•The views expressed in this presentation are the views of the author/s and do not necessarily reflect the views or policies of the Asian Development Bank, or its Board of Governors, or the governments they represent. ADB does not guarantee the accuracy of the data included in this presentation and accepts no responsibility for any consequence of their use. The countries listed in this presentation do not imply any view on ADB's part as to sovereignty or independent status or necessarily conform to ADB's terminology.

Challenges for Asia's Trade and Environment

Olivier Serrat

2000

Contents

Asia's Emerging Agenda for Trade and the Environment

International Efforts on Trade and the Environment

Effects of Environmental Policies on Trade

Effects of Trade Policy on the Environment

Growth, Trade, and the Environment

Preamble

Preamble

The rapid growth of commerce in Asia and the degradation of that region's natural resources have highlighted the nexus between trade and the environment.

Trade policy is an inefficient means of achieving environmental objectives; but, it is a peaceful means of influencing the environment; similarly, environmental policies often have implications for international trade.

Further trade liberalization, new international production standards, and international cooperation will increasingly influence, and be influenced by, the linkages between trade and the environment.

This development warrants a better understanding the effects of trade policy on the environment, the effects of environmental policies on trade, and the role of international efforts on trade and the environment.

Growth, Trade, and the Environment

Gross domestic product among developing Asian economies grew at an average annual rate of 7.6 percent during the 1980s.

From 1990 to 1996, average annual growth in GDP ranged from 6.3 to 8.5 percent; even on a per capita basis, average annual growth in GDP remained between 4.7 and 7.0 percent from 1990 to 1996.

Over the same period, average growth in trade was even stronger than growth in GDP in these economies.

Despite the Asian crisis, which struck in 1997 and continues to affect some economies, growth in the Asian and Pacific region will remain strong.

Demand for infrastructure in the region will intensify in coming decades; population growth, of itself, will generate demand; this will be compounded by what new demand rapid growth creates.

Growth, Trade, and the Environment

Yet, the rapid growth accompanying trade expansion has come at a high environmental cost.

Pollution and congestion, with high health and productivity costs, are common in urban areas.

Meanwhile, in rural areas, deforestation or desertification, depletion or contamination of groundwater supplies, soil salinity or waterlogging, loss of biodiversity, and erosion are just some of the problems.

Developing Asian economies account for slightly more than half the world's population, and the bulk of its poor population; despite declining rates of fertility and poverty, these countries will add almost one billion new consumers to the world's population by 2010.

Growth, Trade, and the Environment

There are good arguments against setting priorities on development first and worrying about the environment later; but, at rapid growth rates in the face of continuing poverty, there is often little time for environmental considerations.

At least, more attention must be paid to which degradation is likely to be at high permanent cost, which may later respond to remedial actions, and which can most profitably be tackled now.

Effects of Trade Policy on the Environment

Economic theory suggests that trade measures are second-best responses to environmental issues, which should be handled by internalizing all costs.

This overlooks the limits on scientific information about many environmental interactions, challenges in valuing resources and amenities (despite improvements in applying the polluter pays principle, in contingent valuation techniques, and in developing satellite national income accounts to reflect changes in natural resource stocks), and difficulties in enforcing international agreements.

Yet, international trade increases competitive pressures for efficient resource and energy use.

This calls for the identification of areas that offer practical promise for a better understanding of the effects of trade policy on the environment.

Effects of Trade Policy on the Environment

The environmental attributes of a product, process, or service often become clearer through the application of a product life-cycle assessment.

The assessment helps to identify the stage(s) where environmental impact is greatest, and has proven to be a useful tool in development of eco-labels and national environmental standards.

Besides the indirect effects of trade on the environment through general income growth resulting from gains from trade, there are four basic avenues in the life cycle of traded products for environmental degradation to arise through international trade:

Production (including resource extraction);

Shipping and handling (including storage);

Consumption; and

Waste, disposal, or recycling of the product

Effects of Trade Policy on the Environment

Product standards or eco-labels based on a product-life cycle assessment are also increasingly being considered as environmental instruments.

So far, they have often been used to reduce trade opportunities by acting as non-tariff barriers to trade, discriminating between domestically produced and imported goods.

But, recent agreements have placed greater limits on the ability of governments to set products standards; the Agreement on Technical Barriers to Trade, for instance, applies a "least trade restrictive" and "no more trade restrictive than necessary to fulfill a legitimate objective" test to national regulations.

Eco-labels in particular have the potential to express consumer desires through market forces, avoiding the need for command-and-control approaches.

Effects of Trade Policy on the Environment

As voluntary measures, eco-labels based on product life-cycle analyses provide an avenue through which consumers can influence environment aspects of production in a manner consistent with international trade rules.

This is one area where capacity building in less developed countries, including technology transfer and human capital investments, can increase welfare and protect the environment there and in more developed countries.

Effects of Environmental Policies on Trade

There is concern in both more developed and less developed countries about the effects of environmental policies on trade, although for different reasons.

In less developed countries, this concern is usually directed at perceived green protectionism in more developed countries, in which ostensibly environmentally directed standards are used as non-tariff barriers to trade.

In more developed countries, there are fears of a "race to the top" as green protectionism in developed competitors demand stricter standards, and of a "race to the bottom" as less developed countries concentrate on production of environmentally-intensive products or methods, or attract polluting industries or technologies from more developed countries.

Effects of Environmental Policies on Trade

Concern about green protectionism, in less developed countries, is not surprising; beyond difficulties in planning, implementing, monitoring, and enforcing the controls desired, pollution taxes levied on production of a pollution-intensive commodity raises its relative price and reduces the country's comparative advantage; but, the demand for exports from less developed countries is relatively price-inelastic.

Evidence of firms or industries migrating to locations with lower environmental standards remains largely anecdotal; on the other hand, there is solid evidence that the bulk of foreign direct investment is targeted at countries with higher environmental standards.

International Efforts on Trade and the Environment

There is no international agency with authority to settle major disputes and enforce settlements related to transboundaryenvironmental interactions.

International cooperation on the environment and its relations with trade takes place through multilateral environmental agreements, which must be negotiated individually, usually in separate fora, or through institutions such as the World Trade Organization.

For political reasons, and for want of better information on resource values and ecological interactions, environmental policies tend in such cases to take the form of command-and-control regulations rather than that of market incentives.

They have been used to (i) enforce agreements through the threat of trade sanctions, (ii) persuade nonparticipants to accede to an agreement, and (iii) set environmental conditions on traded products or processes and production methods.

International Efforts on Trade and the Environment

Over the last two decades, as the economic and environmental interdependence of developing Asian economies increased, so have their efforts toward regional and subregional cooperation.

Prominent among these are the APEC forum, ASEAN, SAARC, the South Pacific Forum, and the South Pacific Commission..

Subregional cooperation in Asia include the Southern China Growth Triangle, the Singapore-Johor-Riau Growth Triangle, the Tumen River Economic Development Area, the Indonesia-Malaysia-Thailand Growth Triangle, the Brunei-Indonesia-Malaysia-Philippines East ASEAN Growth Area, and the Greater Mekong Subregion Economic Cooperation Program.

But, most of these cooperative efforts aim to liberalize trade, with environmental consequences in the interim.

Asia's Emerging Agenda for Trade and the Environment

The international efforts under way in various global, regional, and subregional for a related to transboundary environmental interactions cover a wide range of activities; these include capacity building, biological research, control of cross-border movements of hazardous wastes, bans on driftnet fishing, and efforts to slow down global warming and protect the ozone layer.

Yet, there remain many areas for further action on trade and the environment, both in more developed and less developed countries, together and individually.

Of concern are the gaps in our scientific knowledge of environmental interactions; more research needs to be carried out at the national, subregional, regional, and global levels, with international cooperation playing a key role in exchange of knowledge, technology, and human and financial resources for research and dissemination.

Asia's Emerging Agenda for Trade and the Environment

More research is also needed on the institutional aspects of solving market failures that result in environmental problems.

In practice, property rights and the tax or subsidy approaches differ more in emphasis than in substance; developing countries must examine the extent to which red tape can be reduced or reformed to facilitate more efficient trade and resource use.

Elsewhere, a consensus needs to be reached on acceptable use of trade measures in multilateral environmental agreements and criteria need to be developed for their judicious application.

Yet, proposals for a global environment organization to coordinate international environmental activities have met with lukewarm responses; a structured organization may not be needed, but with little coordination in efforts and poor understanding of environmental factors on which our lives depend, the dangers may be great.

Asia's Emerging Agenda for Trade and the Environment

International aid for the environment, as with other types of aid, suffers from problems of coordination; strengthening and coordination of certification bodies, along with adoption of common sets of standards, can improve efficiency.

Regional and subregional cooperation in Asia play an important role and deserve international support; but, the comparative advantage of each grouping should be established and exploited to increase the efficiency of environmental efforts.

Further Reading

• ADB. 1998. Challenges for Asia's Trade and Environment. Manila. www.adb.org/publications/challenges-asias-trade-and-environment

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