Trade and the Environment: Focus on the Goals!

Environmental concerns are moving up the trade policy agenda both in the WTO and regional trade agreements where countries discuss liberalizing trade in environmental goods and services. A first step is to agree on a definition of environmental goods and services. However, discussions have been stuck in technicalities over definitions for decades. To move forward, a different approach is needed.

The WTO rightly sees trade as such as an important contribution to sustainable development through its effect on efficient resource allocation. Should specific trade flows turn out to be harmful, WTO rules allow measures to protect the environment even if they hamper trade, given that the measures are non-discriminatory, transparent, and not a disguised restriction on international trade.

In addition to these general approaches to trade and the environment, 18 WTO members (including the EU) have started plurilateral negotiations on an Environmental Goods Agreement. There are also discussions on an agreement on eliminating trade barriers in environmental goods and services but so far these have not moved on to negotiations.

The GATS architecture leaves discussions stalled in insurmountable technical difficulties

The architecture of the General Agreement on Trade in Services (GATS) is based on members’ commitments to liberalize trade, sector by sector. For clarity, the WTO secretariat developed a sector classification list (the W120) and a correspondence table to the UN’s product classification at the time (the CPC prov). Multilateral services trade governance thus rests on a clear definition of services sectors. [1]

The W120 includes a category termed environmental services, but these do not resonate well with what stakeholders have in mind when promoting trade liberalization as a means towards a green transition of the global economy. The category consists of sewage services, refuse disposal services, sanitation and some other, including remediation services. These are important for a cleaner and healthier local environment, but most of them are municipality public services, paid for through taxes while their consumption is compulsory. They are hardly the low-hanging fruits for trade liberalization.

To start off on a more palpable path, a number of institutions, including APEC, OECD, and others have suggested alternative and broader lists of environmental goods and services to be liberalized. These have been the subject of countless meetings, conferences and webinars over the past few years but no universally agreed definition has emerged so far.

A contentious issue in these discussions is dual use, which refers to cases when a good or a service can be used both for environmentally beneficial purposes and in activities that are harmful for the environment. For instance, engineering services related to clean energy feature on most of the suggested lists. However, the sector classification for such services (CPC2.1 83324) entails engineering services “related to facilities that generate electrical power from: coal and other fossil-fuel energy such as oil and gas, nuclear energy, the energy in falling water, other energy, such as solar power, wind power, geothermal power including cogeneration facilities and engineering services related to overhead or underground electrical power transmission and distribution lines”.

Should engineering services related to coal and other fossil fuel or nuclear energy be included in the list of environmental services? Many would argue no – and go on to suggest excluding them from the list. This may persuade countries willing to liberalize service trade mainly for environmental reasons. However, a case can be made that, given the existence of fossil fuel-fed power plants, access to state-of-the-art engineering services improves the energy efficiency and abates emissions from those plants. Furthermore, distinguishing between the use of a service in trade governance raises substantial administrative burdens.

Agreeing on a definition on which to build an agreement on trade in environmental (goods and) services may require going through the entire UN product and sector classification to identify which products should be included. Statistical agencies, including Eurostat have done exactly that, resulting in a 200-page report. Using this as a basis for a trade agreement sounds like a herculean task as well as a distraction from the real issue – which should be how to use trade policy to support the green transition.

A different approach: start with the environmental goals

An alternative to the list approach is to start with our common environmental goals, analyze how services trade supports and facilitates a path towards the goals, identify policy-induced barriers along those paths and agree on removing them as well as finding ways to collaborate on solutions that make sustainable prosperity possible.

Let us take the transition to the circular economy as an example of an environmental goal (Figure 1). The circular economy rests on the 3Rs: Reduce, Recycle and Reuse. Services such as wholesale and retail trade, marketing as well as construction are essential for these principles. Packaging and supply chain management can contribute to the reduce principle, trade in second-hand products contributes to the reuse principle while the distribution sector often serves as the main return point for waste recycling from households, contributing to the recycling principle. Construction may reduce, recycle, and reuse building materials and build smart buildings and infrastructure to reduce energy consumption.

The services activities in the second circle in Figure 1 – R&D, engineering, and design – support and feed on the activities in the outer circle. At the core of the transition are the information and innovation systems that underpin a transition to sustainable prosperity.

Having identified how services contribute to the circular economy, the next step is to assess how trade policy supports their contribution. Starting at the core of Figure 1, policy must ensure the free flow of data while safeguarding privacy and cyber security. Equally important is to facilitate open innovation. Such policies facilitate the diffusion of technology as well as the ability to integrate the 3Rs already in product and process design.

Figure 1. Services in the Circular Economy

 

Open innovation is characterized by networks of firms sourcing knowledge and technology from external sources and sharing technology while using external paths to bringing inventions to the market. WIPO finds that the intellectual property rights (IPR) most important for open innovation relate to access regimes such as licensing, franchising, and open-source platforms. These are ways of safely sharing knowledge rather than excluding others from using the ensuing technology. Thus, open innovation networks across borders rest on confidence in the IPR implementation in each country participating.

Policies that would support the contribution of engineering, design, and other professional and technical services more broadly to the circular economy are removing barriers to multidisciplinary cross-border teamwork. Such barriers are typically buried in complex domestic regulation including occupational licensing, recognition of qualifications and reserving certain activities for licensed professionals. With technical changes, notably the proliferation of artificial intelligence, the boundaries between occupations have become blurred, while a broad range of skills, abilities and competencies is needed to solve the challenges of the transition to a circular economy.

Moving to the outer circle in Figure 1, domestic regulations addressing the 3Rs are typically complex, comprehensive, and heterogeneous across countries. Trade polices aiming for interoperable product standards and safe trade in second-hand products and waste would support the contribution of distribution and construction services to the circular economy.

We don’t need a list of environmental services for trade to support the green transition

In a society with rapidly changing technology and new policy challenges, the positive list architecture of the GATS can only work if the list is updated regularly. It has remained unchanged since the early 1990s. Thus, as innovation brings new services to the market and policy challenges traverse sectoral boundaries, the list itself has become a trade policy issue rather than the supporting infrastructure that it was meant to be. Nowhere is this clearer than in the area of trade and environment.

To reach our common environmental goals, we need trade to support open innovation, open information systems, cross-border multidisciplinary collaboration, and setting standards for safe reuse and recycling of materials in global supply chains. Liberalizing environmental services will help, but supporting the green transition involves a much broader set of issues and is too important and urgent to get bogged down in discussions on services sector definitions.

The mandate to design trade policy in support of environmental goals is already in the Decision on Trade and Environment in the Marrakesh declaration establishing the WTO. Let us build on the spirit from that decision.

 

[1] The GATS commitments are made using a positive list meaning that countries are legally obliged to liberalize or refrain from introducing new market access or national treatment limitations only in the sectors that they have explicitly listed in their schedules of commitments. Although countries are in principle free to use the classification they see fit, the W120 and corresponding CPC prov have become the de facto standard.