Trade and Environment Newsletter Issue 12, September 2012

Eco labels as sustainability tools questioned

A recent report by IMD, Switzerland “Have EcoLabels Had Their Day” reveals that while ecolabels have been useful in increasing sustainability awareness and performance across the supply chain, business holds concerns about their credibility, their impacts on trade and their ability to transform markets to achieve more sustainable outcomes.

IMD surveyed over a thousand managers and sustainability practitioners from 70 countries and 20 industries on their views on eco labels. It found that the growth in eco labels – currently 431 in 246 countries across 25 industry sectors – is being driven primarily by regulation, rather than consumer demand. Sustainability requirements based on ecolabel standards are increasingly being integrated into private and public procurement criteria, such as the EU Directives on Green Public Procurement. In some industries, they have become a condition for doing business.

This is despite business scepticism about the effectiveness of ecolabels in transforming markets, concerns about the “credibility of ecolabels and the rigor of their criteria and certification procedures,” and the “potential conflicts of interest experienced by ecolabeling providers.” There are also fears ecolabels can act as technical barriers to trade. Recent WTO disputes over use of regulated eco labels for ‘dolphin safe’ tuna are a case in point.

As IMD point out, effective sustainability strategies, rather than external certification and labelling are the best means of ensuring sustainability. Eco labels “can be useful in communicating about sustainability, but they should remain a means and not become an end.”

Environmental regulations and standards will continue to feature in international trade. While eco labels may ‘have had their day,’ greater demand is expected for traceability of products and transparency in the sustainability performance of supply chains. Over the past year for example, all food products sold in France, including imported goods, were required to display the greenhouse gas emissions caused by their journey through the production chain.

Care needs to be taken ensure such requirements are based on rigorous criteria, are certified independently, and do not create barriers to trade.


Codex food standard could test international trade rules

Codex Alimentarius, the international food and health standards organisation, has established an international food safety standard for maximum residue limits (MRLs) of a veterinary drug, ractopamine, in meat.  Ractopamine is used to promote leanness and boost growth in pigs and cattle by major livestock exporters such as the US, Brazil and Canada. Other agricultural producers, such as China and the EU, ban the use of the drug and also imports of animals containing ractopamine residues on human and animal health grounds.

The US, Brazil, and Canada had been trying for years for a ractopamine standard to be adopted. In July Codex voted in their favour by a margin of a single vote.

The adoption is significant for several reasons. It gives credence to science-based standard setting in international bodies – an expert group ruled ractopamine was perfectly safe within certain limits. This is consistent with WTO rules which permit trade based on international standards. Food safety regulation should be restricted to protect health and be supported by sound science.

Controversy over the narrow vote and the politicised debate over the underlying science have prompted commentary on the standard’s legitimacy. Questions have already been raised by the EU as to whether a standard must be “universally accepted to be universally applicable.” Considerations invoked to justify the EU ractopamine ban include not only human health but also as animal health and welfare.

Could the WTO be called on to judge this? The US might now challenge the EU or China for having zero tolerance policies for ractopamine use in meat products at the WTO.

The controversy over ractopamine demonstrates the clear and emerging divergence in approaches to regulation of food trade adopted by major markets. The US has traditionally followed the risk management approach set out in the WTO. The EU leans to a politicised version of the precautionary principle.

It matters. International approaches which divert from sound regulatory principles and international standards have a direct impact on market access as well as broad economic implications for international competitiveness.


Australian controls on illegal logging closer to becoming law

Australia’s bill on illegal logging (The Illegal Logging Prohibition Bill 2011) passed the lower house of Parliament in August, paving the way for its move to the Senate. The Bill, if enacted, will prohibit the importation of timber harvested in contravention of the laws of its country of origin, including timber in manufactured products such as furniture. Importers will also be required to comply with certain due diligence requirements, such as assessing the risk that their imports contain illegally logged timber.

The Bill was criticised by the Opposition, which voted against the legislation, for its possible incompatibility with WTO rules, the delay in the development of regulations defining its scope and the lack of consultation with important trading partners such as Indonesia.

Other trading partners –Malaysia, PNG, Canada and New Zealand – have also raised concerns over the law and its impact on trade. New Zealand forest and timber industries fear the measure will block legitimate timber exports.  The NZ Wood Processors Association claims ambiguity over its scope is causing considerable uncertainty in the industry.

The majority of Australia’s imports of timber (about A$4.4 billion) come from New Zealand (bilateral forest trade is valued at $715 million) where the risk of sourcing of illegal logs is low. The NZ industry is almost entirely based on privately owned plantation forests. On a world scale this conservatively would account for much less than 1 percent of world trade in illegal timber.

Questions of WTO compatibility also remain. While it has been observed by advocates of trade bans illegal wood products that “it should be entirely possible to respect WTO constraints, while at the same time implementing measures effective enough to exclude illegal products from international trade”,  trade experts from Melbourne University have pointed out “by conditioning entry into the Australian market solely on whether timber was harvested legally, the Bill raises clear issues under the WTO Agreement” and appears to conflict with provisions of the WTO Technical Barriers to Trade Agreement. They suggest that “ultimately, Australia may wish to consider reformulating the Bill so that it more accurately and effectively targets environmentally destructive logging practices and unfair competition against which the Australian government seeks to protect.”


Is Palm Oil an environmental Good?

Members of the Asian Pacific Economic Cooperation (APEC) group agreed at their recent summit in Russia to forward a list of Environmental Goods and Services to the WTO with a recommendation that WTO members reduce trade barriers on them. Indonesia threatened to block agreement unless Palm Oil was included. There are media reports Secretary of State Hilary Clinton gave Indonesia’s President Yudhoyono a commitment US restrictions on imports of Indonesian Palm Oil would be addressed. It’s hard to see that happening in the lead up to the presidential election.

International environmental groups, particularly WWF and Greenpeace, have mounted a campaign to restrict trade and production in Palm Oil. The EU restricts imports of biofuels in its Renewable Energy Directive, including Palm Oil, if they do not meet an EU carbon emission standard. Indonesia and Brazil have charged the measures conflicts with WTO rules. The US Environment Protection Agency has signalled it will impose an import restriction similar to the EU measure. Officials and experts from Indonesia and Malaysia have pointed out the EPA case does not stand, and that Palm Oil is a very efficient biofuel with a small carbon foot print.

Analysts observe the EU measure has the effect of protecting a share of the renewable energy fuel market for product manufactured from more expensive rape seed oil grown in Europe.

Media reports suggest the US Administration has given Indonesia some sort of assurance US restrictions on products based on Palm Oil will be lifted.  It is hard to see the Obama Administration stepping away from the EPA position before the Presidential election.  Green groups have a lot of sway on the Democratic Administration.


US seeks penalties for illegal logging in Trans Pacific Partnership Agreement

The US wants to include tough penalties against illegal logging in the Trans Pacific Partnership Agreement (TPP). The TPP is a free trade agreement currently being negotiated among eleven countries in the Asia Pacific.

At a meeting of the APEC Expert Group on Illegal Logging and Associated Trade (EGILAT) in May 2012 the US presented its ‘Policy on Combating Illegal Logging and Associated Trade and Promoting Trade in Legally Harvested Forest Products.’ The US proposes including in the TPP “strong disciplines aimed at combating illegal logging and associated trade,” including “requiring parties to the Agreement to implement measures to prohibit trade in illegally harvested forest products; adopt civil or criminal penalties sufficient to enforce these measures; and strengthen law enforcement cooperation and information sharing in support of this objective.”

The APEC presentation follows a USTR ‘Green Paper on Conservation and the Trans-Pacific Partnership,’ released in late 2011. This foreshadowed the US desire for a ‘conservation framework’ in the TPP with specific obligations for the timber sector.

The US Peru FTA, in 2009, was the first trade agreement to include substantive, enforceable obligations on parties to combat trade in illegal logging and wildlife. It includes measures to restrict trade in illegal timber products. For example, it permits the US to detain or deny shipments of Peru’s timber exports pending verification they were legally harvested. These provisions are modeled on the US Lacey Act.

The US is unlikely to win endorsement of its tough approach in the TPP agreement. Most Asian Pacific countries oppose environmental trade restrictions in line with the outcome of the Rio +20 Summit held in June 2012.

APEC Trade Ministers have endorsed a program to combat illegal logging through capacity building, not trade bans. EGILAT is specifically charged with promoting and building capacity for trade in legally harvested forest products. This is important for prospective TPP members. APEC economies account for approximately 80 percent of global trade in forest products. APEC forest products trade was valued at over US$150 billion in 2010.


Trade disputes over solar cells ignore reality of global supply chains

A group of European solar panel manufacturers, led by German based SolarWorld AG, has filed a complaint with the European Commission to pursue antidumping action against Chinese solar panels. They allege Chinese manufactured panels are being sold in EU at below market price and want tariffs imposed on them.

The complaint follows increasingly strained energy policy relations between China and the US. The US Commerce Department decided in May to impose anti dumping studies on imports of Chinese solar cells, as well as wind turbine towers. China has since alleged US financial measures supporting renewable energy projects act as trade barriers to Chinese exports, contrary to WTO rules. It has threatened to restrict imports from the US.

WTO rules allow for anti dumping duties, or tariffs, to be imposed on imported products which benefit from unfair cost advantages. They also prohibit the use of subsidies which are designed specifically to support exports.

Anti dumping actions on solar products could damage trade and investment in both China and EU. The EU takes over 60% of China’s solar exports, worth US$20.4 billion in 2011. But to manufacture photovoltaic cells, it imports polysilicon, of which imports from Germany account for 20%.

They also make less sense today where most manufactured products move through global supply chains. It can be difficult to identify where imports have originated for the purpose of determining their market costs. The divide between goods and services is also increasingly blurred. For example, ‘the final destination of the global supply chain ends in the domestic construction sectors that badly need affordable components such as solar cells to cut the cost. This is why not all European industries rally behind the recent antidumping investigation by the Commission’.

WTO rules should not be applied only to remedy unfair trade and not to block legitimate competition for protectionist reasons. The Secretary-General of the European Photovoltaic Industry Association (EPIA) Reinhold Buttgereit noted in April, while referring to the tipping point where renewables become competitive with fossil fuels, “To be frank, without global competition and cheap Chinese PV modules, we wouldn’t be as close to grid parity as we are today.’


US Aviation Industry Pushback against ETS

The US aviation industry has called for a dispute proceedings that would stop the EU from requiring foreign aircrafts pay for carbon emissions.

The aviation sector was phased into the EU’s Emission Trading Scheme (ETS) from the beginning of 2012. Airlines, in particular those in the US, have pushed back against the industry’s inclusion under the scheme. They claim that US sovereignty is being threatened by the imposition of foreign taxes under a ‘cap-and-trade’ scheme unilaterally developed by the EU.

Recently 19 aviation stakeholders including Airlines for America – a trade organisation representing major US airlines – signed a letter urging the US President to initiate a dispute proceeding through the International Civil Aviation Organization (ICAO).

The ICAO is a specialized agency of the United Nations created to set global standards and regulations for the aviation sector.

The industry groups called on the US President to initiate an Article 84 proceeding in the upcoming ICAO governing council meeting. An Article 84 proceeding is a dispute mechanism available to ICAO’s member states, which would give the ICAO’s governing council the authority to decide on disputes that cannot be resolved between members.

Under the EU’s ETS, ‘polluters’ in relevant industries are given allowances to emit greenhouse gases. Companies that exceed their allowances must buy extra permits; those that cut emissions can sell their surplus allowances. Over time, the total number of allowances is scaled back.

Environmental groups and ICAO’s Secretary General have reportedly opposed the proposal by US industry, on the basis that it could undermine efforts by the ICAO to devise a common emission reduction plan.

However, US aviation groups warned that the EU’s scheme may be a “breach of U.S. sovereignty – the imposition of an EU tax on U.S. airlines, aircraft operators and citizens while on the ground in the United States, over our airspace and international waters…”

They also argue that the high cost of the fuel already acts as a strong incentive for airlines to reduce fuel consumption and emissions.

In a related development, a bill is reportedly expected go before US Congress that would shield US airlines from obligations under the EU’s ETS.

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