Greener Trade at the WTO

How Shifting the Focus from Products to Processes Could Save the Environment

By
Geneva Ministerial Conference 18-20 May 1998
WTO
Greener Trade at the WTO : How Shifting the Focus from Products to Processes Could Save the Environment - Allison M. Carragher

Abstract

The World Trade Organization is hindering the ability of member countries to pursue green growth policies. As the nature of international trade evolves, the creation of global supply chains has forced us to measure trade in value added rather than goods produced. These same trends demand a more nuanced and accurate assessment of costs, both economic and environmental. By modernizing its rules governing fossil-fuel subsidies and unincorporated production processes, the WTO can usher in a new era of freer, "greener" trade.

Introduction

The nature of international trade is changing. The emergence of global value chains is transforming the conventional definition from trade in goods to trade in tasks. It is becoming more difficult, and less meaningful, to pinpoint the country of origin of a product. The iPhone in your pocket may have been designed in the United States, but assembled piecemeal in Thailand, Malaysia, South Korea, Singapore, China, and the Philippines. This evolution has inspired the World Trade Organization’s (WTO) “Made in the World” initiative, which measures trade in terms of value added.

The same trends that oblige new measures of value also demand a more nuanced and accurate assessment of cost—both economic and environmental. The consequences of traditional, fossil fuel and resource-driven growth on the environment have been harsh, with export industries contributing a substantial share of contamination.[1] As countries develop, governments are increasingly seeking to adopt green growth strategies and more environmentally friendly policies. Today, it is no longer adequate to consider only the environmental impact of an import on the consuming economy, but also the producing one. As environmental degradation is pushed further down the value chain, the environmental costs of each stage of production need to be weighted into the final price. In order to assess more equitably the environmental costs of production and consumption, it is essential that this final price include externalities, such as fossil fuel use and production processes. Today’s environmental concerns necessitate a shift in focus from products to processes. Unfortunately, WTO rules are impeding governments seeking to adopt green growth strategies and should be modernized.

Environmentalism or Protectionism? Old Dog, New Tricks

Most of the “green” policies that have been challenged at the WTO are little more than thinly veiled protectionism. For example, when India announced its National Solar Mission, environmentalists applauded such an ambitious effort by a developing nation to combat climate change. In practice, however, Local Content Requirements mandating the use of Indian-manufactured modules for certain projects seem to discriminate against foreign manufacturers of solar panels. WTO rules prohibit such preferential measures, and will continue to do so, even if they are disguised as environmentalism.

Protectionism aside, however, outmoded WTO rules are impeding governments from enacting legitimate green agendas due to two key shortcomings. First, the inability to challenge fossil fuel subsidy programs under existing WTO rules produces price distortions that favor energy-intensive exporters, handicaps the renewable energy industry, and unduly incentivizes international production networks. Second, the WTO’s lack of jurisdiction over unincorporated production processes and methods (PPMs)—which relate to how products are produced and the inputs used to make them—undermines attempts by governments to adopt more sustainable production processes and misallocates emissions and environmental damages to the producer instead of the consumer. These limitations of WTO rules should be remedied in order to account more fully for the environmental costs of the international trading system.

Energy Subsidies: Running out of Gas?

From an economic perspective, energy subsidies are destructive because they cause price distortions that wrongly influence producer and consumer behavior. For example, one of the more popular programs, dual-pricing schemes, offers domestic consumers a rate that is lower than the traded price. These subsidies benefit energy-intensive industry, resulting in more competitive exports from countries with heavy fossil fuel subsidies. Cheaper fuel also incentivizes international production networks by reducing transportation and shipping costs. From an environmental perspective, overconsumption of these finite natural resources leads to excess pollution. In fact, the chief economist at the International Energy Agency estimates that subsidies for coal, gas, and oil account for half the greenhouse gas emissions that would need to be reduced in order to keep climate change under two degrees Celsius, the scientifically-accepted threshold.[2] However, it has been difficult to apply existing WTO rules to fossil fuel subsidy programs, as only those programs under which the benefits are contingent upon export performance or the use of domestic over foreign goods are prohibited.[3] With some careful drafting, countries can easily elude WTO scrutiny; despite the clear benefit cheaper inputs afford exporters.

In contrast to fossil fuel subsidies, renewable energy programs often violate these prohibitions and thus have come under attack in recent years, including before the Dispute Settlement Mechanism. Part of this disparity stems from the fact that many renewable energy programs are conceived by state governments, which unlike national governments may not have the capacity or sensitivity to devise WTO-compliant programs.[4] The nature of the renewable energy sector also plays a role, as this industry trades in differentiated end products, like solar panels and wind turbines, rather than identical commodities. Furthermore, young companies with new technologies require direct subsidization, and simply setting a lower price for consumers will not suffice. As a result, clean energy cannot compete with fossil fuels. Instead of offering technical assistance to help countries design green subsidy programs to evade WTO rules, existing fossil fuel subsidies should be dismantled. By allowing green technologies to compete on a level playing field, we can bring down the price of these products and let markets allocate them where they are needed most.

Production Processes: Invisible but Important

According to the WTO, two tables are considered “like products” even if one was produced using fair labor and sustainably harvested wood, while the other was built by child workers and left the farmland desiccated.[5] But which table is more attractive to consumers, and is that table worth more? Unincorporated PPMs are those that have no effect on the physical characteristics or operation of a good. While governments can control production practices and emissions within their own borders, they cannot discriminate against exports from those countries that chose not to embrace such regulations. Economic reasoning surmises that each country’s environmental decisions are a product of its unique absorptive capacity, endowments, income level, and preferences; and its choices translate into a comparative advantage or disadvantage.[6]

In reality, however, environmental degradation is not limited by national borders, and the decisions of one country affect them all. Consider the extreme case of China, where scientists have estimated that one-fifth of the air pollution released into the atmosphere can be linked to the production of goods for export. As a result, Los Angeles and other coastal areas realized at least one additional day of unsafe smog.[7] Critics may contend that labeling schemes can remedy this issue, but such programs are insufficient because they target consumer preferences instead of reflecting real environmental costs. WTO rules should permit countries to incorporate the environmental consequences of their imports into the final price, albeit in a manner that balances the rights of members and may not be used to discriminate arbitrarily.[8] By focusing as much on the process as the final product, we gain a more complete understanding of the costs of different environmental measures and can attribute increased emissions and pollution to the final consumer.

Conclusion: Greeting the WTO

As international trade becomes more complex, a World Trade Organization that can recognize and confront these new challenges becomes more vital. International production networks have focused attention on processes rather than just products, and the need to consider the true cost of inputs, emissions, and environmental practices at every step of the way. WTO rules that allow for fossil fuel but not renewable energy subsidies are inefficient and counterproductive. WTO precedents that treat as like products goods which have dramatically different impacts on the environment are myopic and unjust. By modernizing these rules, producers and consumers see prices that place value on the environment, enabling markets to function and allowing green technologies and products to flow where they are needed most. Instead of hindering green growth, the WTO can and should usher in a new era of greener trade.

Notes & References

  1. Tony Barboza, “China’s Industry Exporting Air Pollution to U.S., Study Says,” Los Angeles Times, January 20, 2014.
  2. Timothy Meyer, “Energy Subsidies and the World Trade Organization” (American Society of International Law, September 10, 2013).
  3. Ibid.
  4. Ibid.
  5. Peter Morici, “Reconciling Trade and the Environment in the World Trade Organization” (Economic Strategy Institute, 2002).
  6. Ibid.
  7. Barboza, “China’s Industry Exporting Air Pollution to U.S., Study Says.”
  8. Peter Morici, “Reconciling Trade and the Environment in the World Trade Organization.”