Trade and Environment Newsletter: Issue 20, May 2013

North South divide in APEC over denomination of Environmental Goods and Services

Proposals by developing countries to expand the list of environmental goods recognised by APEC to include agri-food commodities including palm oil have been opposed by the US and several industrialised economies.  This is a setback for APEC and wider global initiatives to support outcomes which a senior Indonesian trade official described as “pro environment, pro development and pro poor”.

In September 2012, APEC member economies considered a list of 54 ‘environmental goods and services’ (EGS) on which they would reduce tariffs by 2015. The aim was to pass the list to the WTO for agreement there by WTO members to reduce tariffs on those products.

When the US Environment Protection Agency earlier in the year initiated consideration of restrictions on imports of vegetable oil according to their carbon signature (similar to a measure already imposed by the EU), Indonesia objected that the proposed methodology discriminated against palm oil imports.  Legal experts consider the EU measure breaches WTO rules (see story below “Argentina to challenge EU Biofuel regulations in WTO”).

At the APEC Summit last year, President Yudhoyono proposed inclusion of Palm Oil as a sustainable product on the APEC list.  The US objected.  At a recent APEC meeting, Indonesia, Chair of APEC for 2013, proposed adding agri-products to the list, observing it concentrated on manufactured products and not enough on products of greater importance to developing countries.  It was supported by Peru, Chile, PNG and New Zealand, but not by the US.

As stated by Deny Kurnia, Director of APEC Cooperation for Indonesia, “effort to promote palm oil and rubber is aimed at balancing the list of the Environmental Goods, so that developing countries relying on the agricultural sector can contribute to environmental preservation.”

Reducing tariffs on agri food products such as palm oil, rubber and paper will not only expand trade, but also support growth of competitive agricultural products that “meet the demands of not only vegetable oil but also renewable energy and other consumption needs.” As Indonesia has pointed out, these products “also meet the needs of improved livelihoods among small scale producers.” They are “pro environment, pro development and pro poor.”

Swiss study highlights risks of green protectionism

A report by Swiss think-tank Liberales Institut, examines how protectionist measures in the name of environmental and consumer protection are endangering the fight against poverty in developing countries. It highlights European policy on palm oil as an example.

The report, “The Risks of Green Protectionism: European Posturing Over Palm Oil and Other Examples,” demonstrates how “western demand for green agriculture is being used to legitimise extensive agricultural protectionism and distort international trade. It is particularly questionable where it impacts on weaker trade partners, especially in the agricultural industry upon which most newly industrialised and developing countries rely.”

The report makes the general point that the strong popularity of consumer and environmental protection policy measures among the public make them a favourite playing field of special interest groups. Critical attention needs to be paid to the effectiveness and impacts of such policies by both the public and policy makers.

The Swiss Federal Council is discussing whether it will implement mandatory labelling of palm oil content in products. The canton of Freiburg is proposing an import ban on palm oil that does not meet Swiss quality requirements. The report finds that motives of those who are attacking palm oil in Switzerland is questionable: the case is not based on environmental or scientific facts but driven by the desire to promote domestic fats and oils. The proposed polices are also likely to be inconsistent with WTO rules.

The Liberales Institute warned of the impact of such protectionist action. “Special attention should be paid to the effects trade distorting measures have on foreign trade partners … developing countries are dependent on access to the market to escape poverty.”

New trade rules to support sustainable energy?

A new paper by the Peterson Institute, a Washington DC economic think-tank, advocates changes to trade rules to advance climate change and environmental policy.

The paper “Four Changes to Trade rules to Facilitate Climate Change Action” notes that WTO rules can constrain policy choices to address climate change. It considers whether trade rules can be changed to facilitate such action without damaging trade.

The authors advocate reform in four areas. They put the case for reform of current subsidies disciplines to permit production subsidies for green products and technologies; imposing border taxes based on the carbon content of domestic production; strengthening WTO rules on export controls to prohibit restrictions on the export of fossil fuels, principally natural gas, and; strengthening of intellectual property protection for green technologies.

World Growth considers there is no case for such changes.  World Growth released a paper at the Durban UNFCCC meeting in 2011 which demonstrated why strategies to address climate change need not and should not be built on policies that conflict with WTO rules, and proposed policies to mitigate GHG emissions that harmonize with WTO rules, not conflict with them.

This new Peterson Institute report follows earlier work by the Institute for ICTSD, which examined how a Sustainable Energy Trade Agreement (SETA) in the WTO might be negotiated to accommodate “sustainable” energy policy. That 2012 paper considers how the various forms of public support now provided by governments to promote renewable energy – including subsidies and environmental goods- might be treated under trade rules.

The proposal for a SETA is fraught with challenges given how much industrialized economies have been willing to distort domestic markets to meet targets to reduce emissions of GHG gases.  The likelihood of a SETA being similarly contaminated with protectionist exceptions is high.

Discussion about how to address the trade impacts of energy policy follows several recent trade disputes over domestic green energy policies. The WTO Appellate Body ruled this month that Canada’s local content requirements to support solar and wind power illegally discriminate against foreign suppliers.

While support for sustainable development is globally accepted, there is not yet international consensus on global agreement to tackle climate change. It is often assumed that policy action to address environmental issues must be taken by governments and that governments (other than the major trading players) would agree to changes to internationally agreed rules on trade to achieve this.

Not all economies consider climate change action a sufficient policy priority as to warrant changes to trade rules. And many would consider changes to the rules of the WTO which safeguard against discrimination in trade a threat to achieving sustainable growth and reducing poverty.

Argentina to challenge EU Biofuel regulations in WTO

Argentina recently announced it will take steps to challenge the EU’s biodiesel regulations in the WTO on grounds that they discriminate in trade in favour of the domestic industry.

Argentina notified the WTO of its intent to initiate the dispute on May 15. According to media reports, at issue are the EU’s “measures for the promotion of the use of energy from renewable sources and the introduction of a mechanism to control and reduce greenhouse gas emissions as well as measures for their implementation at the level of the member states of the EU.” Argentina also challenges support schemes for the biodiesel sector in the EU.

The action follows an investigation by the EU into alleged subsidisation of biodiesel in Argentina and Indonesia. Since last year, the EU has required imports from both countries to be registered while the Commission considered placing retaliatory duties on soybean and palm oil – permitted under WTO rules. The Argentine biofuels organization Camara Argentina de Combustibles (CARBIO) has rejected the allegation of subsidisation, stating “there is no subsidy on exports of biodiesel from Argentina, let alone in the application of export duties which are considered taxes under national legislation and international law.”

Argentina contends the EU’s biofuel regulations violate WTO rules because they discriminate in trade against imports from developing countries, and unfairly support the domestic industry in Europe.

Concerns have also been raised by other WTO members in the past.  In the WTO TBT Committee the US has attributed the EU-RED with “creating considerable uncertainty in global biofuel and biofuel feedstock markets and trade.” The American Soy Bean Association (ASA) has publicly raised concerns about its discriminatory trade impacts. Indonesia has also expressed concern about the EU RED over its assessment of palm oil based biofuels (See related storySpain’s biofuel laws to be tested in the WTO”).

There is legal opinion in support of the conclusion that the Renewable Energy Directive (RED) violates WTO rules, including its treatment of palm oil for the contribution that makes to green house gas emissions.  Trade commentators point out that the RED is indicative of a broader and consistent inclination of the EU to protect its domestic industry by restricting trade of more competitive biofuels from developing countries (See recent storyEU biofuels policy costly for environment and trade”).

Timber legality controls on “trade facilitation” would undermine benefits

A new report by the OECD reveals that a multilateral agreement to cut red tape in international trade would substantially boost the global economy and benefit developing countries. A trade facilitation agreement is being considered at next WTO Ministerial in Bali in October.

The OECD Trade Facilitation Indicators estimates that comprehensive implementation of all measures currently being negotiated in the WTO would reduce total trade costs by 10% in advanced economies and by 13-15.5% in developing countries. Reducing global trade costs by 1% would increase worldwide income by more than USD $40 billion, most of which would accrue in developing countries. The indicators correspond to the main policy areas under negotiation at the WTO, including the availability of trade-related information, the simplification and harmonisation of documents, the streamlining of procedures and the use of automated processes and advance rulings.

Despite this, proposed WTO trade facilitation measures have been criticised for their potential to contribute to illegal wildlife and timber trade. An ICTSD report examining the Greater Mekong Sub-Region (GMS) refers to their potential adverse effects on the depletion and degradation of forest resources. It states that “current trade facilitation measures at the multilateral, regional and subregional levels could potentially affect the growth of illegal wildlife and timber trade.”

It proposes that such measures be “harnessed to control and regulate” trade in illegal timber and wildlife. It suggests countries adopt international initiatives such as EU FLEGT agreements to regulate trade, albeit agreed between partner countries, based on compliance with national laws in the exporting country and adherence to sustainability criteria.

This effectively advocates the use of trade controls to achieve environmental outcomes. It fails to recognise that illegal trade is only a very small proportion of the potential trade that would benefit from improved facilitation. More efficient trade means more productive and better use of (legal) resources. Open and transparent procedures reduce the potential for illegal trade. Moreover, there are issues of WTO compatibility.

Better options are alternative, non trade restrictive approaches the report advocates – including ensuring the effectiveness of national laws and policies, improving coordination among authorities responsible for trade and considering incentives to change behaviour to encourage legal trade of timber.

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