Trade and Environment Newsletter: Issue 14, November 2012

Environmental trade barriers a target in EU/US trade deal

As the EU and US look towards a possible trade agreement, US industry has called for EU labelling and energy regulations to be addressed as a priority in the negotiations.

The American Soy Bean Association (ASA) claims EU biotech labelling and renewable energy regulations in the EU market act as discriminatory barriers to trade and have a significant negative impact on exports.Soybean exports to the EU fell by 44 percent in value between 1998 and 2011, with volume down by over 70 percent. Central to the concerns of the ASA is that EU labelling regulations “have no scientific basis in fact”. ASA President Steve Wellman adds “Similarly, the EU’s Renewable Energy Directive (RED) establishes arbitrary criteria for the production of soybeans and other commodities in order to meet sustainability requirements and be eligible as feedstocks for biofuels used in EU Member States.”

The US and EU are reportedly set to launch talks on a free trade agreement early next year. If such an agreement were achieved, it would be significant. The EU and the US together account for about half of the world’s GDP and almost a third of global trade flows. They have the largest trading relationship in the world, with a trade volume of 700 billion euro and bilateral investment valued at almost 2.4 trillion euro in 2011.

As tariffs between the two economies are already low (with the exception of some areas such as agriculture), the main gains  - estimated to amount to an increase in GDP of 163 billion euro until 2018 for both sides – would come from reducing regulatory barriers to trade. Work to advance cooperation on transatlantic trade barriers has been the focus of the Transatlantic Economic Council since 2007.

Given the significance of both economies to global trade, any disciplines on regulatory barriers negotiated as part of a bilateral trade deal will not only impact on trade flows, but also create an important standard setting precedent.  As the ASA points out “To allow the EU to establish unsubstantiated process-based labelling requirements or to impose arbitrary environmental criteria on imports and on producers in countries from which they are imported will only invite additional EU regulatory initiatives in other sectors that could offset any positive benefits which an FTA might achieve in reducing domestic or export subsidies or tariffs.” It could also encourage similar regulatory policies in other markets.

It is reported that an expert group co-chaired by EU Trade Commissioner Karel De Gucht and U.S. Trade Representative Ron Kirk will issue a report in December that recommends pursuing talks on the trade agreement.

Should trade rules be changed to support green energy?

In an article in the International Business Times, James Bacchus, a Washington Trade lawyer, has advocated that WTO rules be changed to “permit green subsidies that further the fight against climate change.” Bacchus is a former Chairman of the WTO Appellate Body, which ruled on the controversial Shrimp Turtle dispute – an important WTO environment case involving environmental trade controls.

The article follows several recent cases before the WTO involving the EU, Canada, India, the US and China disputing subsidies for wind and solar energy. In it, Bacchus contends that “subsidies cannot succeed so long as WTO rules make them illegal under international law.” He notes that while ordinarily good economics would dictate that subsidies should be avoided, market forces alone will not be enough to drive renewable energy. He states that “it makes sense to support subsidies that ease the necessary transition to low-carbon economies”, and “to change WTO rules to permit such green subsidies.”

While generally subsidies that discriminate in trade are not permitted by the WTO, the rules provide policy space to regulate in order to support the environment. Trade experts point out that not all subsidies are prohibited. Subsidies to consumers, compared to producers, are likely to be WTO consistent in most cases. The WTO Agreement which sets out rules on subsidies contains a provision for subsidies to adapt to new environmental requirements, but this has now lapsed.

And while there are a number of economic arguments to implement a regime of subsidies for renewable energy – classic market failure arguments – it is important that first, appropriate economic instruments are employed to address the problem, and second, they are not used to engage in “green industrial policy” for protectionist purposes.

Are subsidies the most effective and affordable way of promoting green energy or are there other options? Should trade rules be changed to adequately accommodate these instruments or do they already? Can this be done without distorting trade?

As Bacchus points out, these are questions for the WTO membership to decide. They should not be acted upon unilaterally by those countries which have the means and policy inclination to subsidise their domestic industries in the name of environmental policy. This begs trade conflicts and undermines agreed trade rules.

Trade measures to favour certified palm oil are misguided

The RSPO has called for major palm oil importers such as China and India to reduce their import tariffs on certified sustainable palm oil (CSPO) – presumably without reducing tariffs for non-certified product. This idea is misguided and could contravene WTO rules.

The idea is to spur demand for certified products in the two largest palm oil importing countries where there is currently little demand.  In fact, there is little demand for RSPO certified palm oil even in environmentally sensitive markets within Europe. The largest market for certified palm oil is the RSPO endorsed certificate trading system where certificates, rather than physical palm oil supply, is traded.

The RSPO standard is heavily influenced by WWF’s sustainability agenda. These sustainability requirements are superfluous; industry in leading producer countries such as Malaysia and Indonesia already operate sustainably, being required to comply with environmental requirements set by sovereign governments.

RSPO President and Unilever representative, Jan-Kees Vis, commented “You would only need to have a tiny proportion from the import tariff in order to make CSPO competitive with non-certified palm oil.” Unilever – one of the largest palm oil buying companies – had made a commitment to source only certified palm oil by 2015, but recently stalled on their pledge. Their actions indicate that they understand the commercial difficulties in procuring CSPO and developing segregating supply chains; they have also presumably found that consumers are not willing to pay a price premium on products that contain CSPO.

European processors are choosing not to use available CSPO palm oil, but are comfortable lobbying developing countries to create preferential tariffs that would incentivise certified palm oil.

India and China are important markets for the RSPO, where palm oil is a food staple for much of the population. In 2011/12 both countries accounted for almost 35 percent of global palm oil consumption and were the world’s largest importers of palm oil, with import volume in 2011/12 of 7.3 million metric tons and  5.8 million metric tons, respectively. Import tariffs on palm oil are not high, but are large enough to be commercially significant. Chinese tariffs on edible vegetable oils are 9 percent, and 2 percent for industrial palm oil use. India applies a duty of 7.5 percent on refined palm oil.

Preferential tariff treatment for certified products is problematic – and potentially discriminatory – under WTO trade rules. A better option would be to reduce tariffs for all palm oil – irrespective of whether it is certified or not – to bring prices down in import markets and reduce unwanted costs for exporters.

Use of trade measures to pursue environmental goals is not sound policy. There are better and more effective ways to encourage demand for sustainable palm oil than discriminatory trade policy. Technical assistance to support sustainable production, or voluntary standards that allow consumers to make informed choices, would be better choices than border measures which distort trade.

California rejects flawed GMO labelling law

Late last year California voted against a proposed law requiring all raw and processed foods to bear a label indicating whether they had been “genetically engineered (GE)” or not. The ballot was defeated by a margin of 53 percent to 46 percent on November 6, 2012   If passed, it would have been the first mandatory GE labeling law in the US – at odds with US agriculture, US FDA policy and broad scientific consensus about the safety of GE foods.

Proposition 37  required any food produced from genetic material that had been altered in specific ways to be labeled as genetically engineered. It also prohibited such foods from being labeled as “natural”. Alcoholic beverages, restaurant food and those derived entirely from animals were exempted from the measure. It also required the California Department of Health to regulate the labeling of those foods and allowed individuals to sue food manufacturers who violated the measure’s labeling provisions.

The defeat was a victory for US agribusiness, who claimed it would harm California’s consumers, taxpayers, businesses and farmers. It is also a victory for sound policy. As Gregory Conko of CEI and Henry Miller from the Hoover Institution observed in Forbes, “the deceptive measure fails every test, from science and economics to law and common sense.” Rather than imparting useful information, the label would “imply that the buyer needs to be aware of unspecified dangers.” This is at odds with accepted science on the safety of GE foods – even the World Health Organisation has concluded GM foods approved by governments are not likely to present risks for human health.US Federal policy does not require such labels because bioengineered foods are not significantly different in taste, texture and nutrition.

The costs of the measure would have been felt throughout the supply chain. Its zero tolerance policy for accidental presence of smaller amounts of GE substances (from 2019) would have required most processed foods to be labeled, reformulated with non-GE substitutes or removed. Seventy or 80 percent of processed foods intentionally contain some corn, canola or soy ingredients. A small amount of unintended ingredients are recognised as a feature of complex food systems.

Removal of products with GE ingredients would reduce, not improve consumer choice. Labeling was estimated to add hundreds of dollars to consumer’s grocery bills. One analysis estimated it would cost the state California up to US$1 million on an annual basis.

Anti-globalization NGOs have campaigned against the use of GM technology for some time, despite its potential to help feed the world’s poor and reduce the environment impacts of farming.

More than a dozen U.S. states reportedly introduced GMO labeling bills in 2012, but all failed. Mandatory GM labeling laws are already in place in Europe, Japan and Australia. None apply zero tolerance levels for accidental presence of GM foods.

Revisiting dolphin friendly labelling dispute will undermine WTO

Members of Congress want to use the Trans Pacific Trade Agreement (TPP) to nullify the WTO’s ruling against the US dolphin friendly labelling regime, which was found to unfairly restrict Mexican imports of tuna to the US. The US confirmed in September that it would comply with the ruling and change the labelling law by July of next year.

In a letter to USTR in October last year, Members urged the US to incorporate resolution of the dispute with Mexico into the negotiations, advocating commercial benefits be withheld unless the labelling regime is protected. The letter was championed by Edward J Markey, ranking member of the House Natural Resources Committee. It follows an earlier letter led by Markey from 43 House Members which was sent to President Obama in May.

The TPP is currently being negotiated among ten countries in the Asia Pacific region. Mexico joined the negotiations in July and will participate as a member for a first time in December.

Shifting what should be a resolved issue to the TPP negotiations will set a broader precedent undermining the legitimacy of the WTO as an arbiter of international trade disputes. If WTO members were to simply shift disputes outcomes they were not happy with to bilateral or regional forums, the value of the WTO in enforcing agreed trade rules would be lost. Arguably this is one of its greatest strengths. Without it trade wars would abound. One country would be able to impose its own environmental policy on another based on economic power rather than rules.

Conditioning market access on environmental policy will also frustrate the capacity of the TPP agreement to open trade and investment flows in the Asia Pacific region. More open markets will not only deliver benefits to the US, but also developing countries. Economic modelling estimates that the benefits to the US from the TPP will be $5 billion in 2015, rising to $14 billion in 2025. Total benefits are likely to be larger as this figure does not capture the impacts from investment liberalization, nor the impact of Mexico joining the negotiations. Mexico is the US’s second largest trading partner.


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