developed among them, are
frequently at a disadvantage on account of several factors which adversely
affect competitiveness, such as lack of information, access to inputs and
technology, finance, and infrastructure. Other reasons of concern to
developing countries include the sectoral composition of their exports and
their typically undiversified export basket; the important role of small and
medium-sized enterprises (SMEs) in exports; the emergence of new environmental
requirements in sectors of export interest to developing countries; the low
domestic demand for environmentally friendly products; and the homogenous
nature of exports and the price-taker position of developing countries that
make any cost increases critical.

22.  The debate on environmental policies and competitiveness seems
inconclusive at the present time. The dominant view in the developed countries
appears to be that, at their existing levels, environmental policies are
unlikely to have significant adverse effects on trade and competitiveness, and
their effects can even be positive. Future impacts, however, may be different
if the level of environmental protection is significantly raised. The
developing countries, for their part, continue to be concerned that
environmental policies, particularly when they are based on PPMs, may affect
market access or be used for protectionist purposes. This difference in
perceptions is especially important in the context of MEAs and when
environmental requirements emerge from external markets.

                       C. Cost-benefit analysis and 
                 reducing adverse competitiveness effects

23.   In the developed countries, two divergent arguments on competitiveness
effects of environmental policies are prevalent. Some argue that the enactment
of environmental legislation should not be deterred by considerations of
competitiveness, while others argue that a rigorous cost-benefit analysis
(CBA) of a proposed environmental measure is necessary. 17/ The
difficulties of quantifying the benefits of an environmental measure and of
conducting risk assessments prior to implementing an environmental measure are
widely recognized. Thus, it may not always be feasible to carry out a full
CBA, and the precautionary principle needs to be taken into account in the
face of scientific uncertainty. Also, political considerations such as strong
public pressure could outweigh the results of CBA. 18/

24.  Linked to CBA, proportionality between economic costs and environmental
benefits is an important concept requiring further analysis. In domestic
policy-making, cooperation between government and industry in setting
environmental regulations may implicitly bring in the concept of
proportionality. It has also been pointed out, however, that it may be
sufficient to examine the cost-effectiveness of environmental policies,
particularly since the concept of proportionality may be difficult to
implement.

25.  Appropriate design of environmental policies can also reduce negative
competitiveness effects without compromising the environmental goals.
Selection of cost-efficient instruments, gradual implementation and transitory
arrangements are important in this respect. Consultations between industry and
Government when preparing environmental policies can help to set realistic
requirements and ensure industry cooperation. Greater transparency in setting
standards and information dissemination on environmental regulations can help
foreign producers to adjust to new requirements. 

                 D. Environmental policies and employment

26.  The links between environmental policies and employment have been little
explored by the existing literature. A World Resources Institute study notes
that shifting resources always destroys some jobs and creates others; even if
jobs may be threatened in polluting industries, they will be created
elsewhere. The sectors in which pollution abatement costs are relatively large
(such as petroleum refining, chemicals manufacturing, pulp and paper, and
primary metals) belong to the least labour-intensive industries measured by
the number of employees per million dollars in shipments. These sectors are
less labour-intensive than manufacturing in general, and probably also less
labour-intensive than the pollution control industry. Thus, although increased
environmental protection may lead to an increase or decrease in employment in
particular industries, overall employment is not necessarily reduced. 19/ 

27.   It is also felt that environmental policies should be implemented
because of environmental goals, and other objectives should not be added on in
the implementation of environmental policies. Indded, some have questioned the
futility of analysing these linkages, likening it to the concept of "digging
holes and filling them up". 20/

28.  The problems of small and medium-sized companies in complying with
environmental requirements are especially important, bearing in mind the fact
that, in contrast to many developed countries, a large share of developing
country exports originates from the small-scale sector and the role of SMEs in
providing employment is critical. Various other effects such as industrial
restructuring may also affect employment. 

                          III. EMPIRICAL EVIDENCE

29.   The extent to which environmental policies influence the international
competitiveness of domestic producers is ultimately an empirical question.
Existing evidence in most OECD countries confirms that the links between
environmental costs and export competitiveness are on a par with those of
capital, labour, and research and development, and the effects of
environmental costs on competitiveness have in general been small. Neither
does available empirical evidence suggest that cost differences due to
environmental standards have significant effects on the relocation of
industries. 21/ The experience of developing countries in this context is
relatively limited. However, the effects of environmental policies on the
competitiveness of developing countries may be somewhat different from those
of the OECD countries.

                     A. Problems of empirical analysis

30.  Empirical analysis is complicated by the fact that there are several
variables besides the level of environmental protection requirements that
impinge on competitiveness. To neutralise the effects of these variables on
environment-related competitiveness impacts may be impossible.

               B. Empirical evidence in OECD countries 22/

31.  Several empirical studies have been conducted in OECD countries to test
whether environmental regulations have adverse effects on competitiveness,
whether they improve competitiveness, or whether the (positive or negative)
effects are so small that one can speak of neutral impacts. The relationship
has been analysed by asking whether:

     (a)   The trade performance of highly regulated sectors has deteriorated
           compared to less regulated sectors;

     (b)   Production or investment from highly regulated sectors has moved
           to countries where regulations are less stringent;

     (c)   There is a negative correlation between stringency of
           environmental regulations and profitability; and

     (d)   Basic indicators such as productivity are adversely affected in
           firms in highly regulated sectors. 23/

32.  With regard to question (a), a 1994 World Bank study found that contrary
to common perceptions, higher environmental standards in developed countries
have not led to a decrease in exports of environmentally sensitive goods.
Germany, for example, which has stringent environmental standards, has
actually increased its export share in such goods while losing market shares
in manufactures as a whole. In addition, a 1992 study by the World Resources
Institute shows that the United States bilateral trade deficit with Japan has
been large even though Japanese environmental standards were stricter than
American standards in several respects, lending support to the proposition
that overall exports are not necessarily affected by environmental
standards. 24/ 

33.  With regard to question (b), data on investment flows provide little or
no support for the contention that transnational corporations (TNCs) are
relocating environmentally sensitive industries to countries or territories
with low standards. A study on Argentina, Brazil, Colombia, Hong Kong,
Malaysia, Nigeria, Philippines, Republic of Korea, Singapore, Taiwan Province
of China, Thailand and Venezuela shows that foreign direct investment (FDI) in
the pollution-intensive industries represents a smaller share of total FDI
than in the 1960s and 1970s. This was so despite the fact that environmental
regulations had tightened in the home countries. 25/

34.  With regard to (c), if profitability were taken as an indicator of
competitiveness, it is equally unclear whether firms with superior
environmental performance tend to be more or less profitable compared to
establishments with inferior environmental performance within the same
industry. For example, across the entire range of manufacturing industries
included in the study by the World Resources Institute, correlations between
profitability and the intensity of toxic releases are weak. Even when the age
and scale of a plant and the amount of recent investment in plant and
equipment are taken into account, there is no overall tendency for plants with
superior environmental performance to be less profitable. 26/

35.  With regard to (d), the relationship between environmental regulations
and productivity varies considerably across sectors. Studies in the United
States on three sectors, namely steel, oil and paper, have found that there
may be a negative relationship between a plant's pollution abatement costs and
its total factor productivity and growth rate. Abatement costs may also be
negatively associated with labour productivity growth. However, while paper
mills with a higher enforcement of environmental standards did tend to have
slower productivity growth, the results for steel and oil were neither
significant nor consistent. Moreover, while heavier polluters tended to have
lower productivity levels and slower productivity growth, effects were rarely
significant or consistent across industries. 27/ It should also be
mentioned that methodological problems abound in this kind of analysis. 28/

36.  Overall, empirical studies in OECD countries have found no systematic
evidence showing that higher environmental standards would have led to notable
adverse competitiveness effects. It has been emphasised that in most cases,
environmental costs constitute such a small proportion of overall costs
(usually 1 to 2 per cent) that they do not have a significant impact on
competitiveness compared to other factors, for example costs of labour,
capital and technology. It has also been suggested that due to competitiveness
concerns, the stringency of environmental requirements may have remained low
enough so as not to cause important competitiveness effects. One of the
reasons why economy-wide empirical studies on environmental regulations and
export competitiveness have not found any systematic relationship between
these two variables could also be that the relationship indeed is not uniform:
the competitiveness effects of environmental regulations may vary greatly
between different economic sectors and under different economic circumstances.

               C. Factors identified in developing countries
                       as affecting competitiveness

37.  So far, systematic empirical studies on environmentally related
competitiveness effects have focused on assessing the impacts of domestic
environmental measures on domestic industries in developed countries. One of
the first attempts to analyse trade and environment linkages in developing
countries is being undertaken in the context of the UNCTAD/UNDP and
UNCTAD/UNEP country case studies. 29/ Other studies on developing countries
have been undertaken or are under way elsewhere. 30/ 

38.  With regard to the relationship between environmental policies and
competitiveness in developing countries, the country case studies have
highlighted the importance of factors which have hitherto received little
attention in discussions on competitiveness. Many of these factors may be
equally relevant in developed countries. For example, in general it is more
difficult for small firms to comply with environmental regulations and
standards, both domestic and external, than it is for large firms.
Environmental policies may thus need to specially address the concerns of
small firms. UNIDO's work has shown that SMEs and resource-intensive
industries are more likely than other firms or industries to suffer adverse
competitiveness effects as a result of certain types of environmental
policies. 31/ 

39.   According to an ITC survey, SMEs' share was around 50 per cent of total
exports in a number of Asian developing countries. Their share was much higher
for certain sectors such as textiles, footwear and toys. For example, while
the share of SMEs in India's total exports was about 32 per cent, their share
in exports of textiles and leather was about 80 per cent. Similarly, in the
Republic of Korea, while SMEs accounted for 40 per cent of total exports,
their share in exports of electric and electronic products was about 60 per
cent. 32/ This indicates, however, that there may be a need to examine the
possible conflict between the export promotion strategies of developing
countries and their need to comply with environmental requirements of their
major export markets.

40.  The constraints faced by SMEs in meeting environmental standards and
regulations can be divided into two categories: (a) those which are endemic to
the nature of their operation, and (b) those which can be specifically linked
to environmental requirements. The first category includes factors such as
poorer access to information, raw materials, capital and technology. The
second category includes constraints such as the fact that the economic use of
environmentally sound technologies may require a minimum scale of operation,
often beyond that of small firms. This raises important policy questions:
whether and how small firms could be provided with more assistance, whether
environmental policies may lead to industrial restructuring, and whether that
is socially desirable. It also suggests that special measures may be needed to
promote innovation in small firms.

41.  Additionally, the sectoral composition of developing countries' exports
to markets in developed countries may lead to adverse competitiveness effects
for two main reasons: (a) the high level of export concentration on a
relatively small number of products/sectors, based on comparative advantage;
and (b) the emergence, in the developed countries, of environmental policies,
standards and regulations in these particular sectors.

42.  Other factors identified by the country case studies that have an
important bearing on the effects of environmental policies on competitiveness
include those listed below:  33/

     (a)   Economic growth. The competitiveness effects of environmental
           policies in the case of developing countries are to a large extent
           determined by the ability of the country to trade and to grow,
           stagnant economies being less able to implement environmental
           standards. Such economic growth should be seen to imply not more
           of the same kind of goods, but cleaner products produced with
           cleaner processes. Furthermore, growth allows negative effects in
           some sectors to be compensated elsewhere.

     (b)   Openness of the economy. The more open and dynamic the economy,
           the greater is its adaptability to environmental requirements, for
           example because of better availability of information, inputs and
           technologies. However, increased openness will be more effective
           in mitigating adverse competitiveness of environmental policies if
           it is accompanied by other positive measures such as better access
           to markets, technology, and finance. Economic openness may also
           induce industrial restructuring, which may result in environmental
           improvements.

     (c)   Infrastructural development. Improvements in infrastructure can
           also play a vital role in reducing the costs of compliance,
           particularly for small firms. For example, improved infrastructure
           will reduce the cost of compliance with effluent standards, as
           part of the expense would be borne by municipalities which install
           waste water treatment facilities. Better sanitation and education
           would also reduce the costs of compliance with environmental
           policies. 

     (d)   Destination of exports. The stringency of environmental
           requirements and level of customer consciousness of environmental
           issues in the main export markets have an immediate bearing on the
           extent to which producers will be affected by environmental
           requirements, both mandatory and voluntary. In addition, if export
           markets are large, there is a greater incentive to improve
           environmental standards of products. 

     (e)   Capacity for innovation. Whether firms can find innovative and
           cost-saving responses to environmental requirements determines
           whether compliance costs can be offset or even competitiveness
           improvements gained. To promote innovation, Governments can either
           provide broad enabling conditions for innovation, or take a more
           active part in fostering innovation. Often, the intensification of
           competition that results from increased economic openness can
           induce innovation.

     (f)   Standard-setting process. Cooperation of industry with the
           authorities in the


           standard-setting process can ensure the design of feasible
           standards and facilitate their implementation.

     (g)   Price-based competition. If export competitiveness is based on
           price, environmental policies that lead to cost increases are more
           likely to have an adverse impact on competitiveness. In the case
           of commodities, a large proportion of total costs is accounted for
           by the cost of raw materials, and thus environmental policies
           affecting raw material costs may have significant competitiveness
           effects.

     (h)   Transaction costs. If the environmental regulations vary greatly
           between the target markets of an exporting country, overall costs
           of producers are increased by costs of finding information on all
           the requirements and modifying production to comply with the
           different demands. 

     (i)   Level of domestic environmental regulation. The greater the
           difference between environmental requirements in the producer
           country and those in the importing country, the more the producers
           who have to comply with the latter can be affected. The fact that
           many developing countries are now implementing increasingly
           stringent regulations and standards can reduce the scope for trade
           friction in this respect.

     (j)   Relationship with foreign firms. Companies that have already been
           exposed to stringent environmental standards through commercial or
           investment links with foreign firms are likely to find it easier
           to comply with environmental requirements.
     
     (k)   Level of Government support. Government policies, for example
           through support for research and development, can greatly
           facilitate the ability of firms to respond to environmental
           challenges.

     (l)   Availability of raw materials, specialized inputs, technology and
           information. The availability of all these (which is generally
           improved by economic openness) impinges on the cost impacts of
           producing in a more environmentally friendly manner.
           Competitiveness effects are more pronounced according to whether
           the standard or regulation requires a change in the process or
           technology. Even if the regulation is product-related, it may
           require a change in technology, which may be expensive. In
           addition, even if there are no mandatory process regulations,
           importers may nevertheless request the use of specific PPMs. This
           may require a change in technology and thus have an impact on
           export competitiveness.

                        IV. PRELIMINARY CONCLUSIONS

43.  Studies on environmental policies and competitiveness, particularly in
the developed countries, have so far concentrated on an examination of whether
environmental policies have a positive or a negative effect on
competitiveness. While these studies have been useful, from the perspective of
environmental policy-making it may be equally useful to analyse and enumerate
the specific factors that have led to positive effects. In this context,
sectoral studies would be particularly useful, as would the comparison of
cases where the same policy has had diverse competitiveness effects in the
same country. Governments and other concerned entities are requested to
provide the UNCTAD secretariat with such examples and such studies.

44.  Studies also show that the design and implementation of environmental
policies are crucial in reducing adverse competitiveness effects. In this
context, it would be interesting if Governments could provide information on
their experiences with the use of cost-benefit analysis in domestic policy-
making, so that other countries, particularly developing countries, can
benefit from their experience.

45.   In the context of sustainable development, protecting the environment
while raising living standards and maintaining competitiveness requires
growth-inducing technological change. Some have argued that most new
technologies use fewer inputs, including energy, per unit of output, and are
less polluting than the old technologies they replace. Much of the increasing
environmental friendliness of newer technologies is induced by efforts to
produce at lower costs and with greater efficiency. 34/ When economic
incentives do not produce this result, public policy can create the incentive
structures that ensure that technological change increases environmental
friendliness, and facilitate the acquisition of environmentally friendly
technologies. Again, examples of the kind of public policies and incentive
structures used both in developing and developed countries would greatly
facilitate the compilation of a comprehensive report on competitiveness. 

46.  Environmental policies may be insufficient to generate significant
environmental protection in developing countries, unless they are accompanied
by economic development. To promote environmental protection without affecting
the growth prospects of developing countries requires both national and
international initiatives. Specific examples of successful initiatives at
national and international levels would provide valuable learning experiences
for all countries. There is also a need to further identify positive measures
which are effective in assisting developing countries in achieving the
objectives of sustainable development.

47.  Compliance with environmental policies tends to be more difficult for
small and medium-sized enterprises (SMEs) than for large firms. Thus, specific
measures to promote adaptation and innovation in small firms may be needed.
This also indicates that the need to comply with environmental standards may
have some effects on the level of industrial concentration. Information on
competitiveness effects on small firms and alleviating mechanisms used in both
developed and developing countries would be of relevance in this context.

48.  On MEAs, the tentative conclusion appears to be that international
conventions may have diverse effects on trade and competitiveness. Whereas in
the case of domestic environmental policies most of the debate has focused on
the competitiveness effects of differing standards across countries, an
analysis of the competitiveness effects of standard implementation pursuant to
MEAs can provide a better understanding of the impact of factors such as
levels of development on the competitiveness effects of similar standards.
Here again Governments and other concerned entities could provide valuable
information.

49.  In light of the above conclusions, major gaps and research needs could
be broadly grouped as follows: (a) systematic analysis on the factors
affecting competitiveness impacts and the conditions under which such impacts
could be positive; (b) full incorporation of the development perspective in
the analysis; and (c) the employment effects of environmental protection.

50.  Considering that the topic of environmental protection, job creation and
employment has been little researched, Governments and other entities are
particularly requested to bring their experiences regarding this topic to the
knowledge of the UNCTAD secretariat.

51.  UNCTAD's Ad Hoc Working Group on Trade, Environment and Development has
recommended some future work on the relationship between environmental
protection and international competitiveness which may also be useful in the
context of the study envisaged for the Commission. These work areas include
the following:

     (a)   Competitiveness effects of environmental policies, through country
           case studies and sectoral cross-country studies; competitiveness
           effects of new and emerging environmental policies in sectors of
           export interest to developing countries;
 
     (b)   Short and long term competitiveness effects of environmental
           policies on small and medium-sized firms, taking into account
           their importance in the exports of developing countries, in
           particular the least developed among them; 

     (c)   Positive and negative trade and competitiveness effects of MEAs in
           parallel with an analysis of facilitating mechanisms and
           incentives under different MEAs, taking due account of the ongoing
           work of UNEP;

     (d)   Environmental and competitiveness effects of economic instruments
           such as subsidies and taxes.

  Information provided by Governments and other concerned entities on all
or any of the above-mentioned areas would greatly facilitate the work of the
secretariat in compiling its final report to the fifth session of the CSD.


For further information, comments, or contributions requested above, please
contact Ms. Leena Alanen, Trade and Environment Section, UNCTAD, Palais des
Nations, 1211 Geneva 10, Switzerland (fax 41-22-907 0044, e-mail
leena.alanen@unctad.org).


                                   Notes

1/         Paragraph 62 of the report of the Commission on Sustainable
Development on its third session. See: Official Records of the Economic and
Social Council, 1995, Supplement No. 12, E/CN.17/1995/36 and E/1995/32.

2/         UNCTAD's Ad Hoc Working Group on Trade, Environment and
Development has considered the trade and competitiveness impacts of
environmental policies from the development perspective. To aid these
discussions, the UNCTAD secretariat prepared two linked reports, "Environment,
trade and competitiveness: conceptual and empirical issues" (TD/B/WG.6/6) and
"The policy debate on trade, environment and development" (TD/B/WG.6/10). As
part of the preparations for UNCTAD IX, the Government of Finland and the
UNCTAD secretariat organised a topical seminar on "Environment,
competitiveness and trade: A development perspective", in Helsinki, on 18 and
19 January 1996. The objective of the seminar was to discuss trade,
environment and development linkages in order to advance consensus-building on
these issues. (See Report of the Topical Seminar "Environment, Competitiveness
and Trade: A Development Perspective", UNCTAD IX/Misc.2). Competitiveness
issues were also a major topic of discussions at the fourth session of
UNCTAD's Standing Committee on Commodities, which had before it the document
"Sustainable development and the possibilities for the reflection of
environmental costs in prices" (TD/B/CN.1/29).

3/         OECD has undertaken extensive analytical work on environmental
protection and competitiveness. The work programme carried out by the OECD
Joint Session of Trade and Environment Experts, jointly sponsored by the Trade
Committee and the Environment Policy Committee, has also given special
emphasis, inter alia, to the effects of environmental policies on
competitiveness. See "Report on trade and environment to the OECD Council at
ministerial level", OECD, Paris 1995. OCDE/GD(95)63. Expert workshops have
provided further technical basis for discussions.

4/         See also E/CN.17/1996/8

5/         TD/B/WG.6/11.

6/         An interesting question in this context concerns the extent to
which environmental requirements are different from other standards and
regulations. Compliance with environmental standards may be less likely to
yield a price premium than compliance with, for example, quality standards.
Furthermore, environmental requirements, especially those related to processes
and production methods (PPMs), may be based more on value judgements than
other standards, and pressure groups may be especially vocal on issues of
environmental protection, even outside their own countries.

7/         In this context, a recent OECD report recognizes that "complying
with the environmental requirements of importing countries may raise
particular competitiveness concerns for developing countries and countries
with economies in transition. Preferred methods for OECD countries would be to
facilitate market access and to provide them with technical and financial
assistance directed towards environmental capacity-building". OECD, Report on
Trade and Environment to the OECD Council at Ministerial Level, OECD/GD(95)63,
paragraph 39.

8/         UNCTAD IX/Misc.2.

9/         Porter, M. and C. van der Linde, "Green and Competitive", Harvard
Business Review, September-October 1995, pp 120-134.

10/        European Commission, Communication to the Council and to the
Parliament on trade and environment, 1996. 

11/        US Congress, Office of Technology Assessment, Industry, Technology
and the Environment: Competitive Challenges and Business Opportunities, OTA-
ITE-586, US Government Printing Office, Washington, DC, 1994.

12/        OECD, op.cit.

13/        European Commission, op.cit.

14/        See UNCTAD, "Eco-labelling and market opportunities for
environmentally friendly products", TD/B/WG.6/2, October 1994.

15/        US Congress, op.cit.

16/        UNCTAD IX/Misc.2.

17/        Repetto, R., "Jobs, Competitiveness and Environmental Regulation:
What are the Real Issues?", World Resources Institute, 1995.

18/        UNCTAD IX/Misc.2.

19/        Repetto, op.cit. 

20/        The Economist, June 3rd-9th, 1995, pp 14.

21/        Repetto, op.cit.

22/        TD/B/WG.6/10.

23/        Jaffe A. B., S. R. Peterson, P. R. Portney, and R. N. Stavins,
"Environmental regulations and international competitiveness: What does the
evidence tell us?", Washington, DC, Resources for the Future Discussion Paper,
December 1993.

24/        Sorsa, P., "Environmental Protectionism, North-South Trade and the
Uruguay Round", IMF Working Paper, 1995, WP/95/6.

25/        UNCTAD, World Investment Report 1992. Transnational Corporations
as Engines of Growth.

26/        Repetto, R., op.cit.

27/        Gray and Shadbegian, "Environmental Regulation and Manufacturing
Productivity at the Plant Level", 1993, NBER Working Paper No. 4321.

28/        US Congress, op.cit.

29/        Country-specific studies, carried out in around 20 developing
countries and countries in transition by local research institutes under the
joint UNCTAD/UNDP project on "Reconciliation of environmental and trade
policies" and the joint UNCTAD/UNEP project on "Capacity-building on trade and
environment", are inter alia analysing factors affecting the relationship
between domestic and external environmental policies, standards and
regulations and competitiveness.

30/        See for example: Imme Scholz et al. Medio Ambiente y
competitividad: el caso del sector exportador chileno, Instituto Aleman de
Desarrollo, Berlin, 1994. The ASEAN secretariat has commissioned country
studies on trade and environment linkages from leading research institutes in
member States of ASEAN (ASEAN Workshop Report. Trade and the Environment:
Issues and Opportunities. Manila, Bangkok, Kuala Lumpur, Jakarta 11-23 May
1995. ASEAN Secretariat, October 1995). Similarly, the ESCAP secretariat is
carrying out a synthesis study based on experiences of several Asian
countries. UNIDO and FAO have also carried out work in this area (see
E/CN.17/1996/8/Add.1). A number of studies have been carried out on
competitiveness effects of MEAs: for example, UNEP's Economics Options
Committee has undertaken a series of studies on the economic implications of
the Montreal Protocol on Substances that Deplete the Ozone Layer.

31/        Commission on Sustainable Development, Trade, Environment and
Sustainable Development: Addendum to the Report of the Secretary General,
April 1996 (E/CN.17/1996/8/Add.1).

32/        See United Nations, Expansion of Manufactured Exports by Small and
Medium-Sized Enterprises (SMEs) in ESCAP Region. Vol II : National Studies,
New York 1995, for a detailed study of small-scale enterprises.

33/        For a detailed discussion on factors affecting competitiveness
impacts and examples in developing countries, see UNCTAD/TD/B/WG.6/6.

34/        Lipsey, R.G., 1994, "Sustainable Growth, Innovation,
Competitiveness, and Foreign Trade", background paper for the Traditional
Institute on Innovation, Competitiveness and Sustainability, Whisler, B.C.,
Canada.

 


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Date last posted: 3 December 1999 10:27:35
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