RESEARCH ON LINKAGES BETWEEN TRADE, ENVIRONMENT AND SUSTAINABLE DEVELOPMENT A preliminary note* * This note describes preliminary results of initial work undertaken for the preparation of a background paper for the Commission on Sustainable Development on research on trade, environment and development carried out by international organizations, academic institutions and non-governmental organizations. It is being issued to invite comments and the provision of additional information. The final version of the background paper will be submitted to the Commission at its fifth session in 1997. This note reflects several views, all of which may not necessarily correspond to those of the UNCTAD secretariat. CONTENTS Paragraphs Page INTRODUCTION ..................................... 1 - 4 4 - 5 I. THE NOTION OF SUSTAINABLE DEVELOPMENT ............. 5 - 12 5 - 6 WITHIN THE CURRENT TRADE AND ENVIRONMENT DEBATE II. REVIEW OF OUTSTANDING ISSUES IN TRADE-............. 13 - 95 7 -26 ENVIRONMENT RELATED POLICIES A. Trade liberalisation and the environment ..... 13 - 28 7 -10 B. Processes and production methods ............. 29 - 43 10 -14 1. Conceptual and practical issues related to PPM-based environmental-trade measures ..29 - 38 10 -13 2. Environmental taxes and border tax adjustment ..............................39 - 43 13 -14 C. Competitiveness issues ....................... 44 - 56 14 -17 D. Harmonisation of standards ................... 57 - 67 17 -18 E. Multilateral environmental agreements ........ 68 - 82 19 -23 1. Compatibility and consistency of trade measures in MEAs with WTO rules ........ 69 - 75 19 -20 2. Criteria for MEAs ...................... 76 - 82 21 -23 F. Trade-related aspects of intellectual property rights (TRIPs) ............................... 83 - 95 23 -27 1. Implications for developing countries.. 89 - 95 24 -27 III. PRELIMINARY CONCLUSIONS .......................... 96 - 108 27 -29 INTRODUCTION 1. The Commission on Sustainable Development, at its third session, invited "UNCTAD, the task manager for trade and environment, in cooperation with UNEP, the World Trade Organization, FAO, WHO, the Department for Policy Coordination and Sustainable Development of the United Nations Secretariat and other appropriate institutions, to prepare a background paper for the Commission that would review the growing volume of research on trade, environment and sustainable development linkages carried out by international organizations, as well as academic institutions and non-governmental organizations in developed and developing countries, including within the framework of projects supported by international and bilateral aid agencies with a view to identifying possible gaps, including through the use of independent trade and environment expert groups" (paragraph 60 of chapter I of the report of the Commission on Sustainable Development on its third session). 1/ 2. The background paper will be made available to the Commission at its fifth session in 1997. To initiate this study, the UNCTAD secretariat has requested information from over 150 international organizations, academic institutions and NGOs, of which 40 responded. 2/ The present note is aimed at inviting comments and additional information, in particular from academic institutions and non-governmental organizations, including those which may not have been contacted, so as to allow the UNCTAD secretariat, in cooperation with other international organizations, to complete the background note as requested by the Commission. 3. The report covers the following broad areas: sustainability, trade policies and the environment, environmental policies with trade effects, and major GATT/WTO issues. However, an analysis of the contents of the papers and documents received against the background of the main issues raised in reports on trade, environment and development prepared for the Commission in 1995 (E/CN.17/1995/12) and 1996 (E/CN/17/1996/8 and Add.1), as well as issues which have been discussed in the Committee on Trade and Environment (CTE) of the World Trade Organization and UNCTAD's Ad Hoc Working Group on Trade, Environment and Development, reveals that issues such as market access, domestically prohibited goods, services and TRIPs are hardly covered. 4. This paper is structured within the framework of two main research paradigms. By way of an introduction, the notion of sustainable development within the context of the current trade-environment debate is briefly examined. This is followed by an examination of major trade policy developments and their linkages with environmental issues and sustainable development, highlighting six focal issues - trade liberalisation, processes and production methods, competitiveness, harmonisation of standards, multilateral environmental agreements (MEAs), and trade-related aspects of intellectual property rights (TRIPs). The final section draws some preliminary conclusions in light of the literature reviewed. I. THE NOTION OF SUSTAINABLE DEVELOPMENT WITHIN THE CURRENT TRADE AND ENVIRONMENT DEBATE 5. The concept of sustainable development, introduced and defined by the World Commission on Environment and Development in the Brundtland Report in 1987, has not made much headway in terms of its development and operationalisation, evolving rather in the absence of a common frame of reference (International Institute for Sustainable Development, 1992; FAO, 1994). 6. The European Community has called for further actions on the environment to be based on the principles of sustainable development, preventive and precautionary action and shared responsibility through its Fifth Action Programme. Similarly, the Maastricht Treaty is also committed to the promotion of sustainable growth with due respect to the environment (Commission of the European Communities, 1992). 7. Some empirical studies have been carried out on the subject of sustainable development. In this context, two recent FAO studies which complement each other can be mentioned. The first one examines the underlying implications of sustainable development for economic, social and legal policies, with a major emphasis on the notions of sustainability and sustainable development in agriculture. It is argued that, in spite of the multiplicity of definitions in the existing literature, only very few, which are operational, can provide proper policy guidance towards achieving the desired goal of sustainable development; further to which, there is no general agreement at present on any operational definition of sustainable development (Markandya, 1994). The second study, focusing on agricultural sustainability, attempts from an economic standpoint to clarify basic concepts which can be applied in the analysis of environmental issues. The alternative definitions of and criteria for sustainability which refer to "resilience at the agro- system level", "maintaining the capital stock", and "the implications of entropy and co-evolutionary development" are discussed. Examples of unsustainable agricultural practices are considered, and the causes of unsustainable resource management, namely population growth, property rights, poverty, prices and government policy, are assessed (Young and Burton, 1992). 8. At a different level of analysis, the substitutability of environmental resources raises serious questions in respect of the feasibility and desirability of technology replacing natural resources and doing so without jeopardising the stability of the environmental system with which the economy interacts. For this reason, FAO argues that an approach is needed that pays attention to the vulnerability of the eco-sphere or its capacity to absorb economic activity, pointing out the need to search for integral strategies that serve both development and environment and to resist the notion that the two need necessarily be in conflict (FAO, 1994). 9. It can be deduced from the above that environment and sustainable development are closely related concepts, although sustainable agricultural and rural development is generally perceived as being a wider concept, encompassing environmental, technological, economic and social dimensions. 10. The International Institute for Sustainable Development (IISD) calls for a broader view of sustainability combining ecological, economic and socio- cultural objectives which would reflect the compromises that have to be made in developing policy options and making decisions. It is argued that the task would be to develop analytical tools and indicators and to offer policy options to decision-makers. The problem is that beyond indicators there are necessary trade-offs between objectives, and this is where the issue of sustainable development assumes importance (IISD, 1994). 11. The concept of sustainable development, as stated in the Brundtland Report, also includes the notion of poverty alleviation, particularly meeting basic needs for all and extending equal opportunity to fulfil the aspirations of the poor towards a better life. It further states that a world in which poverty is endemic will always be prone to ecological and other disasters. Further it clearly includes the notion that economic growth and equity are essential facets of sustainable development. Such equity according to the report would be aided by political systems that secure effective citizen participation in decision-making and by greater democracy in international decision-making. Serious gaps in research exist on these other facets of sustainable development: viz promoting economic growth while restoring inter- and intra-generational equity, poverty alleviation and restoring "greater democracy in international decision-making" (World Commission on Environment and Development, 1987) 12. There is a need to undertake more work on the environmental impacts of changes in agricultural, forestry and other practices. With regard to monetary accounts, a number of methodological problems remain to be solved, particularly, in the treatment of environmental protection expenditures, the treatment of pollution damage, and the treatment of depreciation and degradation of the natural resource base. Physical data bases are important for both physical and monetary accounting systems. This is an area where developing countries need support, particularly from developed countries (Markandya, FAO, 1994). The IISD points to the need to analyse the effects of the functioning of commodity markets on sustainable development (IISD, 1995). Studies are required to analyse how trade in certain agricultural commodities will affect patterns of land use and the species and habitats that depend on them (Birdlife International, February 1996). Furthermore, Birdlife International points out that new approaches to promoting sustainable resource exploitation whilst penalising trade which is not sustainable should be considered. OECD calls for more multi-disciplinary work on trade and environment issues with a view to promoting the compatibility and mutual reinforcement of trade and environmental policies in practice in order to contribute to sustainable development (OECD, 1995). II. REVIEW OF OUTSTANDING ISSUES IN TRADE-ENVIRONMENT RELATED POLICIES A. Trade liberalisation and the environment 13. An IMF study, quoting from Grossman and Krueger (1991), points out that liberalisation generally leads to an increase in the scale of activity, resulting in an increase in resource use. Secondly, liberalisation and its induced relative price changes lead to changes in the composition of output. Thirdly, liberalisation typically induces changes in the techniques of production (IMF, Vol. II, 1994). 14. Positive effects of trade liberalisation on the environment and sustainable development can be summarised as follows: (a) a composition/structural effect: improved efficiency of resource allocation and use; (b) a regulatory effect: reduction or removal of environmentally damaging trade restrictions; (c) a technology effect: improvements in and the transfer of environmentally friendly technology, reducing pollution per unit of output; (d) a product effect: increased international availability of environmentally friendly goods and services; (e) a scale effect: increased opportunities for sustainable growth and development and economic diversification, and additional resources to use for environmental protection (Grossman and Krueger 1991, OECD 1994). 15. Similarly, negative environmental effects can arise on account of a number of factors (for example, Leonard 1998, Tobey 1990, Grossman and Krueger 1991, Dean 1992, Birdsall and Wheeler 1992, WWF 1992, French 1993, Repetto 1994, Lopez 1994): (a) adverse composition/structural effects result from trade liberalization in the form of misallocation of productive resources and the inoptimal composition of output if environmental assets are not properly valued and internalized in market prices; (b) negative regulatory effects may arise if trade liberalization and the adoption of stricter multilateral rules regulating tariff and non-tariff trade barriers undermine environmental policy-making; (c) product effects can be negative to the extent that trade liberalisation contributes to increased trade in environmentally harmful or sensitive products; (d) adverse technology effects may occur if trade leads to the spread of environmentally harmful technologies, through, for example, industries migrating to "pollution havens"; and (e) the scale effects of trade liberalisation may be negative if environmental costs of production are not fully internalized and reflected correctly in market prices. 16. In general terms, the Uruguay Round Agreement is expected to result in significant reductions in the level of bound import tariffs on industrial products and an increase in the coverage of bindings. From a resource management point of view, in some cases the reduction of import tariffs may stimulate demand for commodities or products, thus increasing exploitative pressure on resources which may already be managed in an unsustainable manner. In other cases tariff cuts may lead to prices which more accurately reflect resource and environmental costs of a traded item, and this may encourage the use of less environmentally damaging commodities or products. The elimination of tariff escalation offers opportunities for reducing the net impact of international trade on the global environment, while the practice of charging progressively higher tariffs on more processed products has exacerbated developing countries' economic dependence on exports of raw materials, increasing exploitative pressure on these resources. Tariff escalation may further stimulate the demand for natural resouces by ensuring that economic benefits of value-added processing accrue to the consuming countries. On the other hand, the abolition of tariff escalation and the generally improved access to developed country markets for manufactured and processed goods from developing countries, could substantially reduce pressures on those countries' natural resource bases (WWF, February 1994). 17. Beyond environmental effects of high tariffs alone, tariff escalation has its main effects through its influence on the location of production, which is typically associated with processing of primary commodities, for example trade in forestry, mining, fisheries and agricultural products. 18. Tariff escalation encourages the expansion of downstream processing industries in the importing country and a corresponding contraction in third countries. If third countries concerned are also the main suppliers to the world market of raw materials, tariff escalation may increase pressure there to expand output of raw materials for export in order to maintain foreign exchange earnings, causing environmental damage, possibly beyond sustainable limits. A complementary effect stems from constraining value-added in third countries, particularly when they are the raw material exporters, which limits the resources available to reduce poverty and pay for better environmental protection. Furthermore, tariff escalation also reinforces other obstacles to economic diversification (WTO Bulletin, March 1995). 19. The IMF (Vol. II, 1994) notes that a number of empirical studies (Runge 1993, Anderson 1992, Pearce and Watford 1993) show that in practice trade liberalisation improves the environment instead of being harmful to it. In the event of adverse environmental effects, the primary cause is to be attributed not to trade liberalisation but to the failure of markets and Governments to price environmental resources appropriately. In the same context, the widely held view that environmental problems are caused by production and consumption activities and not by international trade needs to be underlined (WTO, 1995). Empirical evidence (Runge 1993) lends support to the fact that many environmental problems associated with agriculture stem from the same policies that result in trade distortions. This is the case of price support and trade protection policies and water, fertilizer and pesticide subsidies, as applied to selected agricultural commodities in industrial countries, which result in reduced crop variety, chemical pollution, soil erosion and depletion, and pollution of water supplies. 20. Further evidence shows that numerous internationally traded crops, for example coffee, cocoa and tea, that can be beneficial for soil stability have been affected by adverse terms-of-trade effects or the anti-export bias of government policies. On the other hand, certain commodities, such as cattle and other crops like maize, cassava and groundnuts, subjected to special trade arrangements can be environmentally damaging (IMF, Vol II. 1994 quoting Pearce and Watford 1993). 21. Studies analysing the adverse effects of trade liberalisation indicate, as in the case of Ghana, a trade-off between the direct increase in output from extending the margin of cultivation and the decrease in agricultural productivity from the reduction in the use of biomass. An estimation of the effects of a decrease in agricultural export taxes and a decrease in industrial tariffs points to a decline in real income in each case due to a deterioration of the environment associated with extensive exploitation of the biomass (IMF, Vol II, 1994 quoting Lopez 1993). 22. Another study analysing the effects of Indonesia's log export ban aimed at curtailing deforestation shows that, given the low efficiency of the wood- processing industry, which benefited from a subsidy as a result of the fall in domestic log prices which followed the ban, the adverse environmental consequences of the subsidy implicit in the ban were significant. It is pointed out that these could have been avoided if the ban, whose price effects led to the subsidization of the local processing industry, had been substituted instead by an appropriate production tax (IMF, Vol II, 1994 quoting Braga 1992). 23. The agricultural sector has turned out to be a subject of serious environmental concern, as it provides many examples of market failures combined with trade restricting and distorting policies, resulting in adverse environmental effects. Studies carried out to date show, on the one hand, direct, negative and often significant environmental effects stemming from market access restrictions, domestic support policies and export subsidies, and on the other hand, those stemming from high taxation of agricultural production relative to other economic activities - both directly and indirectly through exchange rate over-valuation and import protection of other sectors of activity. As a matter of fact, adverse environmental effects are associated with a wide range of specific policies applied to protect agricultural production. For example, production subsidies can lead to deforestation, input subsidies can encourage more intensive use of agro- chemicals, and multiple trade-restrictive measures can cause compounded environmental damage in various ways - water, air and soil pollution. As far as agricultural export subsidies are concerned, they can produce the following effects: depress prices of agricultural products on world markets, especially in targeted export markets; reduce farm incomes; extend low-yielding farming and ranching to ecologically vulnerable tropical forests and; aggravate rural poverty (WTO, 1995, quoting Runge 1994, Repetto, 1993 and 1994, Anderson 1992). 24. In the industrial sector, evidence from the Latin American experience suggests a negative relation between openness and pollution-intensive growth. In addition, it has been observed that pollution and resource intensity increased more rapidly in closed economies than in open ones (IMF, Vol II, 1994 quoting Birdsall and Wheeler 1992; Lucas and Hettige 1992). 25. Other works point to the important role of the effects of openness in inducing the adoption and diffusion of clean technology. Similarly, in the case of Indonesia, it has been shown that liberalisation in the 1980s created a conducive environment which led assembly-based industries to shift away from pollution-intensive processing sectors to cleaner ones. This was accompanied by a rapid movement of industries away from densely populated areas, thus reducing the health hazards caused by industrial concentration (IMF, Vol.II, 1994 quoting Wheeler and Martin 1992; Birdsall and Martin 1992; Wheeler and Martin 1993). 26. Little empirical evidence is available at present on the kinds of environmental benefits which elimination of trade restrictive and distorting trade policies might bring. One argument holds that removing or reducing trade restrictions will not be enough by itself to correct all the environmental problems to which they contribute. Solving agricultural income problems - which are linked to environmental problems in the sector - arising from both domestic and international trade distortions would require the intervention of three policy measures to take place simultaneously. First, domestic policies which affect farmers' production negatively should be reformed. Second, exports of developing countries should have open access to markets in the developed countries, and the latter should "reduce the level of surpluses and export subsidies used to dump these surpluses on world markets". These two reforms which, ultimately, are expected to result in income growth would, under some assumptions, put developing countries in a better position to apply the third policy measure, which is protection of "lands sensitive to environmental damages...from unsustainable practices" (Runge, 1994). 27. Further empirical studies are required to assess the effects of trade liberalisation during the implementation process of the Uruguay Round. The impact of further trade liberalisation on agriculture deserves special consideration, as distortions would remain high even after full implementation of the Round (IMF, 1994). A particular area of concern in agriculture is how trade liberalisation affects the interlinkages between pastoral systems, forest systems, irrigated land systems and marginal land and the broader aspects of development (FAO, 1995). Analytical work should focus on the likely environmental impact of the removal of trade barriers. Similarly, the effect of liberalisation on price instability is another area which requires further research (Young and Burton, FAO, 1992). On the question of environmental subsidies, empirical studies should give consideration to the adequacy of the Uruguay Round exemptions provided for such subsidies and the utility of enhancing the exemptions for developing countries (WWF, January 1994). Studies should be undertaken to analyse the positive and perverse effects on commodities of the removal of all direct and indirect subsidies that are detrimental to the environment or threaten biodiversity (Birdlife International, February 1996). WWF recommends that the combined effects of the partial reductions in developed country production and export subsidies allied to new limitations on the use of import controls by developing countries on food security, the agricultural resource base and the environment in those countries should be evaluated (WWF, March 1994). 28. With regard to tariff escalation, further research on its impact on the environment of developing countries is required (UNCTAD, TD/B/WG.6/L.7, 1995). The effects of escalating tariffs and selected non-tariff barriers on sustainable development is another topic which should be analysed (IISD, 1995). B. Processes and production methods (PPMs) 1. Conceptual and practical issues related to PPM-based environmental- trade measures 29. PPM-based trade measures are becoming more common as awareness of the environmental damage being caused by methods of producing is increasing. At the same time, PPM-based environmental-trade measures also pose a number of potentially serious problems. First, they present difficult conceptual problems in trying to distinguish between genuine environmental measures and protectionist-motivated trade-restrictive practices. Second, they raise the question of the unilateral imposition by a few economically powerful countries of higher environmental standards on smaller countries by restricting or banning their imports unless those smaller countries bring their environmental policies into line with the importing countries. Third, there is concern that if unilateral trade measures can be used to frame environmental policies in other countries, there may be nothing to prevent economically powerful countries from extending their use of trade measures to other policy goals, such as labour standards or other social or cultural matters. The two latter problems have also been raised by trade economists, who have argued that differential environmental practices, to the extent that they do not affect the products themselves and to the extent that they do not involve "spill- over" effects, form part of the comparative advantage equation and are thus primarily an issue of competitiveness (Stro"m, 1995). 30. In WTO's terminology, production processes, referred to as PPMs, are of two types: those which have some effect on the product itself, but which cannot be detected through inspection, and those which have no effect on the characteristics of the product itself and relate only to production or manufacturing process. Regarding the latter, current GATT interpretation, as expressed in the Tuna/Dolphin panel reports, do not recognize them as legitimate trade measures in terms of Article III because national treatment concerns itself with discrimination between "like products". In other words, if a PPM has no effect on the quality or characteristics of the product, it cannot be used as a criterion for differentiating between otherwise "like products" (Dawkins, Institute for Agriculture and Trade Policy, 1995). 31. The use of import restrictions based on PPMs raises a key trade and environment issue. The environmental impact of the PPM may be purely local at the site of production, or it may have transboundary or global environmental implications. Multilateral trade rules and disciplines make no provision for, and have been interpreted not to allow for, import restrictions based on characteristics which are not physically embodied in the imported products and therefore do not impact on the environment in the importing country (OECD, COM/ENV/TD(95)48/REV2). 32. In general, it is impossible to determine the PPMs used to produce a product by physical inspection of this product at the border. This raises questions about the feasibility of PPM-related trade restrictions. However, agreement among relevant countries on verification and certification systems and mutual recognition of such systems can increase the likelihood of the feasibility of PPM-related trade restrictions. Verification and certification systems have in fact been set up for product-related PPM requirements, primarily in the area of sanitary and phytosanitary measures (OECD, op. cit.). 33. The cost of verification and certification systems for non-product- related PPMs can also be higher given the wide diversity of PPMs in various countries. As in the other cases where verification and certification systems are established, the cost of the systems and complying with them can create special difficulties for small producers and exporters, in particular from developing countries (OECD, op. cit.). Similarly, certification costs weigh heavily on "organic farmers" in developing countries, especially when they have to rely on expatriate certifiers. Highly bureaucratic and time-consuming certification procedures can be a constraining factor on the market, where flexibility is a precondition of success. Another crucial issue in certification is credibility. As a rule, consumers must be assured that the certification mark emanates from an independent source which is not dictated by the interests of industry or Governments. For developing countries, an additional concern may arise regarding the competence of their certification systems as such (UNCTAD/COM, 1996). 34. The effectiveness of PPM-related trade restrictions in bringing about specific intended environmental changes in other countries will depend on a number of factors. These factors include the market power of the country or countries extending those requirements (e.g. through trade restrictions) relative to that of the country or countries whose exports are targeted, the trade dependence of the specific industry whose product or products are targeted, the volume and direction of trade in the affected product, the type and combination of instruments used, and the appropriateness and feasibility of the requirement imposed (OECD, op. cit.). 35. Since many PPMs can cause environmental degradation, the issue is now being raised as to whether products produced using environmentally harmful methods could be identified as such and have trade restrictions placed on them. Life-cycle assessment (LCA) is an extension of the PPM tool and attempts to reflect an assessment of the ecological impact of a product during its whole life. Taking into account upstream and downstream environmental effects that a product generates, there is already an increasing spread of such standards and measures relating to the recycling of packaging, return of containers, used items, etc (International Federation of Agricultural Producers, 1995). However, effective LCA methodologies are still very much in the development stages, and many LCAs already carried out have prioritised the waste disposal stage, while neglecting others. In addition, only a few LCAs have dealt with the issue of natural resource based products (UNCTAD/COM/70, 1995). 36. A number of case studies, prepared under UNCTAD's technical cooperation project sponsored by IDRC provide a preliminary indication of some of the possible trade effects of eco-labelling in product categories which are of export interest to developing countries, in particular textiles and footwear. These studies based on interviews with producers and relevant institutions illustrate the kind of competitiveness impacts that may arise. These broad categories include: costs of raw materials; capital costs; costs of testing and verification; special case of small firms (UNCTAD, TD/B/WG.6/2, 1994). 37. Eco-labelling could have trade effects. Transparency, which is an important element in addressing potential adverse trade effects, may also imply involving developing countries in the eco-labelling process when products of special export interest to them are concerned (UNCTAD, TD/B/WG.6/2, 1994). From the developing countries' perspective, the rationale for establishing eco-labelling criteria for products that are principally imported has been questioned, in particular when such criteria relate to the use of specific raw materials or PPMs with local environmental effects (UNCTAD, TD/B/WG.6/L.7, 1995). 38. Studies should be undertaken to look for alternative ways to address PPM-related issues, for example through technology transfer and financial and technical assistance. Along similar lines, the OECD recommends that the appropriate and effective role of PPM-based trade restrictions in MEAs needs to be further explored, as does their relationship with the multilateral trading system; in addition, work is required on valuing the costs involved in the use of PPM-based measures compared with the costs of other policy options considered to be equally feasible and effective (OECD, 1995). According to the IISD, the WTO should set criteria and prerequisites for such actions based on, for example, compensation for the loss of expected benefit from negotiated market access, or acceptance of withdrawal of equivalent trade benefits (IISD, 1995). The Union of Industrial and Employers' Confederations of Europe recommends more detailed work on the use of economic instruments and internalisation of environmental costs (UNICE, May 1995). The IISD underlines the need to address conceptual and methodological issues in relation to valuation of environmental costs, decision criteria to make the precautionary principle operational, and appropriate policy and institutional designs (IISD, 1995). There is a need for an international coordinating body to define legitimate categories and structures for eco-labelling schemes to ensure multilateral input into the design of new and existing schemes and to facilitate harmonisation and mutual recognition of standards where appropriate (IISD, 1995). 2. Environmental taxes and border tax adjustments 39. The WTO Trade and Environment Committee is, inter alia, analysing the relationship between GATT and the question of charges and taxes for environmental purposes. According to some, this begs the question as to whether the Committee's work would see to it that GATT rules do not conflict with seemingly neutral taxes imposed on products in support of environmental or conservation objectives (WWF, September 1994). 40. A general interpretation of GATT rules is that border tax adjustments (BTA) are possible for taxes on products or raw material inputs but not for taxes on processes. Taxes on production processes, therefore, generate differences in production costs. The European Chemical Industry Council, for example, agrees that national environmental problems should be dealt with by national measures, but expresses concern over environmental problems of a transboundary or global nature, as national taxes on processes can create trade distortions. The European Chemical Industry Council proposes that existing taxes or charges should therefore be harmonised within international agreements (European Chemical Industry Council, 1994). 41. Environmental taxes and border tax adjustments are of some concern to developing countries, and the relationship between BTA and GATT rules raises a number of controversial issues for trade and environmental policies. First, if taxes are part of cost internalization measures designed to reduce environmental damage, their rebate at the border upon export may undermine the achievement of the environmental goal they were designed to address. Second, rebating taxes on exports and levying them on imports can reduce the impact of environmental taxes on competitiveness, creating resistance to changes in the present rules. Third, the tax rule reinforces the asymmetry between taxes and regulations under GATT rules, as the costs of compliance with command and control measures cannot be rebated at the border or imposed on imports. Fourth, the rules can lead to imports from developing and other countries being inappropriately subject to environmental standards of industrial countries. Fifth, the fact that GATT allows border adjustment of product taxes, but not of process taxes, could lead to sub-optimal environmental policies (Sorsa, IMF, 1995). 42. The border adjustment of environmental taxes is one area in which present GATT rules may be too "flexible". Any change to the present rules that would consider environmental objectives of taxes faces measurement and implementation problems. For instance, application of environmental taxes on imports, or their rebate on exports, can pose very difficult measurement problems. If the use of environmental levies increases in the future or more substantial carbon taxes are introduced, the existing tax adjustment rules may give rise to trade conflicts (Sorsa, IMF, 1995). It is, however, generally agreed that border tax adjustments would raise serious competitiveness concerns if carbon taxes are implemented on a wide scale. 43. A concern raised by FIELD is to ensure that GATT fully permits border adjustment fees to compensate for energy or pollution taxes imposed on domestic industries. In various countries, manufacturers of energy-intensive products such as chemicals, steel and aluminium have expressed concerns that payments of energy taxes - taxes on the carbon content of fossil fuel to reduce greenhouse gas emission - without border adjustments would make them uncompetitive with foreign firms not subject to comparable taxes (FIELD, 1995). WWF argues that the levying of carbon taxes and other forms of energy tax will have implications for the price of most tradeable goods and that this implies that countries taking the lead in the implementation of energy taxes must have recourse to effective border tax adjustment measures if these industries are to safeguard their international competitiveness. In addition, if energy taxes are to prove effective in reducing wasteful consumption of energy resources and the associated pollution, they must meet certain criteria which are as follows: taxes must be levied at a level which reduces energy production and consumption; taxes should be designed in accordance with the "polluter pays" and "user pays" principles; all power sources should be taxed on environmental grounds, with the exception of renewable energy sources, which should be promoted with financial incentives where necessary; all sectors of industry, including power generation, transport, manufacturing and agriculture should be taxed; no exemption should apply for energy-intensive industries; the energy tax should be fiscally neutral within a country; transfer between countries of revenues raised from energy taxes could be used to provide the finance and technology necessary to provide energy services at minimum cost and with least environmental impact on poorer countries (WWF, September 1994). C. Competitiveness issues 44. The issue of environmental requirements and competitiveness is dealt with in more detail in a separate note, "The relationship of environmental protection to international competitiveness, job creation and development", prepared for the fourth session of the CSD by the UNCTAD secretariat (Background paper # 21). 45. The traditional hypothesis regarding environmental requirements and competitiveness is that such requirements adversely affect international competitiveness, reducing exports from countries with strict regulations. Another hypothesis is that environmental policies may actually have positive effects on international competitiveness. 46. The first hypothesis is based on the fact that although enhanced environmental protection generally increases welfare and may also bring economic benefits, these benefits accrue to the society as a whole rather than to the regulated firms. By contrast, the costs of increased environmental protection are usually borne by individual polluters, thus raising private costs. Examples have been cited where compliance with mandatory and voluntary environmental requirements has negatively affected the competitiveness of certain firms and sectors. On the other hand, non-compliance with mandatory environmental standards can lead to market access problems. For example, there are several environment-related requirements that Indian agricultural, leather and textile sectors need to comply with to be able to export to OECD markets (CUTS 1995). 47. The question of pollution havens and industrial flight has also been brought up in the literature. According to Leonard (1988, quoted by IMF, Vol.II, 1994), differences in pollution control costs between the host countries and Ireland, Spain, Mexico and Romania were not substantial enough to alter the investment decisions of multilateral enterprises. Similar results were obtained by another study for United States investment in Mexico (Krossman and Krueger, 1991, quoted by IMF, op. cit.). Harrison and Eskeland (1994) found no evidence in support of the pollution haven hypothesis in Co^te d'Ivoire, Mexico, Morocco and Venezuela (Harrison and Eskeland, 1994, quoted by IMF, idem). 48. A WTO paper (quoting Leonard 1998, Tobey 1990, Grossman and Krueger 1991, Dean 1992, Birdsall and Wheeler 1992, Wheeler and Martin 1992, and Low 1992) points out that there is considerable empirical evidence which invalidates the view that higher environmental standards make a sufficiently significant impact on costs of production, inciting most industries to migrate, and does not support the argument that such migration has in fact taken place on any significant scale (WTO, WT/CTE/W/1, 1995). For example, in relation to the effects of NAFTA on Mexico's environment, the alleged comparative advantage created by lax pollution controls played no substantial role. Strict environmental regulations imposed in the 1960s and 1970s by industrial countries did not measurably affect trade patterns in the most polluting industries. Pollution abatement and control costs of United States firms are small. There is little evidence of a relationship between environmental expenditures and trade in environmentally sensitive goods - for example, pulp and paper, petroleum products, chemicals - defined as the sectors with the highest pollution abatement costs in the United States in 1988. Furthermore, States with higher pollution abatement controls were not found to suffer lower export performance (IMF, Vol.I, 1994). 49. However, there are several examples of firms exporting harmful industries and technologies as well as hazardous wastes to developing countries. It is argued that although environmental regulations may not be among the main driving forces when industrial location decisions are made, migrating industries sometimes do, nevertheless, use environmentally less friendly technology in the new host country although the migration decision itself was made on other grounds. It has also been pointed out that relocation could be undertaken for purely strategic reasons, to convince policy-makers to refrain from further tightening of environmental control (Bommer 1995). 50. A more dynamic approach to analysing the linkages between environmental requirements and competitiveness tends to emphasise the positive effects instead, as exemplified by the "Porter hypothesis", which maintains that strict environmental regulations can in fact improve competitiveness by resulting in increased efficiency or cost-reducing innovations by firms (Porter and van der Linde 1995). Furthermore, firms operating within a strict regulatory environment may gain important first mover advantages in the sector producing environmental goods and services (EGS), which clearly stands to benefit from increased environmental protection. 51. Several empirical studies have been conducted in OECD countries to test both competing hypotheses - that environmental regulations have adverse effects on competitiveness or that they enhance competitiveness (Jaffe et al. 1993). The relationship between the two hypotheses 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 relation to firms operating in highly regulated sectors. 52. So far, systematic empirical studies on environmentally related competitive effects have focused on assessing the impacts of domestic environmental measures on domestic industries in developed countries. Probably the first attempt to analyse trade and environment linkages in developing countries is being undertaken in the context of a series of country case studies by UNCTAD, in cooperation with UNDP and UNEP. These case studies have shown that developing country producers are concerned about the potential adverse impacts of environmental requirements arising from external markets on their export competitiveness, and brought up specific examples of adverse competitiveness effects. However, there have also been examples of positive competitiveness effects of environmental regulations (UNCTAD, TD/B/WG.6/6, 1995). 53. The literature reveals that no clear links have yet been established between environmental protection and competitiveness. There is not enough evidence in support of either hypothesis to justify generalisations. There are many factors apart from environmental requirements that affect competitiveness, causing comparative advantage to shift between countries and the competitiveness of different sectors and firms to vary over time. Given the complexity of the linkages between environmental protection and competitiveness, further analysis is necessary. 54. There are knowledge gaps regarding the environment-competitiveness relationship itself. Due to methodological and data limitations in the existing research, the nature of the linkages between these two is not resolved. In particular, there has been no systematic identification of conditions under which competitiveness impacts are likely to be either positive or negative. 55. The impacts of environmental regulations on job creation have largely been overlooked by existing research. Topics that need to be addressed in this context include the extent to which jobs are likely to move within a country or between countries because of environmental requirements; whether labour- intensive sectors would benefit or suffer from environmental regulations; the specific difficulties of small and medium-sized enterprises in complying with environmental requirements in the light of their important role in providing employment; and the role of the EGS sector as a provider of jobs. 56. Since most of the existing research has been conducted in the OECD countries, the development perspective has not received enough consideration. Taking into account the specific features of developing countries, the linkages between environmental protection and development through competitiveness and other impacts should be analysed. D. Harmonisation of standards 57. With the growing integration of the world economy, pressures arise for harmonisation of many policies that may affect international competitiveness, including environmental policies. Some sectors within industry and labour favour harmonization as a means to combat import competition and to avoid migration of pollution-intensive industries to countries with lower standards. Many environmentalists favour harmonization of process standards as a guarantee against competing deregulation: from an environmental point of view, harmonization guarantees a commitment to specified environmental objectives. 58. Differences in topography, resource endowments, methods of production and policies, in the broadest sense, exist between all countries; such differences relate to weather, demography, geography, inherited policies, technology, wage structure, capital costs, skills, land taxes, etc. The diversity of standards reflects differences in environmental conditions, social values or development priorities. Levels of environmental protection are thus the outcome of the interplay between environmental endowments, actual environmental pressures and preferences or ability to focus on environmental quality. 59. Because of these complexities, harmonisation of standards might not necessarily imply globally prevailing equal standards. The question also arises as to what should be harmonised, using which criteria or whose criteria - importers' or exporters' - and which instruments at which policy levels (International Federation of Agricultural Producers, May 1995). 60. Support for the harmonisation of environment-related product standards can be argued for, especially when product standards differ from country to country and exporters may face significant transaction costs in acquiring information from many different sources. Similarly, tailoring product characteristics to meet the unique requirements of many markets may be costly (International Federation of Agricultural Producers, May 1995). 61. Wide variations and rapid changes in regulations, particularly in Europe and North America, are a cause for considerable confusion and uncertainty for exporters, who are faced with competing claims concerning, for example, different pesticide residue levels or packaging types and materials in different markets. This could be especially burdensome for small producers, who may need assistance to install equipment or acquire skills necessary to meet production requirements (International Federation of Agricultural Producers, May 1995). 62. However, increasingly demanding standards are not a new phenomenon for many exporters. Those who have worked with the European Union and the United States have accepted the imposition of ever changing and ever stricter regulations and standards as inevitable (International Federation of Agricultural Producers, May 1995). 63. One point of view of the WWF is that the net environmental effect of any harmonisation will depend, among other factors, on the standards chosen. The Codex Alimentarius panel is known to be influenced by multinational food and chemical companies. Equally important is that harmonisation of environmental standards could also inhibit innovation of more vigorous environmental standards (WWF, February 1994). 64. Because it is generally accepted that a country's solution to domestic environmental problems should be based on its own policy decisions and evaluations reflecting its own economic conditions and social preferences, demands for harmonization of production standards are difficult to justify. With the exception of processes and production methods that have transborder environmental impacts or affect the global commons, therefore harmonization of process standards is not required (UNCTAD, TD/B/40(1)/6, 1993). 65. Harmonisation of non-product-related PPM requirements on a consensual basis may be necessary and desirable to address transboundary and global environmental concerns, whereas it may be less desirable or feasible in the case of local environmental problems (OECD, COM/ENV/TD(95)48/REV2). For the European Chemical Industry Council, international harmonisation or convergence of product requirements based on sound scientific evidence and risk assessment is desirable, and to this end global harmonisation of product classification schemes is an essential step. In addition, existing taxes or charges for regional and global environmental problems should be harmonised within international agreements (European Chemical Industry Council, December 1994). 66. The harmonisation of production and processing methods is likely to be a much more contentious trade issue in the future, since it could involve conflicting ethical preferences, moral values and the unilateral assertion of environmental priorities. To avoid such value judgements, the use of objective scientific criteria has been considered fundamental to any harmonisation of standards (OECD, 1995). 67. Research should be based on cases in which harmonisation of standards is appropriate, as standards cover a wide variety of sectors, all of which present different obstacles and opportunities for sustainable development (IISD, 1992). E. Multilateral environmental agreements (MEAs) 68. Multilateral environment agreements (MEAs) constitute an important part of the environmental management framework. Many observers hold the view that a number of regional and global issues can only be addressed through these agreements. Moreover, with the expansion of MEAs, some views are also expressed as to the likelihood that trade provisions, in some circumstances, will remain a feature of these agreements (World Business Council for Sustainable Development, 1995). On the other hand, it has been observed that "trade measures should not be expected to be a regular feature of MEAs, given that trade measures are not necessarily the most effective means to achieve environmental objectives" (WTO, PC/STE/W/3). 1. Compatibility and consistency of trade measures in MEAs with WTO rules 69. The compatibility of trade provisions included in MEAs with GATT's trade law has been debated, although no actual dispute has ever arisen in this regard (World Business Council for Sustainable Development, 1995). However, some of these agreements impose trade restrictions or bans that appear to contravene GATT principles (Stro"m, 1995). 70. Other areas requiring clarification have been suggested by many expert opinions in the literature. For example, in a paper presented to the Preparatory Committee on Trade and Environment, concerning Multilateral Environmental Agreements, Greenpeace draws attention to some features of MEAs which could be subject to challenge under the GATT. Article XX provides exceptions from the application of GATT provisions to protect human, animal or plant life or health (Article XX(b)) or relating to the conservation of exhaustible natural resources (Article XX(g)). Exemption for trade-related environmental measures under Article XX is possible in some cases, but several obstacles to its use may arise. First, there may be difficulty in showing that discrimination against non-signatories is neither arbitrary nor unjustifiable. Second, the exemption may fail if a regulation applies extraterritorially. Finally, it may be difficult to show that a measure was "necessary" to protect life or health under Article XX(b) or "relates to" the conservation of exhaustible natural resources under Article XX(g) and that no less trade- restrictive alternative is available (Greenpeace International, 1994). 71. In addition, there is another point of conflict in international law between GATT and MEA regimes which is often raised in this context. Where conflicts exist between international treaties, for example between a MEA and GATT, the Vienna Convention on the Law of Treaties provides the primary source for determining which one shall prevail. While all GATT parties are not parties to the Vienna Convention, GATT parties are bound by the Vienna Convention where its provisions codify customary international law. Thus, GATT does not automatically supersede an MEA where a dispute takes place between two GATT signatories who are also signatories to the MEA which is being considered (Greenpeace International, 1994). 72. With regard to possible use of trade measures in MEAs, the following requirements have been proposed: trade measures should only be used as a last resort to enforce the provisions laid down; the set objective should not be attainable by other measures or programmes with a lesser impact on trade; trade measures should not be unnecessarily restrictive of trade; they must be clearly related to the environmental objectives of the MEA; they should be approved by a significant number of signatories, including those who would be most affected by the trade restrictions; the process which results in trade measures should be transparent. On the other hand, trade measures against non- parties to an MEA can be justified if they ensure that all imports or exports are subjected to the same environmental standards that apply to the signatories of the agreement (Union of Industrial and Employers' Confederations of Europe, 1995). 73. The use of quantitative restrictions in existing MEAs and their compatibility with the GATT has been summarised by Cameron and Robinson. They point out that, despite the continuous use of quantitative restrictions in MEAs - restrictions on exports by parties, restrictions on imports by parties, restrictions on trade with non-parties - and the policy arguments which accompany it, only some of these existing restrictions are clearly incompatible with the GATT. However, it can be argued that a large proportion are at odds with GATT's basic prohibition on quantitative restrictions, and that GATT's general exceptions are too narrowly drawn to allow for many generally accepted and legitimate environmental objectives (Yearbook of International Environmental Law, Vol. 2, 1991). 74. With regard to amending the status of the three MEAs under discussion at the GATT/WTO (Montreal Protocol, Basel Convention and CITES), it has been suggested that differences in modalities would need to be solved. Generally speaking, the following possibilities exist: (i) an amendment to the GATT, stipulating that trade restrictions in conformity with these treaties would be consistent with the GATT, as in the case of NAFTA which contains such a provision; (ii) a decision under Article IX(2) of the WTO Agreement interpreting such restrictions as permissible under Article XX(b) and/or (g) of GATT; (iii) action under Article IX(3) granting general waivers for restrictions undertaken pursuant to these treaties. It follows that under the three modalities, it would be both possible and appropriate to limit the authorization to restrictions that did not favour domestic production and were not disguised restraints on international trade (The Consensus Building Institute, 1995). 75. In light of the above alternatives, it is argued that an interpretation of GATT Article XX would be the simplest approach, inasmuch as there is considerable expert opinion to the effect that restrictions under the three MEAs are permissible under Article XX as it stands; there can be little doubt that the action would be a proper exercise of the power of interpretation granted in WTO Article IX. Furthermore, it has equally been argued that the use of the waiver technique - which under Article XXV(5) permits the use of a waiver in exceptional circumstances not elsewhere provided for in the GATT, where international agreement exists among signatories on the need to use trade-related environmental measures in an existing and future MEA - would produce the desired result. However, this may be seen to imply a fundamental conflict between the proposed restriction and the GATT, which is being waived only because of "exceptional circumstances". Moreover, a waiver is ordinarily time-limited and would have to be renewed periodically, after review of the intervening experience, again implying that the MEA is being accepted only temporarily and on sufferance (The Consensus Building Institute, 1995; Greenpeace International, 1995). 2. Criteria for MEAs 76. Discussion of the treatment of MEAs that may be negotiated in the future has focused on the choice between ex ante and ex post approaches. The ex ante approach would establish criteria for identifying MEAs containing trade restrictions that would be consistent with the Uruguay Round Agreements. The criteria might be substantive or procedural or both. Again there would be the question of the modalities by which such criteria should be adopted, whether by formal amendment or some kind of decision of the Council. Under the ex post approach, each MEA authorizing trade restrictions would be submitted, after being negotiated, for a waiver action under Article IX (The Consensus Building Institute, 1995). 77. The International Institute for Sustainable Development (IISD) argues that until the international community gains more experience with MEAs and trust levels are built up, MEAs with trade sanctions should seek WTO waivers on a case-by-case basis, which reflects a measured, flexible approach. The process to be used in negotiating an MEA and the criteria which would need to be met so that the MEA qualifies for a waiver should be set out (IISD, 1995). 78. The need to reach an agreed definition as to what constitutes an MEA within the context of GATT has been a matter of concern. The procedural criteria which have been widely proposed as potentially applicable to MEAs include the following: (a) The agreement should be open to all relevant least developed, developing and developed countries on equitable terms; (b) The agreement should feature an environmental problem which has transboundary or trade-related environmental, conservation or human health impacts; (c) The agreement should be international or regional in scope; (d) The agreement should be for the purpose of protecting human, animal or plant life or health or for the conservation of exhaustible natural resources; (e) The negotiation of the agreement should be sponsored by the United Nations, a United Nations agency, or a responsible regional organization, and it should be open to the participation of all interested States on equal terms; (f) Membership should be open to all States affected by the environmental problem addressed by the agreement; (g) The parties adhering to the agreement should account for a substantial proportion of the activity regulated by it; (h) The agreement should take account of the special situation of developing countries; (i) The agreement should not unfairly or unnecessarily discriminate against non-parties; (j) Trade restrictions contemplated should not constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail or a disguised restriction on international trade. (k) There should be clear and enforceable obligations, including dispute settlement procedures; (l) Trade measures used as enforcement mechanisms should be defensible on grounds of necessity, effectiveness, proportionality and specificity; (m) There should be a clear definition of what constitutes a significant free-rider country to be targeted for punitive measures (The Consensus Building Institute, 1995; Greenpeace International, 1994; IISD, 1995). 79. Other suggested criteria concern the "significance" or "importance" of the environmental problem addressed by the agreement, or whether the trade restrictions authorized are "necessary" for the achievement of the environmental objective. But some have questioned whether it would be appropriate for the WTO to "second-guess" the parties to an MEA that met the other requirements on matters such as the "importance" of the problem or the "necessity" of the restrictions (The Consensus Building Institute, 1995). 80. The experience with the use of trade measures in the Basel Convention, the Montreal Protocol and CITES has been diverse. Consequently, it is difficult to formulate general conclusions drawn from the analysis of a particular MEA. This suggests that there is a need to analyze carefully the environmental effectiveness of the use of trade measures on a case-by-case basis. The World Business Council for Sustainable Development, for example, argues that the negotiation of an international PPM standard should not become a basis for downward harmonisation or other forms of lowering of standards. This puts added pressure to ensure that strategies such as the lowest common denominator or the averaging of standards are not accepted as a prima facie basis for any negotiation. Only careful consideration of the merits of each case should determine the appropriate standard or differentiated standards to be applied. Trade liberalisation should not become a disincentive for applying appropriate and effective environmental standards (The World Business Council for Sustainable Development, 1995). 81. There is general agreement on the need to integrate environmental considerations into trade agreements and vice versa. The need to seek international consensus and coordination to do so is also recognised, as unilateral trade measures are considered inappropriate to remedy global, cross-border or national environmental problems. From this standpoint, the use of trade measures should reflect a genuine multilateral consensus on (a) the need for environmental measures to be least trade-restrictive; and (b) the need to ensure that trade measures are least environmentally restrictive (International Council of Chemical Associations, 1995; European Chemical Industry Council, 1994; United States Council for International Business, 1993; Greenpeace International, 1994). 82. Some areas requiring further work have also been indicated. The necessity and effectiveness of trade measures in MEAs are not easy to establish, as they form part of a wider framework which can include technology transfer and technical cooperation, financial elements, differentiated responsibilities for developing countries and other elements, in addition to environmental obligations the trade measures are designed to support. Further work to measure their likely impact on the implementation and enforcement of these agreements on a case-by-case basis would be useful. The impact of these provisions on actual trade needs and trade regimes also needs to be established through empirical studies. Furthermore, in order to bridge the gap between achieving maximum levels of environmental protection and ensuring an open trading system free of trade barriers and opportunities for protectionist and disruptive measures, specific substantive and procedural criteria should be developed, as suggested by the World Business Council For Sustainable Development (1995). The OECD argues for the need to develop further internationally agreed principles to guide the use of trade measures within the context of MEAs, while avoiding protectionism and disruption of the trading system, with the objective of reconciling international environmental law and the multilateral trading system to avoid clashes between the two systems. Furthermore, the OECD points out the need to promote the effective implementation of MEAs by stating obligations in these agreements as clearly as possible and strengthening the provisions on compliance with obligations for consultation, mediation, conciliation, arbitration or judicial settlement, as stipulated in a number of these agreements (OECD, 1995). UNCTAD recommends more research to analyse and evaluate the trade and competitiveness effects of MEAs. In this context, interim evaluations of MEAs in order to examine such effects, particularly in the negotiation of future MEAs, are also needed (TD/B/WG.6/L.7, 1995). Capacity-building efforts should become a standard part of any MEA, both as incentives for participation and as insurance that domestic-level efforts at such participation will be as effective as possible (IISD, 1995). E. Trade-related aspects of intellectual property rights (TRIPs) 83. The Uruguay Round package contains a new agreement on TRIPs, which can be considered as one of the most ambitious and extensive international legal agreements ever negotiated on intellectual property rights (WWF, 1995). The TRIPs Agreement was signed in Marrakesh in April 1994 as part of the Uruguay Round Final Act. 84. The Agreement covers patents, trademarks, copyright and related rights, geographical indications, layout-designs of integrated circuits, industrial designs and protection of undisclosed information. It also includes commitments on national enforcement procedures, as well as multilateral procedures for the settlement of disputes. 85. As with all Uruguay Round Agreements, the TRIPs Agreement will be administered by the WTO and enforced through its Dispute Settlement Body. However, the Agreement gives Members discretion to determine the "appropriate method" for implementing the Agreement under their own jurisdictions, although subsequent provisions appear to circumscribe this discretion by limiting Member's use of Article 27 exceptions when amending or reconstructing their legal systems and practices concerning intellectual property rights (WWF, 1995). 86. The agreement on TRIPs applies the principles of national treatment and most-favoured-nation treatment to intellectual property rights for the first time. It also establishes minimum standards - in terms of availability, scope and use - for patents, copyright, trademarks, geographical origin of products, industrial designs, layout designs of integrated circuits and trade secrets. 87. Article 27.2 is the only provision in the TRIPs Agreement that makes an explicit reference to the environment. It states that "Members may exclude from patentability inventions, the prevention within their territory of the commercial exploitation of which is necessary to protect ordre public or morality, including to protect human, animal or plant life or health or to avoid serious prejudice to the environment, provided that such exclusion is not made merely because the exploitation is prohibited by their law". Thus, if it is necessary to ban the commercial exploitation of an invention in order to avoid serious prejudice to the environment, a WTO Member is free to refuse a patent for the invention concerned (WTO, WT/CTE/W/8, 1995). 88. While the TRIPs Agreement covers all the main areas of intellectual property, the intellectual property issues that have been raised in the environment fora concern essentially those IPRs relevant to technology in particular patents. For example, the importance of promoting environmentally sound technology has been referred to in many discussions in environmental fora. A number of provisions of the TRIPs Agreement are of relevance to the promotion of technological innovation (for example, Article 27.2, Article 39, Articles 35 to 38). The TRIPs Agreement also contains a number of provisions, in particular on compulsory licensing and control of anti-competitive practices, to establish an appropriate balance between these two objectives, and thus between the interests of producers and users of technological knowledge, conducive to social and economic welfare (Section 8 of Part II) (WTO, WT/CTE/W/8, 1995). 1. Implications for developing countries 89. The effects of intellectual property protection on the acquisition and transfer of environmentally sound technologies by developing countries may be diverse. It is believed by some that better intellectual property protection could promote the transfer and development of environmentally sound technologies. On the other hand, the fear of an adverse impact of higher levels of intellectual property protection on prices and welfare is manifest. It has also been argued that stronger protection of intellectual property rights will further widen the gap between North and South, since the North will be better equipped to have an upper hand in respect of the world's cutting-edge technology, and that only countries with knowledge-based value added will benefit from the improvement in the terms of trade (WWF, 1995; IISD, 1992). Furthermore, failure to uphold TRIPs requirements can lead to the imposition of substantial penalties, which could mean, among other things, prohibition of access to Northern country markets of genetically produced goods or raw materials produced in offending countries (IMF, 1994). 90. According to a paper by the WWF, the TRIPs Agreement affects the conservation of biodiversity because it will extend and regulate the commercialization of biological diversity and genetic resources. This biodiversity is being eroded by the increasing pressure of various human activities which the Convention on Biological Diversity seeks to alleviate, in light of which it is argued that the commercial use of biodiversity, which will be both encouraged and regulated by the TRIPs Agreement, adds significantly to this pressure (WWF, 1995). 91. Another concern stems from the fact that the TRIPs Agreement may undermine the interests of indigenous people with long-standing knowledge of biodiversity resources and that revenues thereby derived may not be channelled back to the respective source areas and human communities (WWF, 1994). As a matter of fact, the TRIPs Agreement is silent on the question of the participation of countries/communities in the benefits arising from the use of technology based on genetic resources originating in their territories. In this context it is worth noting that in the negotiation of the Biodiversity Convention, issues related to intellectual rights were important in the context of provisions dealing with access to and transfer of technology (Article 166 of the Convention). The role of indigenous and local communities in conserving biodiversity is recognized in the preamble of the Biodiversity Convention. The importance of maintaining their knowledge and practices relevant to the conservation of biodiversity and sustainable use of its components is also recognised, as is the need to encourage equitable sharing of benefits derived from their knowledge, innovations and practices (Articles 8(j) and 10(c)) (WTO, 1995). In addition, other arguments hold that any work the Committee on Trade and Environment undertakes on intellectual property rights must include in-depth analysis of the legal and institutional relationships between the WTO regime and the Convention on Biological Diversity (FIELD, 1995). 92. Other implications of the TRIPs Agreement for the developing countries which need to be assessed relate to access to new technologies in the areas of biotechnology. According to UNCTAD's Trade and Development Report, studies conducted so far point out that some developing countries "are fairly well- positioned to promote biotechnological innovation owing to such factors as climate and geography, which endow them with genetically diverse raw materials on which the developed countries increasingly depend". It is further argued that the provision of proprietary rights in this field, including plant breeders' rights, may contribute to enhancing the competitiveness of a number of developing countries. In addition to acquiring ownership rights, developing countries interested in the pursuit of biotechnological innovation need to preserve their natural genetic endowment for future exploitation. However, within the short-term perspective, "much biotechnological innovation, especially processes for making end-products, will fail to meet the non- obviousness standards of domestic patent laws in industrialized countries. Such innovations could obtain protection only under a trade-secret law. Possibilities for reverse engineering are then enhanced by the self- reproductive properties characteristic of both natural and genetically refined organisms" (UNCTAD, Trade and Development Report 14 (Supplement), 1994). With regard to the mechanism in place for the protection of plant varieties, mention should be made of the UPOV (International Association of Plant Breeders for the Protection of Plant Varieties) Convention, which was established as a system of protection distinct from patents. The Convention attempts to deal with the problems of plant breeders' rights holders in relation to "the limitations that the requirements of the public interest may impose on the free exercise of such right(s)". "Under the Convention, property rights are given to plant breeders for improved varieties which possess characteristics similar to those required for a patentable invention and whose properties have been improved by human intervention". However, the granting of exclusive rights to the plant breeder is subject to two exceptions: the right to save seeds for replanting, and the right to use protected varieties as an initial source of variation for creating or marketing other varieties that may be the subject matter of separate and independent protection. One important point that can be retained here in relation to the TRIPs Agreement is that "the 1978 and 1991 UPOV Conventions and the patent or effective sui generis system requirements contained in Article 27(3)(b) of the TRIPs Agreement may limit "seed sharing" between farmers - a widespread practice in developing countries - if farmers involved are also engaged in commercial marketing transactions (i.e. where they sell any agricultural goods produced from the seeds being shared). This constitutes a powerful disincentive to signing the UPOV Convention or the TRIPS Agreement" (WWF, June 1995). 94. A concern highlighted in various discussions on environmental matters is the need to curb the adverse effects of certain technology on the environment. Another long-standing subject of attention in most countries has been the environmental effects of agricultural chemicals, which are generally subject to a testing and approval procedure before being authorized for marketing. As far as the TRIPs Agreement is concerned, the main point is that it does not affect the right of Governments to restrict research or development or the use of technology on the grounds of protecting the environment. A patent gives the right to the patent owner to prevent others from using the protected invention (subject to certain exceptions), but does not guarantee the patent owner the right to exploit the technology in question. 95. Research is required to assess the relationship between the TRIPs Agreement and the Convention on Biological Diversity and the extent to which the TRIPs Agreement could reduce local and national control over biological and genetic resources and impair the transfer of environmentally sound technology to poorer countries (WWF, October 1994 and June 1995). A wide range of issues related to access to and transfer of technology and the supporting financial framework which require further enquiries and analysis have been suggested by OECD. They include access to genetic resources being subject to national sovereignty; access to and transfer of relevant technologies, especially in the framework of MEAs, including biotechnology, by those conserving and providing the genetic resources; and access to benefits ultimately gained from the use of genetic material in the development of biotechnology. Other areas of research which need to be probed into include the impact of IPRs on the environment, with particular emphasis on access to related technologies and the realization of farmers' rights (OECD, 1995). Along the same lines, the IISD adds that the effects of IPRs, with reference to both technology transfer and preservation of biodiversity on sustainable development, should be analysed (IISD, 1995). III. PRELIMINARY CONCLUSIONS 96. This note has attempted to undertake a preliminary review of existing research on the major issues underlying the trade and environment debate as they relate to sustainable development. Without claiming to be an exhaustive analysis of the issues and concerns raised, it has tried to take stock of a number of issues and suggested areas where greater focus might be necessary in light of the key policy issues which are likely to be of particular relevance, mainly to developing countries. 97. In general, research efforts should aim at assisting Governments, the private sector and others in their efforts to make trade and environment policies mutually supportive in the pursuit of sustainable development. As called for in Agenda 21, improved access to markets and access to and transfer of finance and technology are of key importance in assisting developing countries and countries with economies in transition in meeting the objectives of sustainable development. In this context, studies are required, for example, on technology transfer issues and on innovative financing mechanisms to support developing countries in their efforts to internalize costs. 98. Specific subjects most frequently dealt with in studies and other materials received so far have been grouped, for analytical reasons, in six areas (chapter II). 99. Studies on the effects of trade liberalization on the environment can be subdivided into two groups: (a) studies which analyse the (positive or negative) environmental effects of trade liberalization and trade expansion; and (b) studies which analyse the environmental benefits of the reduction or removal of trade-restrictive or trade-distortive measures. In both cases, more empirical work is needed to further clarify the relationship. It is to be noted that policy implications may be different. In the first case, where trade liberalization has negative environmental effects, there is a need to complement trade liberalization by sound environmental policies. In the second case, there is a premium attached to removing trade distorting policies. 100. With regard to PPMs, many of the studies and statements received refer to the treatment of PPMs in the WTO. More studies may be needed on the implications of the use of voluntary instruments based on the life-cycle approach in the developed countries for the exports of developing countries. Specific issues which need further research include the question as to whether the same PPMs yield equivalent environmental benefits across all firms and industries. In this context, more research is required on concepts such as mutual recognition and equivalency of divergent environmental standards at an appropriate level of environmental protection, and that of proportionality between environmental benefits and economic costs. 101. With regard to competitiveness, additional research could focus on the systematic identification of conditions under which competitiveness impacts are likely to be either positive or negative. Sectoral studies on competitiveness effects across countries and across firms will also be relevant. Further, studies are required on measures which may assist firms in developing countries to adjust to rapidly changing environmental requirements in domestic and external markets. Studies are also required to determine cost- effective ways for developing country firms to enhance environmental management and, where possible, improve international competitiveness. In this context, additional research on enterprise development and sustainable development policies, particularly for SMEs, may be especially relevant. Studies aimed at assisting developing countries in increasing competitiveness may also focus on infrastructural development and other enabling factors. 102. Most studies and statements on multilateral environmental agreements (MEAs) refer to the relationship between trade measures pursuant to MEAs and the rules of the WTO, as well as to the issue of criteria for the use of trade measures. At the same time, a number of papers express the view that it is difficult to judge the necessity and effectiveness of trade measures in achieving the environmental effectiveness of MEAs. 103. Additional studies should perhaps focus on proposing a greater range of more attractive positive measures, in particular innovative instruments to facilitate financial and technology transfers to developing countries, such as voluntary mechanisms in the context of foreign investment and technology transfer and certain market-based instruments. 104. An area which is particularly underresearched is the relationship between intellectual property rights and sustainable development, an issue which is also relevant in the context of the Convention on Biological Diversity. Case studies may be required to contribute to a better understanding of the relationship between IPRs and sustainable development, particularly in the context of MEAs. Studies are also required to determine under what circumstances IPRs could be a barrier to the transfer of environmentally sound technologies and under what circumstances IPRs could promote such transfers. 105. Relatively little research appears to have been undertaken on issues such as domestically prohibited goods and the relationship between development of the services sector and sustainable development. More research, particularly empirical research, is required to determine whether existing instruments in international trade provide enough protection against the environmentally harmful effects resulting in the recipient country from the export of domestically prohibited goods. This is particularly relevant in view of the widely differing capacities for monitoring environmental effects between the exporting and the importing countries. Based on the above, a preliminary conclusion of this note is that more research may be needed in particular in the following areas: (a) trade liberalisation and the environment; (b) environmental protection, technology transfer and trade-related intellectual property rights (TRIPS); (c) trade and competitiveness effects of environmental policies, including voluntary and other standards; (d) enterprise development, trade promotion and sustainable development policies in developing countries; (e) innovative financing mechanisms to support developing countries in their efforts to internalize costs; (f) positive measures to address transborder, regional and global environmental policies, such as incentives to encourage trade in environment- friendly substitutes, voluntary mechanisms on foreign direct investment and technology transfer, and market-based instruments; (g) trade and competitiveness effects of MEAs; and (h) the issue of domestically prohibited goods. All these issues should be studied with special reference to the prevailing conditions in developing countries. 107. This is only a preliminary conclusion. At this early stage of the preparation of the research paper, it would be inappropriate to make definite recommendations to the Commission, in particular with regard to the use of independent expert groups. 108. Comments to this paper and additional information are invited from international organisations, academic institutions, non-governmental organisations, and other appropriate institutions in developed and developing countries. These can be addressed to Ms. Leena Alanen, Trade and Environment Section, UNCTAD, Palais des Nations, 1211 Geneva 10, Switzerland (fax 41-22- 907 0044, e-mail firstname.lastname@example.org). 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