INDEXSR. NO PARTICULARS PAGE NUMBER

1. Introduction 2

2. Trade 3

3. Environment 8

4. Trade & Environment 9

5. Need for constructive engagement 15

6. Strategies for Sustainable Trade 17

7. Environment Policy Recommendations 20

8. Review of Literature 28

9. Case Study 35

10. Critique and Conclusion 38

11. References 44

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INTRODUCTION

Trade and Environment issues are some of the highly contentious ones as the World Trade

Organization (WTO) has no particular specification on this agreement. However in recent years,

there has been a lot of concern, debate and dispute on this topic. This will be an important mandate

for future discussions because of the emerging framework of Sustainable Development Goods

(SDG) that as discussed recently and will be implemented post Millennium Development Goals

(MDGs) from 2015-2030 by the United Nations (U.N)

The Goal had lost momentum in the past 2008 Global economic crisis due to concerns of an

immediately plummeting global economic growth and recession.

Thus the suggestions of the Rio conference on the environment could not be implemented. Several

Contentious issues surrounding this argument emerged because of disagreement on the nature of

commitment. Also environmental standards need to be set up due to clean development agenda that

ensures high living standards, full employment and high economic growth. This has to be attained

by using scarce economic resources judiciously in order to balance the economy and ecology The

challenge is of laying a uniform policy because different countries are at different levels of growth

and development e.g. Western Europe is very progressive in terms of environmental standards and

is very sensitive to animal rights ranging from banning of killing of crocodiles, snakes and other

reptiles who are endangered as well.

Developed Countries use these items for fashion and high living by Hollywood actors and the rich

and famous even decorate their living rooms with skulls of tiger or stuffed lions or elephant tusks.

Unfortunately poor and developing countries in Africa as well as some Asian countries like China

are involved in trade of endangered species of animals and plants. Thus there is precarious balance

between the prosperity and poverty

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TRADE

International trade is the exchange of capital, goods, and services across international borders or

territories, which could involve the activities of the government and individual

Theories of International Trade

1. Absolute Cost Advantage

The theory of Absolute Cost Advantage was put forward by Adam Smith. The Absolute Cost

Advantage states that when one nation is more productive than another in the production of a

certain commodity, but is less productive in producing another commodity as compared to the other

nation, then in such a situation both the nations can gain by specializing in the production of the

commodity in which each enjoys absolute cost advantage. Both the nations can enter into

international trade with each other by exporting that commodity in which they enjoy absolute cost

advantage e.g. Because of climatic conditions, India is more productive in producing spices but less

productive in producing wheat as compared to USA. USA in turn is more productive in producing

wheat and less productive in producing spices. Thus India has Absolute Cost Advantage in the

production of spices and USA has Absolute Cost Advantage in the production of wheat.

Man Hours Required To Produce One Unit (1 Tonne) of Spices

and Wheat

Commodity India USA

Spices 20 40

Wheat 40 20

In the above illustration, India has Absolute Cost Advantage for production of spices and USA has

Absolute Cost Advantage for production of wheat. In such a situation, India will specialise in

producing spices and produce more than what it requires, and exports the surplus to USA. Similarly,

USA will specialise in producing wheat and produce more than what it requires, and export the

surplus to India.

2. Comparative Cost Advantage Theory

David Ricardo states that even though a country may enjoy Absolute Cost Advantage in the

production of both the commodities it would be more beneficial for a country to specialise in the

production of that commodity in which it has greater Comparative Cost Advantage

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Assumptions of Ricardo’s Theory

1. Labor is only factor of production, other than natural resources. Therefore, the production cost

of commodities is measured in terms of labor units.

2. Labor is perfectly mobile within its country, but perfectly immobile between countries.

3. Labor is homogeneous in nature across industries.

4. Production is subject to law of constant returns.

5. Perfect competition exists in commodity and factor markets.

6. Technology is constant

7. Transport cost is assumed to be nil.

8. Trade between countries takes place on barter basis.

9. Trade is free from restrictions - no trade barriers.

10. Full employment exists in the participating countries.

E.g. Let us assume that the two countries involved in trade are India and Japan, and the

commodities include spices and wheat as shown below:

Commodity India Japan Comparative Cost

Ratio

Spices (S) 20 40 20/40 = 0.50

Wheat (W) 40 50 40/50 = 0.80

Domestic Exchange

Ratio

1 S = 0.50 W 1 S = 0.80 W

In the above illustration, India has Absolute Cost Advantage both in terms of spices and wheat as

compared to Japan. But India has Comparative Cost Advantage in producing Spices, i.e., 50% of

Japan’s labor cost. But in case of wheat India’s Comparative Cost Advantage is less, i.e. 80% of

Japan’s labor cost.

As far Japan is concerned, there is Absolute Cost Disadvantage in producing both spices and wheat.

However, the Comparative Cost Disadvantage is less in producing wheat.

In the above illustration, Since India has Comparative Cost Advantage in producing spices, and then

India would specialise in production of spices, and export the surplus to Japan. Similarly Japan has

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least Comparative Cost Disadvantage in producing wheat, and then Japan would specialise in

production of wheat and export the surplus to India.

3. Heckscher - Ohlin (HO) Modern Theory

Eli Heckscher and Bertil Ohlin developed Factor Endowment Theory of International Trade. This

theory does not invalidate Ricardo’s Comparative Cost Advantage theory but supports it since it

also accepts comparative advantage as the cause of international trade .This theory states that each

nation is best suitable to produce the commodity that requires a large proportion of the factor which

is relatively abundant. Conversely, each nation is least suitable to produce the commodity which

requires a greater proportion of factor which is scarce or available in small quantity. Thus, the

ability of a nation to produce goods differs due to differences in factor endowment. A nation will

export products that use its relatively abundant factors of production. It will import those products

that use relatively scarce factors of production.

Assumptions of Heckscher - Ohlin Theory

1. There are two countries, two commodities and two factors of production - labor and capital.

2. The relative endowments of labor and capital are different in two countries.

3. Factors of production are perfectly mobile within the country, but immobile between two

countries.

4. The techniques of production of identical goods are same in the two countries.

5. There are no trade barriers on movement of goods between the two countries.

6. The transport costs are assumed to be nil.

7. The consumer tastes and preferences in both countries are identical.

8. All resources are fully employed in both nations.

9. International trade between the two nations is balanced.

10. There is perfect competition in both commodities and factor markets in both nations.

11. Both commodities are produced under constant returns to scale in both nations.

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Environmental elements may be included in this model in two ways:

a) By considering the environment as a factor of production, or

b) By changing the assumptions of the model.

Environment as a factor of production

The environment can be introduced into the model as one more factor of production, in addition to

the traditional factors of capital and labor. Thus, countries with greater environmental wealth can

develop a comparative advantage that will allow them to specialise in pollution-intensive goods,

given their relatively greater capacity to assimilate these. The comparative advantage arises when

the cost of environmental pollution or natural resource degradation is not accounted for.

In fact, countries that specialise in the production of pollution-intensive goods as a result of having

abundant environmental resources run the risk of exhausting the assimilation capacity of those

resources in the absence of environmental policies. Moreover, the environmental degradation

caused by the export of relatively more polluting goods reduces trade revenues for the countries that

produce them, because these would equal the sum of the benefits gained directly from trade minus

the indirect losses resulting from environmental degradation.

Changes in assumptions of the model

The environmental aspect can also be included in the H-O Model by changing some of its

assumptions. Two interesting cases are changes in the assumptions relative to the uniformity of

technologies and the absence of externalities.

a) Technological differences - The “technological uniformity” assumption can be changed

in two ways:

1. By assuming that there are differences between sectors in the productivity of the technologies, or

2. By assuming that the technologies vary between countries.

In the first case it is assumed that the same technologies are used in all the countries, but that their

productivity varies from one sector to another; in other words, with the same quantity of inputs, the

sector with the most productive technology obtains higher production. In the second case it is

assumed that the technologies used in each country are different, which implies that with the same

quantity of inputs, more production is obtained in the country with the most productive technology.

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In the first case, the technologies differ between sectors; in the second case, they differ between

countries.

In the second case, a country could specialise in producing goods for which it does not have a

comparative advantage derived from a similarity in technologies. For example, the environmental

factor can be more productive in one country than in another, if the difference in technology allows

a unit of environment to generate a greater quantity of production than in another country. In a

situation like this the countries could change their specialization, which in the absence of adequate

environmental regulation could promote the deterioration or exhaustion of natural resources.

b) Externalities in production - In this case, it is assumed that there are environmental externalities

that can negatively influence the productivity of capital and labor. These externalities can be

corrected by means of specific environmental policies. By introducing an environmental policy into

the model, costs to producers generally increase due to the investment required to internalize

environmental costs The price of the product will then tend to increase. The consequences of

environmental policies will vary according to whether a country imports or exports an affected

good. If the environmental policy is applied abroad via tariffs, then the international price of the

good whose production is polluting will increase. The wellbeing of a small, open economy that

exports this product will improve, despite the environmental harm caused by a greater production of

that good, whenever a pollution tax is levied on national producers to help compensate the

environmental harm caused by the production. By contrast, if the country imports the good, a hike

in the international price will benefit it when:

• Reduction of national production of that product is promoted via governmental assistance to

other, less polluting sectors of the economy, or

• There are other more polluting sectors than one that produces the good in question, in which case

diverting resources toward the less polluting sector will improve the country’s environment.

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ENVIRONMENT

The term environment has been derived from a French word “Environia” means to surround. It

refers to both abiotic (physical or non-living) and biotic (living) environment. The word

environment means surroundings, in which organisms live. Environment is the sum total of

conditions that surrounds us at a given point of time and space. It is comprised of the interacting

systems of physical, biological and cultural elements which are interlinked both individually and

collectively. Environment is the sum total of conditions in which an organism has to survive or

maintain its life process. It influences the growth and development of living forms.

In other words environment refers to those surroundings that surrounds living beings from all sides

and affect their lives in total. It consists of atmosphere, hydrosphere, lithosphere and biosphere. It’s

chief components are soil, water, air, organisms and solar energy. It has provided us all the

resources for leading a comfortable life.

Components of Environment

Environment mainly consists of atmosphere, hydrosphere, lithosphere and biosphere. But it can be

roughly divided into two types such as (a) Micro environment and (b) Macro environment. It can

also be divided into two other types such as (c) Physical and (d) biotic environment.

(a) Micro environment refers to the immediate local surrounding of the organism.

(b) Macro environment refers to all the physical and biotic conditions that surround the organism

externally.

(c) Physical environment refers to all abiotic factors or conditions like temperature, light, rainfall,

soil, minerals etc. It comprises of atmosphere, lithosphere and hydrosphere.

(d) Biotic environment includes all biotic factors or living forms like plants, animals, Micro-

organisms.

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TRADE AND ENVIRONMENT

World trade expansion has raised the issue of the relationship between trade and the environment.

The first is that expansion of trade may produce environmental damage, either directly, if new

export opportunities encourage polluting industries to expand their operations and/or increase

pollution associated with transport of goods, or indirectly, as conventional gains from trade raise

national incomes and consumption. A related second concern is that some countries will use weaker

environmental protection as a way of increasing their international competitiveness. A third issue is

that individual countries seeking to maintain high environmental standards may be restrained by

GATT/WTO rules from using trade policy for this purpose. Finally, GATT/WTO rules may inhibit

international cooperation to reduce environmental threats by restricting the use of trade sanctions to

enforce multilateral environmental agreements.

Trade as a Threat to Environmental Quality

Many environmentalists view expanded trade (globalisation) as a threat to environmental quality.

The threat is perceived to arise through one or both of two channels. The first and more direct

channel is the effect of trade expansion on the composition of output in each country. Specifically,

freer trade may increase the ability of dirty industries to expand where environmental regulation—

or enforcement of environmental standards—is relatively weak. This relocation of dirty production

to less-regulated sites is presumed to increase pollution in exporting countries and worldwide.

Environmental regulation is an important component of total production cost, i.e., that countries

with the lowest environmental standards are therefore likely to have comparative advantage in dirty

industries. To the extent that increased trade means goods travel longer distances to markets,

pollution associated with transport may also rise.

A second and less direct channel through which globalisation itself may affect the environment

arises through the usually favourable net impact of expanded trade on economic growth and per-

capita income. If environmental externalities such as pollution are roughly proportional to output,

higher output necessarily translates into higher total pollution.

The Effects of Trade on the Environment

The effects of trade on the environment have been classified in different ways.

1. Combination effects

Combination effects (mixed effects) are environmental impacts derived from the change in the

relationship between products produced and consumed that occurs as an outcome of international

trade, maintaining the scale of economic activity constant. Combination effects can be positive or 9 | P a g e

negative, depending on the relative impact that changes in production in each sector might have on

the total stock of environmental. This means that combination effects capture the environmental

impact of the readjustment of the sectors that comprise the Gross Domestic Product (GDP),

occurring as a result of international trade. e.g. If international trade causes a reduction in

agricultural production with respect to non-agricultural production and if the agricultural sector

pollutes less, then, the environmental impact of the combination effect of products is negative; by

contrast, if the agricultural sector pollutes more, the environmental effect is positive.

2. Effects of scale

Effects of scale refer to the environmental impacts derived from changes in the scale of economic

activity as a result of international trade, keeping constant the combination of goods produced.

Increased international trade increases the scale of economic activity in all sectors; therefore, the

environmental impact of the effects of scale is always negative Combination and scale effects

assume that the impact of environmental externalities and other externalities in production and

consumption is maintained constant, as well as the impact of changes on policies and on the

technologies used in production

3. Effects of negative externalities

The effects of externalities capture feedback effects on production and consumption that occur as a

result of the environmental externalities and other externalities caused by production and

consumption These feedback effects generate more environmental impacts in addition to those

produced by the combination and scale effects. In the model proposed by Abler and Shortle), it is

assumed that only environmental externalities exist and that these are stronger in the sector that

pollutes the most. Under these conditions, the environmental impact of the externalities occurs in

the same direction as the environmental impact of combination and scale effects. Nevertheless,

other types of externalities may occur in production, due to the effects that some sectors have over

others that are not captured by the price system; moreover, externalities may also occur in

consumption, such as the generation of solid wastes and emissions. All these externalities generate

environmental impacts that are not reflected in the combination and scale effects.

4. Technological effects

Technological effects refer to the impacts that trade has on the environment through the creation

and adoption of new products, new productive processes or new technologies for reducing pollution

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5. Policy effects

Policy effects refer to the environmental impacts stemming from changes in environmental policies

and other public policies that occur as a result of international trade. In other words, the increase in

international trade prompts the introduction or re-directing of policies and these in turn have

environmental impacts. This argument refers to the effects of trade on policies and not on

environmental changes or changes in international trade that occur in response to environmental

policies.

Comparative Advantage and Environmental Externalities

We can use economic theory to analyse some of the gains and losses associated with environmental

effects of trade. The theory of comparative advantage tells us that both trading partners gain from

trade through specialising in the goods that they can produce most efficiently. But this basic theory

does not consider environmental externalities that may be associated with the production or

consumption of goods. Consider Figure 1, which shows the welfare effects of an imported good,

using automobiles as an example.

The supply curve S takes

into account private

costs, whereas S’ shows

social costs including

both private costs and

externalities. P* is the

domestic price in the

absence of trade,

whereas Pw is the world

price, which will also be

the domestic price under

conditions of free trade.

Q* is the quantity

produced domestically with no trade, while with free trade Q1 is produced domestically and (Q2 -

Q1) is imported, for a total domestic consumption of Q2.

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Domestic producers of automobiles lose the shaded area A, since they now sell fewer cars at a

lower price. Domestic consumers gain areas A+B, since they can now buy more cars at the same

lower price. The net gain from trade is therefore (A+B) - A = B.

But this leaves out any environmental externalities associated with trade. If the production of

automobiles causes environmental damage, then by lowering production the country gains cross-

hatched area C in reduced environmental costs -- costs which are shifted to countries producing cars

for export. On the other hand, if environmental damage is associated with the consumption and use

of automobiles, lowering the true marginal benefits from consumption, then trade increases the

environmental costs of consumption by the shaded area D. Even though one group (automobile

producers) loses, the gains to consumers outweigh these losses. But once we introduce externalities,

we can no longer be so sure that there are net gains from trade. It depends on the nature and size of

the environmental damages C and D.

Environmental Effects of Expanding Resource Exports

Environmental effects must

also be figured into the

analysis of the effects of trade

on an exporting country. This

is shown in Figure 2.

Here we use timber exports as

our example. In the ordinary

analysis of trade without

externalities, timber producers

gain areas A’+B’ since with

trade they can produce and sell

more timber, at the higher

world price Pw. Domestic consumers of timber lose A’, being able to afford less timber at the

higher world price. The net gain to the country is B’. The external costs associated with higher

timber production – which could include land and watershed degradation as well as user costs,

option values, and ecological costs – are shown by the area of C’.

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Expanded trade tends to increase the scale of production for the world as a whole, meaning that the

total volume of pollution and environmental damage is likely to increase. Trade also necessarily

involves energy use for transportation, with resulting air pollution and other environmental impacts.

There can also be indirect environmental effects of trade, for example when peasant farmers are

displaced by larger-scale export agriculture onto marginal lands such as hillsides and forest

margins. Specific kinds of trade, such as trade in toxic wastes or endangered species, have obvious

environmental impacts.

Environmental Kuznets Curve

Environmental Kuznets Curve (EKC) asserts that environmental damage increases in the early

stages of growth, but diminishes once nations reach higher levels of income . According to this

theory, after passing through a "dirty" stage of development, nations will put effort into "cleaning

up" and may also shift to less-polluting production methods. More open trade will therefore

accelerate the process of achieving both economic growth and a cleaner environment

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According to the EKC hypothesis, the relationship between economic growth and environmental

degradation is an inverted U (0); it proposes that demand for better environmental quality increases

with increasing per capita income.

Several explanations have been offered for the relationship proposed in the EKC hypothesis from an

economic theory point of view, including:

a) The displacement of externalities, through the re localization of the economic activities that

generate them (shiftable externalities);

b) Changes in the composition of economic activities

c) Greater technological efficiency;

d) The impact of improvements on environmental regulation;

e) The presence of changes or differences in trade policy regimes

A study by Grossman and Krueger found it to be effective for a limited number of air and water

pollutants. But other important environmental pollutants, such as nitrogen oxides, carbon monoxide,

carbon dioxide, methane, and tropospheric ozone, were not included, nor were municipal wastes or

measures of ecosystem degradation such as species loss, soil degradation, or groundwater depletion.

According to a World Bank study, carbon dioxide emissions and municipal wastes continued to

increase with economic growth. And even for those pollutants which seem to conform to an EKC

the "turning points" are high enough, ranging from $2000 to $12,000 in income, to imply a

considerable increase in pollution for most of the world's developing nations before any

improvement would be noted. According to one EKC study, the estimated global "turning point" for

sulfur dioxide would not come until 2085, by which time global emissions would be 354 percent

above 1986 levels; suspended particulate matter would peak in 2089 at 421 percent higher

emissions, and nitrogen oxides in 2079 with 226 percent higher emissions.

Another review of EKC studies suggested that “using different indicators, more explanatory

variables than income alone, and the estimation of different models, the EKC results are generally

not reproduced.

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N EED FOR CONSTRUCTIVE E NGAGEMENT IN THE T RADE AND

ENVIRONMENT AGENDA

There are at least four reasons why it is in the interests of the developing countries to engage

proactively at the national and international level in the trade and environment debate in order to

ensure that environmental concerns are properly addressed in the WTO and that trade liberalization

and environmental protection efforts reinforce each other.

1. Social welfare could be maximised if both trade and environmental goals are strengthened

2. An effective trade and environment approach at the WTO would help maintain momentum for

trade liberalisation and restore confidence in the organization.

3. By dismissing the need for this debate, many “win–win” opportunities remain unexplored,

including those that could potentially benefit exporters in developing countries;

4. It is preferable to try to influence the debate rather than to have the difficult issues resolved

through the dispute settlement mechanism.

Enhancing social welfare

Environmental protection efforts seek to increase social welfare. More progress towards the

fulfilment of this common objective could be made by linking trade and environment and realising

the synergies created by their interaction. On the contrary, if trade liberalisation proceeds in

developing countries without regard for its effects on the environment, there is a high probability

that some of the economic gains from trade will be consumed, and in some specific sectors or

products the environmental costs will perhaps turn out to be higher than the economic gains. In

other words, although poor countries may gain some material advances from trade liberalisation,

they will simultaneously have losses from environmental harms.

Supporting trade liberalisation

Environmental destruction threatens the ongoing commitment to trade liberalisation—and to the

WTO in particular— especially in the developed nations. Trade liberalisation might not be

irreversible and the question of what it takes to maintain support for such an agenda deserves

considerable attention. The coalition in favour of free trade is increasingly vulnerable, especially in

developed nations where there is a growing public perception that the costs of trade liberalisation

could end up outweighing the benefits. There is a growing sense of nervousness, especially in the

United States and several European countries, about the unintended consequences of globalisation,

especially for the environment and domestic wages.

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The potential for win–win opportunities

The third core argument for developing nations not opposing the trade and environment debate

relates to the potential for some trade and environmental objectives to overlap and, in fact, reinforce

each other. The most classic example is the elimination of subsidies in agriculture, energy, fisheries,

and timber. Not only do subsidies distort prices and disrupt trade, but they also cause environmental

harms. In the case of fisheries, which is the sector that has recently received more attention in the

WTO, some experts have estimated that the world’s fishing fleets have nearly two and a half times

the fishing capacity required to harvest fish stocks in an economically optimal and environmentally

sustainable manner; in many cases, what keeps the boats afloat is the subsidies, which are in open

violation of the existing international trade rules

But there are many other areas that offer opportunities for win–win situations for both trade and

environmental objectives. Ecolabelling, for example, represents a clear intersection between market

opportunities and environmental protection because it relies on market forces to promote

environmentally friendlier products. Unfortunately, in the WTO context developing countries have

focused so heavily on the potential discriminatory implications of labelling schemes that they have

blocked further progress on the specifics of an environmental initiative that could benefit some

exporters. A more effective way to approach concerns about ecolabelling schemes would be to

propose specific steps for developing country participation in the selection of the criteria for the

schemes themselves. Developing countries could win by addressing their trade-related concerns,

and also win by taking advantage of “green” opportunities abroad. Under the current approach they

lose because, by polarising the debate, their concerns have less chance to be taken seriously, and

they lose again because delaying progress on ecolabelling hinders potential business opportunities.

Pressure on the dispute settlement mechanism

The fourth reason for developing countries to join the effort to advance the trade and environmental

debate is that it is preferable to try to influence the debate rather than the issues being decided

through decisions from the Dispute Settlement Mechanism. Trade and environment experts have

argued that, especially in the absence of a new trade round where some issues could be negotiated,

the responsibility for resolving conflicts in these two areas will continue to be placed on the trade

body’s already overburdened dispute settlement system.

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STRATEGIES FOR SUSTAINABLE TRADE

A World Bank review of trade and environment issues finds that “many participants in the debate

now agree that

a) more open trade improves growth and economic welfare,

b) increased trade and growth without appropriate environmental policies in place may have

unwanted effects on the environment.”

“Greening” Global Environmental Organisations

At the global level, a major reform proposal would be to set up a World Environmental

Organization (WEO) which would counterbalance the World Trade Organization much as national

environmental protection agencies balance departments of finance and commerce. Another

approach would be to "green" existing institutions, broadening the environmental and social

provisions of GATT's Article XX, and altering the missions of the World Bank and International

Monetary Fund to emphasise sustainable development objectives.

The idea of a World Environmental Organization may seem visionary, but there is a good argument

for its establishment. According to Sir Leon Brittan, former Vice President of the European

Commission: “Setting environmental standards within a territory may be fine, but what about

damage that spills over national borders? In a rapidly globalising world, more and more of these

problems cannot be effectively solved at the national or bilateral level, or even at the level of

regional trading blocs like the European Union. Global problems require global solutions.”

A World Environmental Organization could serve as an umbrella for the implementation of existing

multinational environmental agreements, as well as promoting further agreements consistent with

global sustainable development strategies. Global public goods such as biodiversity, protection of

the ozone layer,

climate

stabilisation,

and the

protection of

oceans and

water systems,

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would be the responsibility of the WEO. A WEO could also play a role in the negotiation of trade

agreements on

agricultural subsidies, seeking to redirect of farm subsidies to soil conservation and development of

low-input agricultural techniques. As global CO2 emissions continue to rise, trade in the energy

sector may need to accommodate a substantial carbon tax or tradable permit scheme. Global

agreements on forest and biodiversity preservation are also likely to involve specific trade

restrictions, tariff preferences, or labeling systems. In all these areas, the existence of a powerful

advocate for environmental interests would have a major impact on the shaping of trade treaties and

regulations.

Local, Regional, and Private Sector Policies

Reserving powers of resource conservation and management to local and regional institutions is

important to the sustainable management of resources. Also, it is often difficult to make a match

between centralised World Bank or institutional financing, even if "greened", and the local

institutions that are crucial to effective implementation of resource conservation and environmental

standards. Most environmental policies are implemented at the national level, and it is important to

maintain national authority to enforce environmental standards.

In regional groupings such as NAFTA, that involve no supranational rule-making body, trade

agreements could give special status to national policies aimed at sustainable agriculture and

resource management. NAFTA rules currently give precedence to international environmental

treaties (the Basel Convention on hazardous wastes, the Montreal Protocol on ozone depleting

substances, and CITES on endangered species). This principle could be expanded to all national

environmental protection policies, and effective sanctions for environmental violations could be

established.

In regional trade and customs unions such as the European Union where elected supranational

policy-making bodies exist, these bodies must take responsibility for environmental and social

issues to the extent that their legitimate democratic mandate allows. Transboundary issues are a

logical area for supranational bodies to be responsible for environmental rule making. Where they

are empowered to intervene in national policy-making, the process must be oriented towards

"harmonising up" rather than "harmonising down" standards. This means that countries within the

common market must retain the power to impose higher social and environmental standards where

they see fit.

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Certification and labeling requirements for sustainably produced products help consumers make

informed purchasing decisions. Germany’s “green dot” system for recyclable and recycled goods is

one example. Private, non-governmental organisations have also set up certification systems for

goods such as coffee and timber. To be effective in a globalised world, however, certification

systems must be international. This requires support both at the national level and from corporations

and international agencies.

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ENVIRONMENTAL POLICY RECOMMENDATIONS

When the market fails to allocate resources, as occurs when there are negative environmental

externalities, the Government must exercise its regulatory role to correct this omission. Externalities

arise due to several reasons, including: a lack of information about the costs and benefits of

regulation; the search for revenues by pressure groups that use the political process for their own

benefit; the public nature of losses, which means that those who lose do not unite to oppose policies

that affect them; and, finally, failures in the implementation of instruments or governmental

regulatory measures, a situation that may ultimately turn out to be more costly than the externality

itself.

Direct regulation

This refers to environmental policy mechanisms through which:

a) Polluters are obliged to develop environmental behaviours and actions that are considered

socially desirable;

b) Controls are established to enforce those behaviours.

This desirable behaviour and mandatory compliance are defined in national laws or international

agreements. The mechanisms for ensuring compliance with mandates are generally established in

regulations.It is the State that defines, applies and oversees environmental policy

Table 1 lists the most common instruments used for direct regulation, as well as some of their

advantages and

disadvantages.

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Market regulation

This refers to instruments that directly affect the prices of goods whose production generates

pollution or the prices of inputs used in the production of those goods. These instruments seek to

change the behavior of economic agents, making them pay for the environmental costs associated

with production. The main instruments used for this purpose are taxes on emissions and subsidies

for emission reductions, along with tradable emissions permits and deposit-reimbursement schemes.

Table 2 lists some of these instruments, along with some of their main advantages and

disadvantages.

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Legal Approach

This section examines the instruments that allow the economic agents involved in an environmental

problem to resolve that problem by themselves, through the legal system, without the intervention

of an environmental authority. The main legal instruments used for settling environmental disputes

are property rights and the rules of environmental responsibility or liability

Property Rights

The absence of property rights over environmental resources generally results in their excessive

use. This phenomenon is known as “the tragedy of the commons,” since resources that belong to no

one end up being used by everyone, resulting in their overexploitation. Granting property rights is

one way to prevent this situation. In the case of a resource that is affected by pollution, property

rights can be assigned to those who pollute the resource, or to those who are affected by that

pollution. According to one well known result in economic theory, known as the Coase Theorem,

regardless of who is granted property rights, the same optimal result will always be reached in

which the interests of both the polluters and those who have been polluted are balanced.

However, for the property rights system to function properly, at least three conditions are required:

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a) Property rights must be well defined, enforceable and transferable;

b) There must be a reasonably efficient and competitive system so that the interested parties can

meet and negotiate how the property rights will be used;

c) There must be a full array of markets, so that private property owners can capture all the social

values associated with the use of environmental assets.

Environmental Liability Rules

Environmental liability rules or laws seek to hold polluters responsible for the damage resulting

from their actions through the payment of compensation to the affected party. Thus, the expectation

of having to pay compensation (the polluter pays principle) for damage caused is an incentive for

polluters to modify their behaviour. Environmental liability rules seek to reduce levels of non-

compliance with environmental policy by raising the cost of “bad behavior.” There are two criteria

for determining liability

a) Negligence: the polluter is liable for the damage caused only if the actions that resulted in

damage are not in compliance with the established standards.

b) Strict liability: the polluter is liable for the damage caused regardless of the care taken to avoid

the damage. The second applies mainly to extreme situations in terms of damage, if this occurs.

The purpose of environmental liability laws is not simply to compensate individuals after they have

been affected. It is also - and more importantly - to force potential polluters to consider their

decisions more carefully. By starting from the premise that they will be liable for damage caused to

others, companies will be forced to internalize effects they might otherwise ignore.

Voluntary agreements

Voluntary agreements are not strictly environmental policy instruments; rather they are instruments

of environmental management for companies. However, they can serve as a mechanism for

supporting the implementation of environmental policies and defining standards in that area.

Under this approach, the polluting entities undertake to improve their environmental performance,

without a law or regulation requiring them to do so, and without any governmental economic

incentives. This commitment is expressed in voluntary agreements signed by companies.

In fact, governments may promote such initiatives through positive incentives (e.g. subsidies,

sharing implementation costs, etc.) or even negative incentives (e.g. delaying the regulation of the

participants, etc.). Furthermore, companies may decide to embrace these systems before the

authorities impose mandatory measures to force them to reduce pollution.

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Voluntary agreements often arise in response to pressure from consumers or communities, from

competition, from regulatory measures or taxes. Voluntary agreements can offer an individual

solution as well as collective action. In individual solution agreements, the externalities are resolved

by private means based on property rights, without government intervention. In collective action

agreements, the economic agents cooperate to obtain higher earnings;

Businesses are encouraged to participate in programs of this nature for many reasons: because it

allows them to project an environmentally responsible (“green”) image; because consumers are

more willing to pay for environment-friendly products; because better environmental management

helps them improve their competitiveness; or because they avoid the costs of public regulation.

At the same time, the government also benefits, because by showing greater flexibility in pursuing

its goals, it fosters efficient results, and this, in turn, promotes a proactive attitude in the industries

regarding environmental problems and our shared responsibility in resolving them.

These agreements also reduce the amount of time that governments must invest in designing and

implementing a policy for reducing pollution and emissions.

Voluntary environmental agreements offer the following advantages:

1. GREATER FLEXIBILITY WITH RESPECT TO THE FULFlLLMENT OF GOALS

2. LOWER COSTS FROM A PUBLIC POINT OF VIEW

3. CAN BEA PPLIED TO MANY ENVIRONMENTAL PROBLEMS

4. ARE USEFUL FOR TRYING OUT NEW APPROACHES

There are several kinds of voluntary agreements

1. UNILATERAL INITIATIVES: initiatives of a business or industry without direct intervention by

the government; for example, ISO 14000 Standards.

2. BILATERAL AGREEMENTS: agreements negotiated between the business sector and the

government; for example, agreements regarding CO2 emissions

3. Voluntary programs promoted by public initiative government-designed programs that promote

the voluntary participation of businesses and industries; for example, environmental quality

initiatives, such as the “cleaner production” program that is being applied in Chile to encourage

small and medium-sized businesses to take advantage of the benefits of less polluting production

methods.

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Criteria for evaluating environmental policy instruments

Different criteria may be used to evaluate environmental policies and environmental policy

instruments, such as:

a) economic efficiency (cost – benefit analyses);

b) cost effectiveness analyses;

c) equity;

d) incentives to promote competitiveness;

e) administration feasibility and cost.

Cost-benefit analyses

Cost-benefit analyses help determine the economic efficiency of environmental policies and policy

instruments, i.e. their capacity to obtain emission reductions that would balance the costs of those

reductions with the damage that the emissions cause. As the benefits generated by these policy

instruments increase, with respect to the costs of their application, economic efficiency increases.

Cost-effctiveness analyses

Cost-effectiveness analysis offers an alternative for situations in which only cost information is

available. According to this criterion, out of two available alternatives, the one that achieves the

established environmental protection goal at the lower cost should be selected. Cost-effectiveness is

a necessary but insufficient condition for economic efficiency; a policy can be effective in costs but

not be efficient. Therefore, economic efficiency is the most important condition. However, due to

the limited availability of information about the benefits of the environmental improvements, the

criterion for cost effectiveness is more easily implemented

Social equity

This refers to the equitable distribution of the costs and benefits of environmental protection

policies among the different groups that comprise society. Equity and efficiency

are two socially desirable objectives; however, there is no agreement on the weight each one should

have. In some cases both objectives complement one another, but not always.

Administration feasibility and cost

Effective environmental programs require institutional infrastructure and resources for their design,

implementation, evaluation, and enforcement monitoring. Therefore, the administration feasibility

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and cost of the instruments must be considered when choosing between different approaches.

Administration feasibility and costs depend on factors such as

• The amount of information required to implement, reassess and periodically revise the instrument.

• The amount of information required to monitor enforcement;

• The use of incentives for non compliance I

• The cost of sanctioning non compliance

• The capacity of the agencies responsible for administering and supervising the implementation of

the policy

Other Criteria

• Relocation of Polluting Activities: One desirable feature of environmental policies is that, in the

long term, they promote economic activity in places with lower environmental risks.

• Promotion of Competitiveness: Environmental policies should ideally promote the development

and adoption of technologies that are less resource-intensive and less hazardous from an

environmental point of view.

• Environmental Effectiveness: We must consider whether the application of the instrument

achieves the environmental objective in the time specified and with the desired certainty.

• Flexibility: The instruments should be adapted to technological changes, the availability of

resources and market conditions.

• Legal Consistency: the instruments should be consistent with the institutional framework in force,

the environmental policies and the applicable international agreements and principles in the

country where they will be applied.

• Acceptability: The instruments should be understood and accepted by the affected parties, and be

politically viable.

Environmental Policies And Competitiveness

The effect of environmental policies on competitiveness can be seen from two perspectives: from a

conventional point of view in which major environmental requirements reduce competitiveness; and

from a standpoint that emphasises the importance of environmental regulation as an instrument for

increasing competitiveness.

The conventional vision focuses on the conflict that arises between the environmental gains derived

from environmental regulation and the economic costs that compliance with those regulations

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entails. It is argued that major environmental requirements reduce competitiveness because they

generate an increase in costs that is not compensated for environmental gains, since the latter are

perceived at a social level and not at the business level. However, many studies confirm that the

cost of environmental regulations tends to be a very small portion of the average costs of industries.

The reduction in the amount of goods produced is equally insignificant, although it should be noted

that this reduction could be significant at a sectoral level.

The alternative vision emphasises the synergy that exists between environmental regulations and

competitiveness. According to this viewpoint, while promoting environmental

improvements, businesses can economise on inputs, justify productive processes, take advantage of

residues and differentiate their product (e.g. develop an exclusive product) and with this gain

competitiveness. Compliance with the strictest environmental standards can lead to cost reduction

processes and can even generate private economic benefits.

The Competitiveness of Businesses

Several studies have shown that businesses considered to be “environmental leaders” do not

necessarily pay a price —in terms of reduced benefits— for having embraced the environmental

regulations in force. Furthermore, these companies can often recover costs in the market:

1. A considerable number of consumers are willing to pay higher prices for products that have some

form of environmental certification;

2. The companies that comply with recognised environmental management standards (e.g. ISO

14000) appear to enjoy certain competitive advantages, such as lower guarantees for backing loans,

and better access to clients concerned about their own environmental reputation.

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REVIEW OF LITERATURE

Since its adoption in 1947, the General Agreements on Tariffs and Trade (GATT) requires its

members to give equal treatments to exports from all member countries and prohibit members from

discriminating between locally produced and imported products. GATT/WTO provides an

opportunity within which its member governments may negotiate over market access. GATT

interprets market access as a competitive relationship between imported and domestic products This

arrangement between two different countries involves reduction of import tariffs on a particular

product hence altering the competitive relationship between imported and local products Reduction

of import tariffs provides a larger market access to foreign producers and provides an assurance of

better market access through improved price competition However, domestic market access could

be altered by a foreign export subsidy or by changing market conditions at home or abroad. The

GATT conducted eight rounds of multilateral trade negotiations before it was succeeded by the

World Trade Organization (WTO) in 1995. Geneva concluded in 1947, Annecy 1949, Torquay

1951, Geneva 1956, Dillon 1961, Kennedy 1967, Torkyo 1979 and Uruguay 1994 (Rose 2004). The

Uruguay round agreement negotiation and signing happened when a group of seventy seven

countries were in a state of confusion due to debt obligations and the changes of former Soviet

Union as well as the end of cold war in world of politics.

Free Trade and Globalisation Fallacies

According to Shafaeddin (2003) the philosophy behind universal trade liberalization suffers from

two fallacies; universality and uniformity. Universality is a situation where free trade is supposed to

benefit all countries regardless of their level of development, industrial capacity, technological

capacity and other structural characteristics. On the other hand, uniformity implies that for each

country, all industries and products should be subjected to the same level of tariff. A good example

of disagreements between the WTO member countries is the failure of Seattle meeting to arrive at a

consensus. Dissatisfaction with trade liberalization and globalisation was evident at the Seattle

meeting which took place in the midst of street demonstrations by environmentalist, developing

countries labor organisations, human rights activist and non governmental organisations (Bhagwati

2001).

Contradictions of GATT/WTO Rules in Agriculture

One of the major contradiction is that while the GATT/WTO rules require that the government

intervention in trade be reduced and eventually eliminated (free from political power), there is no

mention of eliminating or controlling the increasing monopoly or oligopoly power of firms involved

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in international trade . In addition the capital is to be free to move freely across the boarders, labour

and other factors of production do not enjoy the same benefit. While international trade was to be

free, free trade did not apply to agricultural goods because they were not covered by GATT

agreement until the Uruguay Round. According to GATT rules, international trade in manufactured

goods should be subjected to reduction of tariffs and other trade barriers. However, this does not

apply for the labour-intensive products. Agricultural products and labour intensive goods were of

major export interest by developing countries. Shafaeddin (2003) reported that textile and clothing,

which falls into labour-intensive product category accounted for 60% of the total export of

manufactured goods from developing countries in 1997. Agricultural sector regulation wasraised at

the Tokyo Round but it was strongly opposed by the European Community. Processed agricultural

products had been the major subject of disagreement in GATT panel. FAO had attempted to come

up with regulations on disposal of surplus agricultural products by developing the concept of Usual

Marketing Requirement (UMR).

The United States, European Economic Commission/ European Union and Japan have intensively

intervened in production and trade in agricultural products through their support and stabilization

programmes. United States in particular have programmes on wheat, corn, cotton, soy beans, rice,

wool, barley, oats and sugar among other products. On the other hand, the EEC has intervened on

trade of agricultural goods through Common Agricultural Policy (CAP) mostly inform of price

support and subsidies. United States and European farmers have continuously received subsidies

payment through CAPs from their government. Similarly, tariffs and quantitative restrictions

applied to agricultural goods by many developed countries during the post war period have

continued with no international trade regulation. Governments in most of the developed countries

have protected agriculture through tariffs, quantitative restrictions, prices and direct income support

to producers and input subsidy. Developing countries have been under pressure through WTO rules,

World Bank and bilateral financial arrangements to liberalise their industries on a time scale that

critics called premature. Critics charge that this has resulted to destruction of their existing

industries without any significant replacement. The long term implications include high rate of

unemployment, lower income, social deprivation and marginalisation. Most developing countries

have developed simple processing techniques for their primary products; however, developing

countries have been locked in production and exports of primary products.

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World Trade Organization Agreements on Agriculture (WTO-AOA)

The WTO agreements on agriculture have been a big debate that was started in the year 1986 and

only finalised in 1994. The goal of inclusion of agriculture in Uruguay Round was to establish a fair

and market oriented trading system in agriculture through elimination of trade barriers and trade

distorting support in agriculture. The Uruguay Round culminated to the first multilateral agreement

dedicated to agricultural sector (WTO 2007).The provision of WTO agreement on agriculture

focuses on three major themes; market accessibility, domestic support and export subsidies as

illustrated in Table 1

Market Accessibility: Requires WTO members to reduce tariffication of all non-tariff barriers

and progressive reduction of tariffs over specified number of years categorised into developed

and developing countries. Before the Uruguay Round was adopted, a few agricultural imports

were restricted by quotas and other non Tariffs measures. Under WTO-AOA the quotas and

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other measures were converted to Tariffs and this process is called Tariffication (WTO, 2007).

Domestic support: WTO member states are required to reduce agricultural subsidies that distort

trade as specified in Table 1. This applies to all subsidies and other programs including those that

increase or guarantee farm gate prices and farmers incomes.

Export Subsidies: The agreements on agriculture require members to reduce export subsidies

unless if the subsidies were specified in the members list of commitments. Developed countries

agreed to cut their export subsidies by 36% over a period of six years between 1995-2001 while

the developing countries were allowed a 24% within 10years (WTO 2007).

These agreements allow countries to support their rural economies through policies that

do not cause any distortion to the trade. According to (Murphy 2001) the implementation of

AOA has left the developing countries with decreased agricultural export revenues while the

developed countries’ market for agricultural and textile industry remained heavily protected.

Franscisco and Glipo (2002) reported that 2/3 of the total 38% of the global imports in 1999,

came from trade between European Union member states themselves. On the other hand the

prices of the agricultural products in the world market have been decreasing.

GATT/WTO and Environment

Environmental and labor groups argue that WTO and GATT single most mission is to:

Serve the interest of the exporters over labor and environmental policies.International economic

integration may pose a threat to the government by failing to resist raising the labor and

environmental standards that it would otherwise apply to the local producers in order to enhance the

competitive position of the producers in the international market place. Bagwell and Staiger (2001)

argue that the consumer gain that comes from free trade is not the liberalisation force harnessed by

GATT/WTO but instead the WTO is driven by exporters’ interests. Bagwell and Staiger (1999)

suggested that when a country is confronted from greater import competition because of adoption of

a new domestic standard that is tougher than applies abroad, it should be allowed to raise its bound

tariff as much as necessary to curtail that import surge. Rose (2004) study on the role of WTO on

increasing trade, concluded that there is no empirical evidence to justify that GATT/WTO has

played a vital role in encouraging trade. Bilateral trade cannot be reliably linked to membership of

WTO or its predecessor the GATT. Rose (2004) study demonstrated that membership in the

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GATT/WTO is not associated with enhanced trade by illustrating that GATT/WTO members did

not have significantly different trading patterns than non members.

According to Falkner (2002), any successful sustainable development strategy has to

strike a balance between the interest of trade and concerns for the environment. The WTO has

received several accusations of insensitivity to environmental problems . The

debatable nature of trade and environmental relationship is marked by the failure of WTO to

introduce a formal environmental mandate into the international trade and the collapse of 1999

WTO ministerial meeting in Seattle

WTO and GMO Issues

One of the most controversial environmental concerns is the emerging trading interests of

states and corporations on Genetically Modified Organisms (GMOs) . Resistance to release of

GMOs particularly in Europe has led to accusations by the GMO- exporting countries of unfair

trade restrictions particularly in United States, the World’s largest exporter of products. On the

other hand, farmers in North America and other large developing countries like Argentina and

China have embraced GMO crops and are actively developing more technologies for adoption.

Cartagena Protocol on Biosafety was adopted to establish international rules for trade in genetically

modified organisms and reinforce the rights of the importing nations to reject GMOs imports on

environmental and health grounds

Marketing of GMOs in developing countries has been extensively done by the developed nations

particularly United States. The justification for using GMO has a solution to food security has

mainly been emphasising that majority of the population living in rural areas in developing

countries are food insecure. Most of these rural populations are dependent on agriculture as source

of income and for subsistence farming and therefore anything that has a potential to increase food

production and income is a priority.Similarly, the urban poor communities in developing countries

support anything that might lower the prices for the food products or increase their nutritional value.

WTO provisions that affect national policies

The Uruguay Round established the three pillars upon which international trade negotiations rest: a)

market access; b) the reduction of export subsidies; and c) domestic support. These pillars must also

be the starting point for the definition of national policies. Domestic support measures are classified

in two categories:

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a) measures that countries are not required to reduce; and

b) measures that countries are required to reduce over time

Measures subject to reduction commitments

The measures that are exempt from reduction commitments, including measures to correct

environmental externalities, are classified in four categories: a) “Green Box” measures; b) “Blue

Box” measures; c) Special and Differentiated Treatment measures for developing countries (SDT);

and d) De Minimis exemptions.

Green box measures: these include subsidies that are totally decoupled from prices and production

levels, and do not distort trade or production, or that have minimal effects on those activities. This

support must be provided through government-funded programs; in other

words, costs must not be transferred to consumers by increasing the prices of products. Such

measures may be adopted by developed countries and by developing

countries, and include:

• Support services, such as research, pest and disease control, training dissemination, inspection,

marketing and promotion services, and infrastructure;

• Public food stock for food for food security purposes.

• Domestic food support

• Direct payments to producers for e.g. Assistance in cases of natural disasters, environmental

programs and regional assistance programs.

Blue box measures: these include direct support, partially decoupled from prices and from

production, which the Agriculture Agreement of the Uruguay Round does not oblige to reduce and

is considered to create relatively minor trade distortions. Direct payments made to producers in the

context of programs to limit production are exempt from commitments to reduce domestic support,

if these are based on surface areas ( or, in the case of livestock on a fixed number of head of cattle)

and fixed yields and are applied with respect to 85% or less of production levels.

Special and differentiated treatment (STD) measures: direct or indirect assistance measures,

excluded from reduction commitments, and aimed at promoting agricultural and rural development.

These form an intrinsic part of the developing countries’ programs and include:

• Investment Subsidies, generally available to the agriculture of developing countries.

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• Subsidies for agriculture inputs, generally available to low income or resource poor producers in

developing countries

De minimis exemptions: These refer to any support granted to a specific product that does not

exceed 5% of the total production value

Measures prohibited or subject to Reduction

The measures that countries are required to reduce or that are prohibited fall into two categories: a)

“Amber Box” measures; and b) “Red Box” measures.

Amber Box Measures: These include all instruments that must be significantly reduced or avoided,

as they are considered to create significant trade distortions. For example, price support measures,

and subsidies based on yields or on the volume of production. Many countries, including the United

States and the European Union, seek to transfer programs that currently belong to the “Amber Box”

to the “Green Box”

Red Box Measures: these include all instruments that are prohibited because they create very

severe trade distortions; for example, variable import quotas, quantitative limitations.

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CASE STUDIES

WTO and Philippines Agriculture

Agriculture contributes 20% of the Philippines GDP. In addition over 50% of the population is

dependent on agriculture for their livelihood . Philippine joined WTO when the Philippine senate

agreed to ratify GATT-Uruguay round in December 1994. They committed themselves to all other

agreement embodied in Uruguay round including Agreements on Agriculture (AOA) which allowed

them to an initial bound rate of 100% for sensitive products like corn, sugar, onions and garlic.

However, these had to be reduced to 40%-50% in 2004. Philippine joined WTO with very

ambitious promises like creating 500,000 jobs annually; economic growth rate of 6% per year; and

reduction of poverty after joining WTO.

Decline in Agricultural Productivity in Philippines

Philippines agricultural sector did not show any improvement under liberalised trading regime

seven years after joining GATT/WTO. In the year 2003, nine years after Philippine accession to

WTO, Philippines were reduced from the status of agricultural exporter to a net food import. Before

joining WTO (1990-1994) trade in agriculture had registered a surplus of $ 1.3 Billion while four

years after joining WTO (1995-1999) had accumulated a trade deficit of $ 3.5 Billion. Between the

year 1995-2000 the average growth rate for the agriculture gross value added was 1.38% lower than

1.62% in the year 1991. Franscisco and Glipo (2002) and Glipo (2003) reported that Philippines

membership in WTO resulted to decline of Philippines food security, deteriorated livelihood of

small farmers and agricultural workers and exacerbated long running social inequities. The decline

in gross value added demonstrates declining output of the agriculture and hence its capacity to

supply the population with adequate food, ability to generate opportunities besides the capacity to

compete in the world market. Franscisco and Glipo (2002), reported that Philippines rice production

suffered a significant decline between 1997 to 1988 with a negative 24.1% for the year 1988.

Similarly, the same trend was noted in other crops like corn production with a negative growth rate

in 1995, 1988 and the year 2000.

Franscisco and Glipo (2002) highlighted some of the causes for the falling agricultural prices as

insufficient agricultural support and investment and decline in hectarage devoted to agriculture. The

importation of cheaper agricultural products together with increased smuggled goods led to flooding

of Philippine’s market hence decreasing the prices of the domestic products specifically rice and

corn. Contrary to Philippines government expectation, agricultural export did not register a

significant increase six years after joining the WTO as illustrated in Table 2.

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Table 2: Value of Agricultural exports, 1994-2000

Value of Agricultural Exports, 1994-2000

Year Export in Million Dollars

1994 2,072.02

1995 2,499.63

1996 2,306.64

1997 2,337.51

1998 2224.67

1999 1,760.14

2000 1,982.73

The value of agricultural export declined by 25% between 1997 and 1999. The promise of increased

market accessibility under WTO turned the country from a net exporter to net importer of

agricultural commodities. Philippine’s government did not meet the anticipated benefits under

WTO membership. The WTO-AOA aim of reducing barriers in trade and elimination of trade

distorting subsidies and support in agriculture did not make a significant impact on Philippines’s

agricultural trade. Instead the government agricultural support in the form of price support remained

low, credit research and development and infrastructure development continued declining.

Franscisco and Glipo (2002) argued that WTO-AOA worked against Philippines agriculture

because the country was unable to compete with the highly subsidised industrial agriculture of the

world economic powers. Philippines agriculture is dominated by small scale agricultural production

of traditional crops and cash crops like Rice, corn and coconut oil. Similarly, the level of

technology is also very low as compared to other developed countries which can afford highly

mechanised system. This leads to low efficiency and low productivity a typical problem in all other

developing nations. Therefore, the issue of fair trade within Philippines’s context does not make

sense because the country is not in a position to engage in fair market competition. According to

Franscisco and Glipo (2002), Philippines dependency on cheap and heavily subsidised imports has

contributed to the country’s inability to achieve food security. The increased level of imports posed

a serious threat to the countries’ food security situation. It led to accumulation of large trade deficits

in Agriculture, In a period of six years following GATT ratification, the balance of trade in

agriculture raised to US$ 1 Billion in 1999 as compared to consistent trade surplus in 1970’s and

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1980’s. Table 2 shows the Philippines balance of trade in agriculture from the 80’s to 90’s. It is

apparent that Philippines was turned from a food exporter to a net food importer after its accession

to WTO.

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CRITIQUE

Through out this entire paper, the WTO has been criticised for failing to accomplish its intended

goals. My critique will be based on the implications of WTO in Agriculture with particular

reference to the case studies. WTO Agreement in Agriculture has been a victim of critique by many

other authors (Wise 2004). The most popular evidence of WTO disagreements was during the WTO

ministerial meeting on September 2003 at Cancun where agricultural trade liberalisation was a

major bond of contention. It has been argued that Northern countries are subsidising their producers

with over $ 300 Billion per year (Wise 2004). While this idea of giving subsidies has been reported

to cause a significant amount of export dumping in the developing world the WTO has failed to

coordinate the member countries to address this sensitive issue.

Wise (2004) argues that subsidised agriculture in the developed world is one of the greatest

obstacles in economic growth in developing countries. In 2002, developed countries spent US$300

million on crop price support, production payments and other forms of programs. World markets

are flooded with surplus crop that are sold below the cost of production. Developing countries are

shut out of the world market because they cannot afford to subsidise their farmers while the

developed countries’ agricultural trade remain highly subsidised. Prosperous countries give US$50-

550 billion annually to developing nations as a foreign aid. If developed nations would reduce

subsidies and eliminate trade barriers such as import tariff trade would support domestic producers

in developing countries.

From the literature review, it appears that the AOA are tailored in favour of developed countries.

While the developing countries are given a longer period for implementation, the developed

countries are given a better concessions through provision of blue and green boxes which are both

categories of exemption under the subsidy reduction regulation. Under the WTO -AOA rule these

kind of subsidies are allowed if they are intended to meet environmental and social objectives.

Developed countries have often used these boxes to replace the lost production support and export

subsidies subjected to reduction under WTO rule as illustrated with the US case study. In general

the implementation of the WTO at global level benefited only the developed countries as opposed

to developing countries. According to World Bank (2003) report, the projected potential benefits of

agricultural trade liberalisation before the Cancun meeting highlighted warfare gains and reduction

of poverty as one of the priorities. If both developed countries and developing country agricultural

tariffs were to be reduced to 10% and 15% respectively, the report projected an additional world

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income by over $500 billion by 2015 with a $350 Billion going to the developing countries (World

Bank 2003) Similarly this report projected a reduction of people living under $2 dollar per day by

144 million. Philippines’ case study reviews that this anticipated benefits of agricultural trade

liberalisation is not bound to benefit the developing countries. Philippine’s government is unable to

achieve its food security even after accession to WTO. This demonstrates that there is need for

more localised actions at the country level. WTO should allow all countries to take protective

measures to avoid agricultural exports dumping from other countries below the cost of production.

To protect food security, countries should be able to protect any key food crops without having to

prove that dumping is taking place. Philippines’ shift from a net exporter to a net importer is also

another indication that the WTO promise of the countries increase in export volume and better

prices is questionable. Philippines’ government should conduct a review of WTO commitments in

agriculture and revisit the country economic productivity to make the necessary policy changes.The

government should be able to resist the pressure applied by the world economic powers and give

priority to recovering national food security situation. Since agriculture is the backbone of the

economy for most developing countries, the WTO regulations should allow countries to make their

own decisions on protecting the overwhelmingly number of agricultural labor force who are mostly

the peasant farmers. In Philippines’ case, although agriculture contributes only 20%, agricultural

sector employs over 50% of the labor force. Philippines food security situation should be given a

priority to achieve self sufficiency. Dependence on imports food and other imports is certainly very

risky from a sustainable development perspective. American Agricultural subsidies can be criticised

in the sense that the subsidies goes to the richest farmers and to very few crops. This concentration

of the subsidy on relatively few commodities is not good in liberalised trading system where only

very few people are given the benefit of economics of scale.

On the flip side it has been argued that protection in agriculture can be environmentally damaging.

Yu (1994) reported that the high food prices maintained by the European Community (EC)

Common Agricultural policy (CAP) has distorted trade due to export subsidies and put many

species in danger of extinction. The same report also not that the farmers have put environmentally

valuable wetlands into production. The US the farm policy have had the same disastrous effect on

wetlands and marginal areas. A good example is how the rise in sugar prices led to increase in sugar

plantation in Florida. Trade liberalisation in Agriculture has led to massive deforestation in

developing countries in order to expand their agricultural export production. China’s case study

demonstrates that WTO does not have capacity to influence decision making for its members.

China’s policy makers continue to use several strategies to continue corn exports and block imports.

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Although China as a member of WTO has a bound to fulfil her WTO obligation of reduction of

import tariffs and increasing imports, there is no follow up mechanism set up by the WTO structure

to ensure that each member implements its obligation. China’s corn import remained minimum

since its entry into WTO. In conclusion the practice of export dumping has led to deterioration of

the livelihood of small holder farmers in developed countries and directly threatening the food

security situation of the developing nations. AOA has turned these countries into net food importers

and further undermining their food security and sustainable rural development goals as illustrated in

Philippines case study.

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CONCLUSION

The trade – environment link is a two-way relationship: trade policy has environmental implications

and environmental policy has trade implications. Trade policy – in principle– helps to stimulate

economic growth, which can lead to an increased demand for goods that produce pollution, but also

to greater demands for a cleaner environment. By bringing about changes in production volumes

and in the composition of goods produced in the economy, trade policy can alter the scale and

nature of environmental degradation problems. And, by generating changes in the localisation of

productive activities, environmental policy can also contribute to changing the spatial distribution

of the sources of environmental degradation.

At the same time, by affecting domestic and international prices (in order to internalize

externalities), environmental policy affects the terms of exchange, thereby producing changes in the

volume and composition of trade flows between countries. Environmental policy can also help

create new markets, which in turn gives rise to movements of goods and services between countries,

for example, markets for goods that would probably be produced mainly by developed countries,

such as cleaner technologies; markets for environmental services that would almost certainly be

provided by developing countries, such as fixing carbon dioxide and protecting biodiversity; and

markets for goods produced through more environment-friendly productive processes, such as

organic agriculture.

Differences in environmental policies can also prompt the relocation of productive activities from

one country to another. For example, a country with few environmental regulations may encourage

the relocation or installation of polluting activities; on the contrary, one with appropriate

environmental regulations will attract activities in sectors that must comply with environmental

quality standards in their production processes, due to changes in consumer demand.

In the last decade, the trend toward open markets and trade liberalisation has fueled concerns in

both areas. The sectors concerned with protecting the environment fear the damage that may be

caused by opening up trade and international investment flows. However, those that favour trade

liberalisation are concerned that environmental on Agriculture protection regulations will function

as a non-tariff barrier that will interfere with free trade, with the aim of protecting national

producers from international competition. These divergent positions underscore the fact that there is

an ideological-conceptual dimension to the relationship between trade – environment. This leads us

to the question: what are the effects of international trade –and particularly, of increased trade

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liberalisation– on the environment? The answer to a question of such scope –as is to be expected–

has involved opposing theories and ideological points of view. However, beyond the theoretical and

ideological aspects, the answer to this question is, essentially, an empirical matter. In this case, it is

also difficult to obtain conclusive results, even among economists. The world is possibly not as

simple as suggested by the basic model of international trade, which is traditionally used as a frame

of reference in empirical studies; in addition, the political and institutional context is important, as

is the production structure of the countries.

Another major element in the discussions on trade and environment is the possibility of using trade

policies for environmental purposes and environmental policies for trade purposes. For example,

hard-line environmentalist groups would most likely favour the first option; by contrast,

uncompromising defenders of free trade would probably oppose any type of environmental policy

that could potentially interfere with trade, including legitimate policies to correct environmental

externalities. They would advocate the subordination of environmental policy to the objectives of

trade policy.

The vision of sustainable development in the design of public policies overcomes this argument by

recognising that environmental policies should pursue environmental objectives and that trade

policies should pursue trade objectives; however, the trade objectives should not compromise the

environmental goals and vice-versa. Furthermore, the vision of sustainable development proposes

that both types of policies should contribute to achieve the sustainable development of agriculture

and rural life, in pursuit of competitiveness, equity and social inclusion and the sustainable

management of natural resources.

A country’s environmental policy should contemplate an appropriate combination of instruments,

including market based instruments, regulations and negotiations based on consensus with the

relevant stakeholders. Environmental policy must have clear objectives in order to facilitate its

monitoring and evaluation, and foster dialogue between the government, the productive sectors and

other parties concerned with the environment. To ensure that trade agreements are compatible with

the environment and with environmental policy objectives, it is essential to strengthen citizen

participation, the institutional framework and national and regional legislation. At the same time, it

is important to facilitate access to information and promote the necessary technical and financial

assistance to promote agreements and execute actions towards achieving sustainable regional

development. In addition, it is necessary to design and implement methodologies for evaluating the

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environmental aspects of trade agreements, in order to ensure the complementarity and efficiency of

environmental and trade policies and to maximise social well-being.

Another important action is to promote the application of “positive measures “, instead of restrictive

measures, to support developing countries in their efforts to establish more rigorous environmental

standards and to help them achieve the objectives agreed in the context of multilateral

environmental agreements. These positive measures could be aimed at alleviating the sectoral

vulnerability of developing countries; strengthening the competitiveness of small businesses; and

mitigating the effects of the MEAs on trade and development. The emergence of an anti-

globalisation movement in the last few years - in which environmental concerns are an important

battle standard - and growing interest in the development of mechanisms to promote free trade

(which captured public attention during the Symposium organised at the Cancun meeting)

underscore the need for greater on Agriculture dialogue between environmental policymakers and

trade policymakers. Undoubtedly, this dialogue must increase significantly in the coming years,

especially in the light of recent events such as the difficulties encountered in Cancun to achieve

significant agreements. Undoubtedly, the discussion on trade and the environment must be a two

way process.

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