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Chapter 7: Uneasy Neighbors: Trade and the Environment

By William Krist

According to economic theory, trade liberalization can have both positive and negative effects on the environment, and historically environmental groups have had mixed views regarding the impact of trade liberalization on the environment. Some environmentalists believe economic growth per se is damaging to the environment and generally oppose all trade agreements, while other environmental groups will support trade agreements that they believe are constructed in a way to protect the environment.

However, developments with the World Trade Organization and NAFTA in the mid-1990s united virtually all environmental organizations in opposition to trade agreements.  Since then, U.S. negotiators and the World Trade Organization (WTO) have made significant progress in better reconciling the United States’ trade agreements with environmental stewardship. 

Today, some environmental groups support the newly negotiated Trans-Pacific Partnership (TPP), including the World Wildlife Fund, while others, such as Sierra Club, are strongly opposed.  (The TPP’s environmental provisions and the pros and cons of the agreement’s impact on the environment are discussed in Chapter 10.)

The environmental and health communities have long raised concerns regarding expanded trade. Although some environmentalists are intrinsically opposed to trade liberalization and its resulting growth, more moderate groups argue that trade liberalization can be positive if care is taken in trade agreements to protect—or even advance—environmental stewardship. These moderate groups supported trade liberalization up through the Uruguay Round and the negotiations for the North America Free Trade Agreement (NAFTA). However, by 1999 events in the WTO and NAFTA had raised the concerns of almost all environmental groups. By the time of the WTO Seattle Ministerial Meeting in 1999, almost all environmental groups opposed further trade liberalization.

Conversely, staunch free trade advocates, including most businessmen and many academics, historically argued that trade expansion promotes efficiency and creates economic growth. This new economic wealth, according to this argument, can be used to strengthen environmental stewardship and promote health and safety. Free traders argued that any environmental effects of trade agreements would be minor and, in any case, the best way to protect the environment was through separate agreements on environment and safety.

A third view was expressed by developing countries, which generally have been skeptical of including environmental provisions in regional trade agreements.  The major concern of the developing world is that environmental provisions could be used as new trade barriers to restrict their access to developed-country markets. Accordingly, they tended to resist including environmental provisions in the WTO and bilateral agreements.[1]

However, the issue of how to reconcile trade and environmental protection has evolved enormously during the past two decades. Trade negotiators now are more sensitive to the concerns of the environmental community, and trade agreements better deal with environmental and health/safety concerns. Today there is much greater acceptance by the business community of the legitimacy of including environmental provisions in trade agreements. Parallel to this, a number of environmental groups have moved back to supporting trade agreements where they believe the provisions adequately address environmental concerns.  And though developing countries as a whole continue to oppose including environmental provisions in the Doha Round negotiations, many have accepted far-reaching environmental provisions in bilateral trade agreements.[2]

How We Got Here

The original General Agreement on Tariffs and Trade (GATT) negotiated in 1947 recognized the right of the parties to abrogate trade commitments as necessary to protect human, animal, or plant life or health, or for the conservation of exhaustible natural resources provided these derogations were not disguised protectionism (Article XX).[3] Other than this, however, the original GATT did not acknowledge environmental concerns.

The U.S. free trade agreement (FTA) with Israel—the first post–World War II U.S. agreement—went into force in 1985. This agreement included the GATT Article XX exception, but otherwise gave short shrift to environmental considerations, and in fact leaned the other way. One article of the Israel agreement specifies that “the Parties shall review their current and future rules on veterinary and plant health matters to insure that these rules are applied in a non-discriminatory manner, and that these rules do not have the effect of unduly obstructing trade.”

The concerns of environmentalists with trade were fanned in 1991 when the GATT ruled that a U.S. law prohibiting imports of tuna caught by purse seine nets, which often killed dolphins, was a violation of U.S. trade commitments. Mexico brought this case to the GATT but decided not to pursue a resolution because of concerns that it would cost them a potential FTA with the United States.[4]   Nonetheless, the case became a cause célèbre for the environmental community, which dubbed it GATTzilla versus Flipper. This tuna-dolphin dispute became a symbol for the environmentalists that the trade rules would be used to systematically undermine international and national environmental rules.

With the commencement of negotiations for NAFTA in June 1991, environmental considerations received greater emphasis. Environmentalists were extremely concerned about the negative environmental impact this agreement could have on the United States, because Mexican environmental protection lagged far behind that of the United States and because the United States and Mexico share a 2,000-mile border.  Among other negative effects, environmentalists believed this trade agreement could lead to a reduction in U.S. standards in an effort to remain competitive with imports from Mexico and could worsen Mexico’s already-threatened environment.

To address these concerns, negotiators conducted the first-ever U.S. environmental review of a trade agreement and incorporated far more provisions addressing environmental concerns than ever before. When the agreement was signed by President George H. W. Bush in December

1992, the agreement was the greenest in U.S. history. Its preamble specifically recognized the need for environmental protection and conservation and the promotion of sustainable development, and it called for strengthening development and the enforcement of environmental laws and regulations.

NAFTA also contains a chapter on sanitary and phytosanitary measures, which allows the parties to impose more stringent health and safety standards than those in international agreements. Its chapter on technical barriers to trade specifically allows the parties to choose “the levels of protection considered appropriate” for that country. And the agreement provides that certain specified multilateral environmental agreements (MEAs) take precedence over NAFTA’s trade liberalizing rules.[5]

One element of NAFTA, however, raised particular concern among environmental groups, and this was the provision in the investment chapter that allows investors to initiate a claim against a government if they believe their rights have been infringed. Environmentalists argued that this provision could be used by companies to block important environmental and health/safety regulations.

Even though NAFTA negotiated by the Bush administration recognized environmental concerns to a great extent, U.S. politics had changed even more dramatically. While the NAFTA negotiations were proceeding, the U.S. presidential contest was under way. Labor and many environmental nongovernmental organizations (NGOs) opposed NAFTA, and on October 5, 1992, a month before the election, candidate Bill Clinton moved to accommodate NAFTA opponents by committing to renegotiate NAFTA to include labor and environmental side agreements.

As one of his first acts as president, Clinton launched discussions with Mexico and Canada to negotiate subsidiary agreements covering labor and the environment, which concluded in September 1993. The revised NAFTA went into effect January 1, 1994, with side agreements on labor and the environment.

The Clinton changes were enough to gain support for passage of NAFTA from mainstream environmental groups, such as the World Wildlife Fund and the Audubon Society. Other environmental groups, such as the Sierra Club and Public Citizen, however, opposed NAFTA, arguing that it would weaken laws and regulations to protect the environment and health and safety, and would lead to environmental degradation.

While the NAFTA negotiations were proceeding, 123 countries were negotiating multilaterally in the Uruguay Round. The resulting agreement went into effect on January 1, 1995, and established the World Trade Organization, which incorporated the original GATT along with the many new elements negotiated in the Uruguay Round.

The WTO expanded environmental considerations substantially over the GATT. Among other elements, the preamble recognizes the objective of sustainable development, a new committee on trade and environment was established with the charter to enhance positive interaction between trade and the environment, and a new agreement was reached which recognized that members have the right to take sanitary and phytosanitary measures necessary for the protection of human, animal, or plant life or health, provided that such measures are not disguised restrictions on trade and do not discriminate between members. Additionally, a new agreement on services, the General Agreement on Services, also explicitly recognized the right of members to maintain service provisions to protect the environment.

Following passage of the Uruguay Round agreements and NAFTA, however, it looked like the worst fears of the environmental community were coming true. In 1998 a WTO Appellate Body ruled against a U.S. law that placed an embargo on the importation of shrimp caught without turtle-excluder devices, which were designed to allow endangered sea turtles to escape from shrimp nets. The dispute was brought by four Southeast Asian countries, and the panel based its ruling on the fact that the United States had not taken into account unique conditions in those countries and had not attempted to negotiate a multilateral agreement with those countries.

The ruling, however, took an enormous step in recognizing the concerns of environmentalists in setting out the view that an international agreement could enable the U.S. law to fall under the WTO/GATT Article XX exemptions permitting derogation from most favored trade provisions.[6] Nonetheless, the initial reaction of the environmental community was that once again trade trumped reasonable measures to protect the environment.

And then in June 1999 a Canadian company, Methanex, filed a case under the NAFTA investor-state dispute settlement provisions against a California law that banned MTBE, a gasoline blending additive. California’s ban was based on studies that indicated MTBE was increasingly found in drinking water. (MTBE is an ether that otherwise has a number of favorable properties.) These developments enraged the environmental community, and the moderate groups that had previously supported free trade were forced to the sidelines.

President Clinton tried to move the debate forward by issuing an executive order on November 18, 1999, requiring that environmental impact studies be conducted of all future trade agreements. But it was too little, too late. Many from the environmental community descended on Seattle from November 30 to December 3, 1999, to protest the WTO Ministerial, which had hoped to launch a new trade round, with protesters dressed as turtles joining labor union activists in hard hats and a myriad of other protesters in the Seattle streets.

Then on September 11, 2001, al Qaeda terrorists hit the World Trade Center and the Pentagon. Policymakers recognized that failed states provided a breeding ground for potential terrorist activities, as noted previously, and that the WTO could play a role in helping developing countries.  In this context, on November 14, 2001, the WTO finally succeeded in launching a new round of multilateral trade negotiations. This new round, the Doha Development Round, was couched in terms of supporting national security by promoting economic development, a hoped for antidote to failed states.

Additionally, however, the mandate for this new round had an environmental component. Specifically, the Ministerial Declaration directed that the negotiations should consider the relationship between WTO rules and trade obligations in Multilateral Environmental Agreements, procedures for the WTO and MEAs to share information, and the reduction of trade barriers on environmental goods and services.[7]   Additionally, ministers committed to improve WTO disciplines on fisheries subsidies. They also agreed that the WTO Committee on Trade and Environment should give attention to the effect of environmental measures on market access, the relevant provisions of the Agreement on Trade-Related Aspects of Intellectual Property Rights, and labeling requirements for environmental purposes.

One month later, the U.S. FTA with Jordan went into effect. This agreement included environmental provisions modeled after NAFTA, although not as extensive. Additionally, both the United States and Jordan had conducted environmental assessments of the likely impact of the trade agreement.

In August, President George W. Bush signed the 2002 Trade Act, legislation driven by the Republican chairman of the House Ways and Means Committee, Bill Thomas (R-Calif.). For the first time, legislation giving the president trade negotiating authority included significant provisions aimed at ensuring that trade and environment policies are mutually supportive. For example, objectives for trade negotiations specified in the legislation included ensuring that parties to the agreement effectively enforce environmental laws in a manner affecting trade, strengthening the capacity of U.S. trade partners to protect the environment, and opening market access for environmental goods and services, as well as ensuring that environmental policies do not unjustifiably discriminate against U.S. exports.

The provisions of this legislation shaped the United States’ subsequent FTAs with Chile, Singapore, Australia, Morocco, the members of the Central American Free Trade Agreement (CAFTA; later, including the Dominican Republic, known as CAFTA-DR), and Bahrain; in fact, language closely parallel to language in the 2002 trade bill was included in many of these agreements. Even though this legislation represented a major evolution in U.S. trade policy toward recognizing the environmental implications of expanded trade, still-suspicious environmental groups generally opposed the 2002 bill.

In 2006, the Democrats won control of Congress and immediately pressed for stronger environment and labor provisions. To meet congressional concerns, on May 10, 2007, the administration and congressional leaders announced an agreement under which environmental provisions would have the same enforcement rules as commercial disputes and that foreign investors would have no greater substantive rights than U.S. citizens in investor-state disputes.

Trade’s Impact on the Environment

Expanded trade may have an impact on the environment in a number of different ways, and depending on the specific conditions may have either positive or negative effects. First, as trade barriers are eliminated, trade increases, and this spurs economic growth and increased consumption and production, producing what is called scale effects. All other things being equal, this greater economic activity raises demand for energy and raw materials, and increases emissions and waste generation.

The impact of expanded trade on specific sectors, such as would occur if subsidies for agriculture were reduced, are called structural or composition effects. Production and consumption of some products is more polluting than others. For example, increased coal mining has profound impacts on water and ground pollution, and increased coal consumption has major effects on air quality. By contrast, the production and consumption of software has only a minimal impact on the environment.  If the sectors that expand are more polluting, the environmental impact will be negative for a country; and if the sectors that are less polluting expand, the environmental impact will be positive.

A third impact, often called the technique effect, refers to changes in production methods that follow from trade liberalization. For example, if trade barriers are eliminated, trade in goods and services that protect the environment would likely increase. Liberalizing investment rules along with trade barriers will significantly amplify technique effects; for example, firms with more efficient production technology may invest overseas. Their production techniques may then be emulated by local companies.

And finally, regulatory effects refer to the impact the agreement might have on the ability of the parties to the agreement to implement environmental regulations. This impact also might be either positive or negative.  It would be negative, for example, if the agreement’s trade rules could be used to block rules and regulations to protect the environment or health and safety. Alternatively, the impact would be positive if the parties to the agreement were required to implement stronger environmental and health/safety regulations.

A major concern of environmentalists has been with what has been dubbed a race to the bottom, whereby the parties to a trade agreement seek to gain a competitive advantage by lowering environmental and health standards, creating so-called pollution havens. Alternatively, a race to the bottom may occur as companies move to areas with lower standards (pollution havens) to cut production costs.

Initially, free trade advocates tended to dismiss the concern about a potential race to the bottom, arguing that the costs of complying with environmental regulations are only a small percentage of total production costs. Other factors such as wages and proximity to market or vital resources were deemed to be much more critical to decisions as to where to produce. And initial academic studies of the issue tended to support this view.

However, more recent studies have found “statistically significant pollution haven effects of reasonable magnitude,” according to a thorough review of the literature by Smita Brunnermeier.[8]   These studies indicate that some firms that face high costs of complying with environmental rules and intense price competition may be influenced by the costs of complying with environmental regulations. According to the Organization for Economic Cooperation and Development, “the sectors prone to relocation tend to face high environmental costs, are relatively ‘footloose’—not tied to specific locations by the need for particular mineral resource inputs, for example—and are traded between industrialized and developing countries.”[9]

The impact of a trade agreement on the environment depends on the interaction of the scale, composition, technique, and regulatory effects.  For example, expanded trade will increase the risks of an invasive species entering a new market that may cause extensive environmental damage, and it will increase the risks of oil spills and pollution from increased transportation. However, these adverse effects can be offset by improved regulation and capacity building to prevent environmental or health problems.

Some analysts argue that as countries grow from an impoverished level, first there are negative environmental effects and then after a certain level of growth is reached there are positive effects. This theory, known as the Environmental Kuznets Curve, is that after reaching a certain level of income, a society has the means and the will to spend on reducing pollution, and at that time technique effects and a strengthened regulatory system will more than counterbalance the scale effects.

Overall, studies of a possible environmental Kuznets curve indicate that the relationship seems to hold for a number of pollutants—such as sulfur dioxide, lead, and sewage—but not for other environmental threats —such as carbon emissions and deforestation.

Developing-Country Views

Poverty is the major cause of environmental degradation in most developing countries. Poverty forces people on the verge of starving to overfish and to chop down forests for fuel for heating and light. Because of poverty, farmers engage in non-sustainable agriculture. And because of poverty, governments do not have the resources to enforce environmental laws and regulations.

Developing countries often look to trade agreements as a way to develop economically, and thus it is no surprise that they view proposals to include environmental provisions in trade agreements with substantial skepticism. Many developing countries lack the capacity to negotiate on environmental issues in trade agreements, and they suspect that developed countries may use environmental provisions to block their access to markets. They are also concerned that the implementation of environmental provisions will constitute an excessive burden on their limited financial and human resources.

Finally, developing countries tend not to see any benefits to themselves from environmental provisions. They generally do not have companies that make products or create services that promote environmental stewardship.

For many developing countries, of course, their environment—whether a rain forest, a pristine seacoast, or unique wildlife—is a treasure of inestimable value, but it is a treasure only in the long term and in the short term poverty is the main focus. However, developing countries have been willing to accede to including environmental provisions in bilateral FTAs, particularly when capacity building is provided to help them comply with their commitments.

Environmental Reviews of FTAs

The United States first undertook an environmental review of a trade agreement in 1991, with an early review of the potential NAFTA, which identified issues of possible concern. Eight years later, President Clinton issued Executive Order 13141, which mandated that environmental reviews of trade agreements be “undertaken sufficiently early in the process to inform the development of negotiating positions.”[10]

This order required that public comments be solicited and that the draft review be made available for public comment and the final review made public. Although the executive order defined the focus of these reviews as the impact on the United States, it provided that such reviews could also consider global and transboundary effects.

A precedent for environmental reviews of U.S. trade agreements is the requirement for environmental impact statements under the 1969 National Environmental Policy Act. However, this act’s statements are an analysis of a fixed project, such as a dam, which is known in advance.  Environmental assessments of a possible trade negotiation’s result, however, are a moving target, as the outcome of a trade negotiation is never known until its very end. A second critical difference is the enormous complexity in predicting the results of a trade agreement, which may cover many different issues and two or more countries. Third, data to analyze the potential environmental effects are often very sketchy, particularly when one of the parties to the trade agreement is a developing country with limited statistical information.

Guidelines for implementing the executive order identified a number of “reasonably foreseeable environmental impacts arising from a proposed trade agreement” that should be considered.[11]  Possible effects included the potential positive and negative implications of the proposed trade agreement for U.S. environmental regulations, and potential economic and environmental effects.

Negotiations for an FTA with Jordan were launched in June 2000, and this became the first agreement subject to the requirement to conduct an environmental review under Executive Order 13141. Because of critical foreign policy interests to bolster the Middle East peace process, these negotiations were on a very fast track and concluded in October 2000. The final environmental review found that the agreement would have no measurable impact on total U.S. imports, exports, production, or employment, and accordingly the environmental effects on the United

States were expected to be de minimis.[12]

The review went farther and found two positive effects on the environment.  Because the agreement included provisions that help to maintain current legal and regulatory discretion, the FTA would encourage the parties to improve their environmental protection regimes (regulatory effect). Additionally, by eliminating trade barriers on environmental goods and services, the agreement would have a positive impact on environmental technologies (technique effect).

All subsequent FTA negotiations followed the requirement of the executive order and the Jordanian precedent for ex ante environmental reviews.  And like the Jordan review, the environmental reviews of all subsequent agreements similarly found that environmental effects on the United States were expected to be de minimis, based on the analysis that the impact on U.S. production from each agreement was expected to be small. Other than NAFTA, the United States’ imports from its partner countries in each of its FTAs accounted for no more than 2.5 percent of its total imports, and its exports to each of its partners accounted for no more than 3.4 percent of its total exports in 2006. (Data for 2006 are used here because that was roughly the year when the International Trade Commission conducted many of these studies.)

Furthermore, because of the provisions in each of the FTAs requiring each of the parties to enforce their environmental rules, each of the reviews has concluded that the relevant agreement would encourage the parties to improve environmental protection. Each of the reviews, however, did identify some unique environmental implications of the FTAs, such as the following:

• Chile’s economy is heavily dependent on natural resource sectors, such as mining and metals, forestry, fisheries, and agriculture, and this helped identify priorities for the environmental cooperation provisions.

• Singapore is a major transit center for endangered species.

• An increased risk of invasive species was identified as a potential environmental concern in the Australian and South Korean FTAs.

• Provisions in the Australian FTA to allow trade in remanufactured goods would have positive environmental benefits, because remanufacturing reduces the volume of material entering the waste stream by redirecting waste products to remanufactured goods and reducing energy consumption.

• CAFTA-DR, through increased economic activity in its partner countries, could have indirect effects on the U.S. environment through the transboundary transmission of air and water pollutants and their impact on migratory species of wildlife.

• Oman’s trade in the horn of the rhinoceros, a highly endangered species, was flagged as an area of concern that should be addressed through environmental cooperation.

In its review of the experiences with environmental reviews, the Organization for Economic Cooperation and Development notes that it does not seem as if there have been any changes to final texts of the United States’ FTAs as a result of its environmental reviews: “However, there are typically changes in the form of mitigation or enhancement measures: proactive policies such as capacity building for environmental management or increased cooperation that try to address the concerns raised. Indeed, there have been numerous instances of assessments feeding into the work programs of any related environmental cooperation or capacity building efforts.”[13]

Like the United States, several other developed countries also undertake environmental reviews, including Canada and New Zealand.[14]   The European Union conducts sustainability impact assessments, which are broader than U.S. environmental reviews, as these consider labor and social effects as well as environmental, and they consider effects both in the EU and the partner country. Additionally, a very few developing countries, most notably Chile, also regularly conduct environmental reviews of their FTAs.

Some international governmental organizations—including the African Development Bank, the Economic Commission for Africa, the Food and Agriculture Organization, the Inter-American Development Bank, and the United Nations Environment Program—have conducted or been involved in reviews. Finally, some NGOs also conduct environmental assessments, including the University of Manchester’s Impact Assessment Research Centre and the World Wildlife Fund.

However, there is no agreed-on international methodology for conducting environmental reviews, and different countries use differing methodologies. Most countries still do not undertake environmental reviews, either because they do not recognize their importance or more often because they lack the resources to undertake such a review.

Almost all environmental assessments to date have been ex ante; that is, they were conducted before the agreement was adopted. NAFTA is one of the few U.S. agreements for which an ex post assessment (i.e., one that assesses the actual consequences after the agreement is in effect) has been conducted. This was conducted by the North American Commission for Environmental Cooperation (CEC) in 2005, ten years after NAFTA had gone into effect.

In 1999 the CEC issued a public call for research papers, which were financially supported by the CEC and selected by a trinational multidisciplinary advisory group. Papers selected were presented in 2000, 2003, and 2005. Between 200 and 300 trade and environment stakeholders participated.  Some of the findings of the researchers were that the agreement had positive effects on the environment, and some found negative effects. According to the CEC report, some of the findings include the following:

• Fredriksson and Millimet failed to find evidence supporting the hypothesis that there would be a race to the bottom in U.S. environmental policies following NAFTA. In fact, they found that their three measures of environmental quality improved during the 1990s and did not seem affected by NAFTA’s ratification.

• Carpentier considered whether NAFTA had created any “pollution havens” and interestingly found only one case and that concerned Canada (as opposed to Mexico as was originally feared). Canada experienced a nearly fivefold jump in hazardous waste imports from the United States in the few years after NAFTA came into effect, primarily in steel and chemicals. (The CEC found it reassuring that only one case of a pollution haven was documented.)

• Dyer-Leal and Yunez-Naude found that increased corn imports displaced domestic Mexican production and traditional technologies.  This led to the expansion of cultivated area into marginal and forested lands and increasing adult male migration to the big cities.  Ackerman concluded that this result, and the higher pesticide and water intensity in the U.S. corn sector, led to negative environmental and social effects.

• Porter reported that adoption of drip-irrigated technologies in Mexico’s tomato production doubled yields and decreased the total area under cultivation by 15 percent, and displaced 15 percent of tomato production from the environmentally stressed Florida region.

• Reinert and Roland-Holst found that NAFTA appears to have led to increases in particulate matter, carbon monoxide, sulfur dioxide, nitrous oxide, and volatile organic compound emissions in the petroleum, base metals, and transportation equipment sectors.

• IFC Consulting reported that expanded road freight transportation has led to an absolute increase in air emission concentrations at the Mexico–United States and United States–Canada border-crossing points.

Perhaps a major shortcoming of the environmental review process is that—except for Canada, Jordan, Chile, Singapore, and Australia—the United States’ FTA partners have not conducted reviews of the environmental impact of the agreement on their countries. Although it is clearly true that these agreements are likely to only have minimal effects on the United States, they may well have very significant effects on smaller U.S. trade partners. For example, Honduras’s exports to the United States account for more than 40 percent of its gross domestic product, and Nicaragua’s exports to the United States account for slightly more than 28 percent of its gross domestic product.

U.S. negotiators believe they cannot require other parties to FTAs with the United States to undertake environmental reviews, as these are sovereign nations. Additionally, they do not believe that the United States should undertake its own analysis of the potential environmental impact on U.S. trade partners because such a study would lack credibility in the other party and would be viewed as condescending.

Provisions of U.S. FTAs

The U.S. approach to the environment in negotiating FTAs has been to seek a balance between two somewhat conflicting objectives. The first is a recognition that, as sovereign nations, each party to the agreement has the right to determine its own approach to environmental protection. This is appropriate as each country faces different environmental problems and has a different level of capacity and political will to deal with these problems.  The second basic objective has been to ensure that neither party to the agreement lowers its environmental standards or enforcement of standards already in place to gain a commercial advantage.

Accordingly, environmental chapters in U.S. FTAs have included language to accomplish both objectives. For example, the basic language, as set out in Article 5:3 of the Jordan agreement, is as follows: “(a) A Party shall not fail to effectively enforce its environmental laws, through a sustained or recurring course of action or inaction, in a manner affecting trade between the Parties. . . . (b) The Parties recognize that each Party retains the right to exercise discretion with respect to investigatory, prosecutorial, regulatory, and compliance matters and to make decisions regarding the allocation of resources to enforcement with respect to other environmental matters determined to have higher priorities.”

Along with the commitment not to lower environmental standards or enforcement, recent U.S. agreements all contain hortatory language to the effect that the parties “shall ensure that [their] laws and regulations provide for the highest levels of environmental protection and shall strive to continue to improve those laws and regulations.”

Starting with the United States–Chile agreement, agreements have also included hortatory language on voluntary instruments and mechanisms that can contribute to enhancing environmental stewardship. In the case of Chile and Singapore, the agreements simply stated that each party should encourage enterprises operating within its jurisdiction to voluntarily incorporate sound principles of corporate stewardship. The Australian agreement had a different emphasis on encouraging flexible, market-based mechanisms that encourage the protection of natural resources and the environment. The Moroccan agreement expanded this further to include a listing of complementary voluntary mechanisms, such as partnerships involving business, NGOs, government agencies, and so on, and market-based incentives to encourage conservation and the protection of natural resources. The Moroccan model was continued in CAFTA, and in the Bahrain, Colombia, South Korea, Oman, Panama, and Peru agreements.

The environmental side agreement to NAFTA has an elaborate institutional structure for administering the environmental provisions, including the CEC, a Secretariat, and a public advisory committee. The CEC, which is the governing institution, is composed of the environment ministers from each country, and meets at least once a year.

The post-NAFTA agreements all have less elaborate institutions. For example, institutional arrangements in some other U.S. FTAs include the following:

• Chile: a Commission that meets at least once every two years;

• Morocco: a Working Group on Environmental Cooperation meets at least once a year;

• Bahrain and Oman: a Joint Forum to meet regularly; and

• CAFTA-DR: an Environmental Affairs Council.

Initially, a number of environmental groups objected to institutional structures that are less elaborate than NAFTA’s. However, it is unrealistic to expect Cabinet officials to attend annual meetings for all the FTAs. Additionally, because the amount of trade and potential environmental impact on the United States of these other agreements is considerably less than for NAFTA, the less elaborate structure is preferable.

A very important feature of U.S. FTAs with developing countries, where institutions and expertise for environmental protection may be lacking, has been the provisions for capacity building. Some examples of the capacity-building assistance that the United States has given its trade partners include the following:

• Mexico: Established a chemicals department in the environment agency; improved management of toxic chemicals (Mexico’s successful approach at phasing out DDT is now being adopted in Central America); development of a mandatory pollutant release and transfer registry; and conservation of wildlife habitat;[15]

• Morocco: Capacity-building efforts have addressed areas such as pollution prevention, cleaner production, and the principles of environmental law and enforcement; and

• CAFTA-DR: Programs are designed “to strengthen environmental management systems, including reinforcing the institutional and legal frameworks and the capacity to develop, implement, administer, and enforce environmental laws, regulations, standards, and policies.”[16]

Adequate financing, of course, is crucial to good capacity building.  However, an important question is whether the funding is new money that would not otherwise have been forthcoming or reprogrammed funding.  If it is the latter, has the funding for trade-related capacity building been more or less effective than would have been the case if the money had been used for other projects to promote environmental protection?

In the case of CAFTA-DR, funding for capacity building appears to be new money. However, for the other agreements, it generally appears to be reprogrammed funding. It must also be noted that “some developing countries have complained that once the momentum of the negotiation is gone, and commitments on environmental issues agreed, the necessary resources for the implementation of environmental co-operation provisions does not always follow, or the allocation of resources is not necessarily in line with recipients’ priorities.”[17]

All the U.S. FTAs also have dispute settlement provisions. Until the May 10, 2007, agreement between the administration and congressional leaders on treating the environment in trade agreements, the penalty for a violation of environmental laws was a fine (up to $15 million for most of the agreements, and $20 million for Australia and the first year of NAFTA, which then changed to a percentage of trade). The fines were to go to a fund that would be used to provide capacity building to the country to remedy the problem.

However, as a result of the May 10 agreement, the most recent agreements with Colombia, South Korea, Panama, and Peru subject violations of environmental provisions to the same dispute settlement process as commercial disputes, which could mean trade retaliation. These newest agreements also extend the scope of violations farther to include a commitment to enforce environmental regulations and other measures, as well as laws.

The agreements with Peru, Colombia, Panama, and South Korea also have provisions to subject obligations under MEAs to dispute settlement.  And the level of obligation in these agreements is also strengthened, from a soft obligation found in some of the agreements (“shall seek to”) to a no-derogation provision (“shall not lower”).

One of the greatest benefits of including environmental provisions in the United States’ FTAs has been that it has improved the way some of its developing-country partners treat environmental protection. For example, at the time of the NAFTA negotiations, Mexico was still developing its environmental legislation and its trade and environmental ministries had not worked together to any great extent. El Salvador had similar problems in the United States–CAFTA-DR negotiations.

For Morocco, the negotiation of the [trade agreement] with the United States accelerated the adoption of several environmental Acts that had been pending for years. For Chile, the negotiations with Canada and the United States provided momentum for a thorough overhaul and codification of its environmental legislation, which up to then was scattered in numerous Acts and regulations. Without the “external” impulse given by the negotiation of this kind of provision, these changes may not have occurred, or would have occurred at a later stage. Another positive outcome has been enhanced regional cohesion in environmental matters. For Central American countries involved in the negotiations of the U.S.-CAFTA-DR, the experience of working on common “regional” positions, in preparation of the negotiations with the United States, enhanced regional cohesion and facilitated (for the first time) discussions on environmental and trade issues among experts of these countries.[18]

Investor-State Dispute Settlement Provisions

U.S. FTAs, from NAFTA on, have included investor-state dispute settlement (ISDS) provisions, which allow foreign investors to initiate binding arbitration to determine if the company is due financial compensation because of a government action or regulation that results in a “taking” of the company’s property. U.S. business organizations have argued these provisions are necessary because they do not trust foreign courts. In the view of many, however, these provisions give foreign investors greater rights than domestic companies, because this procedure is not open to a domestic firm, and it also gives foreign investors an additional avenue for redress because they can also seek redress through the domestic court system or through the agreement’s dispute settlement mechanism. Additionally, environmental groups argue that investors might use this system to undermine those domestic regulations that are intended to protect the environment and human health.

Three events did reduce concerns regarding this issue for awhile.  First, the 2002 trade act requires U.S. negotiators to pursue investment agreements in a manner “consistent with U.S. legal principles and practice,” to provide foreign investors with no “greater substantive rights with respect to investment protections” than those enjoyed by U.S. investors in U.S. courts, and to establish an appellate process in dispute resolution and ensure appropriate public involvement in dispute hearings.

Concern regarding investor-state provisions was further reduced in August 2005, when a NAFTA tribunal dismissed the case filed by Methanex. (In 1999, as noted above, Methanex had challenged a California regulation banning the gasoline additive MTBE in a case that had seemed to confirm the concerns of many environmentalists.) Not only did the tribunal dismiss Methanex’s case; it also awarded $4 million in damages to the U.S. government. The U.S. government views the decision as a “vindication of the prerogative of states to take action to protect public health and the environment without running afoul of the investment protection provisions of international trade agreements and investment treaties.”[19]   Finally, the May 10, 2007, agreement between the administration and congressional leaders specified that these provisions do not give investors the right to challenge legitimate environmental and safety measures.

However, the investor-state dispute settlement provisions have emerged as a huge flash point in the debate over whether or not Congress should approve the Trans-Pacific Partnership agreement.  Many environmentalists (as well as labor unions, civil society activists and local government officials) believe there has been abuse of the ISDS system and that serious reforms are needed before the TPP should be approved.  These concerns have been exacerbated because the TPP ISDS mechanism does not include an appellate review mechanism of arbitrator decisions and the ISDS process has not been fully transparent.  (The ISDS issue is discussed further in Chapter 10.)

WTO Dispute Settlement

As previously noted, the WTO recognized the need for the trade rules to be compatible with the needs of sustainable development to a far greater extent than had its predecessor, the GATT. However, the environmental community had significant concerns with the WTO’s new dispute settlement mechanism, which could result in real sanctions being imposed for violations and which had sharp timelines for resolving disputes. Many viewed this new mechanism, which is arguably significantly more far reaching than any other international organization’s dispute resolution procedure, as a threat to domestic environmental and safety regulations.  Many were also concerned that the new WTO dispute settlement system lacked transparency, and there was no assurance that it would consider the views of outside experts.

The original GATT, which was now incorporated into the WTO, requires in Article III that imported products be treated no less favorably than “like” domestic products. Traditionally, the phrase “like” products was interpreted by the trade rules as two products that compete against each other in the market as substitutes without consideration of how the product was produced. However, many environmental rules and agreements specifically address the way in which the product is made, known as “production process method” (PPM) rules.

Under the GATT’s perspective, tuna were tuna regardless of whether they were caught in a net that inadvertently killed dolphins or not; but to an environmentalist concerned about preserving endangered dolphins, this was the key distinction. Two GATT dispute settlement cases particularly upset environmentalists; under one brought by Mexico and one by the EU, the GATT ruled that U.S. provisions, which required that tuna had to be caught in a way that avoided inadvertently killing dolphins, were illegal.

The trade rules traditionally took a very dim view of drawing trade distinctions based on the way a product is made (or tuna caught), because it is extraordinarily easy to design a protectionist standard based on such a rule. (To the trade community, this is known as “green protectionism,” i.e., the use of a trade measure under the guise of an environmental objective when the real intent is to protect a domestic industry.) Now, however, for environmentalists the new dispute settlement mechanism raised the specter of the WTO ruling against environmental and safety measures based on PPMs in domestic law and MEAs.

However, WTO dispute settlement cases have since gone a long way to allow environmental and safety rules that are based on the way the product is produced provided it is not trade protectionist. A major case was the Appellate Body’s second ruling in October 22, 2001, on the shrimp-turtle case. Although the initial ruling by a dispute settlement panel in 1998 alarmed environmentalists, the Appellate Body’s second ruling went a long way to easing the environmental community’s concerns.  The initial ruling had found the United States in violation of its trade obligations in banning shrimp imported from four Southeast Asian nations because they did not harvest the shrimp in nets incorporating turtle excluder devices. This decision was based to a large extent on the fact that the United States had not sought an international agreement on protecting endangered sea turtles in harvesting shrimp. Following this ruling, the United States sought such an international agreement and allowed countries greater flexibility in how they protected turtles when harvesting shrimp, provided that the effectiveness of the protection was comparable to the U.S. level.

Malaysia launched a second complaint, and this time the Appellate Body ruled in the United States’ favor. This new ruling specified that trade measures were acceptable provided that they met the test of one of Article XX’s specific exceptions (necessary to protect human, animal, or plant life; or relating to the conservation of natural resources) and did not constitute a disguised restriction on trade. As a result of this decision and others, the WTO would seem to provide flexibility for countries to impose production process method standards for environmental protection.

Another major issue for the WTO in the trade-environment nexus is the treatment of the “precautionary principle,” and progress here is not as great as for the PPM issue. The Rio Declaration on Environment and Development stated that where there are threats of serious or irreversible damage, the lack of full scientific certainty shall not be used as a reason for postponing cost-effective measures to prevent environmental degradation.[20]   However, WTO members—particularly the United States and the EU—disagree sharply as to the test for what constitutes the threat of serious damage.

This issue of what is the legitimate use of the precautionary principle has come to a head several times in disputes between the EU and the United States. In 1996, the United States brought a dispute regarding EU restrictions on the importation of meat products with traces of meat hormones. In 1998, the WTO ruled that the EU restrictions were inconsistent with the sanitary and phytosanitary measures agreement. However, rather than remove the restrictions, the EU opted to allow the United States to impose sanctions on imports of other products (valued at $116.8 million) from the EU.

In 2003, the United States brought a dispute regarding national marketing and import bans on biotechnology products that a number of EU member states maintain, even though those products have already been approved by the EU for importing and marketing in the EU. This is also an issue with enormous implications for many developing countries, which hope to be able to use genetically modified organisms (GMOs) to raise more drought and disease resistant crops, and unfortunately the EU’s restrictions have scared some African countries away from GMO crops, even though such crops have enormous potential for that continent.  Accordingly, a number of developing countries have joined the dispute—including Chile, Colombia, India, Mexico, Peru, El Salvador, China, Honduras, Thailand, and Uruguay. In January 2008, the WTO sided with the United States and gave the EU a deadline to speed up the approval process of GMOs and lift member states’ bans on GMOs that have been found safe by EU regulators.

It seems that from these cases, the WTO gives members substantial latitude in determining acceptable levels of risk in applying the precautionary principle, but that the procedural risk assessments of the sanitary and phytosanitary measures code must be followed.

The Unfulfilled Environmental Promise of the Doha Round

In launching a new multilateral trade round in November 2001, the WTO committed to become more environmentally friendly. In the words of the WTO director-general Pascal Lamy, these negotiations represent a “very modest start that the international community has agreed to make to address environmental challenges through the prism of trade.”[21]

A small initial positive step was taken as the round was launched. As noted in chapter 2, to gain the developing countries’ support for launching the Doha Round, the developed countries had to agree to a procedure under which waivers from the requirements of the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement could be approved to allow small developing countries facing a national emergency, such as the AIDS crisis, to be able to import inexpensive generic drugs. Rwanda, which was facing a severe AIDS crisis and whose impoverished population could not afford patented retroviral drugs that cost several hundred thousand dollars a year, was the first to apply for a waiver.

Unfortunately, it took until July 2007 before Rwanda could use this provision so that they could import generics that only cost several hundred dollars a year—still a huge sum for a country with an average per capita income of less than $200 annually, but it has brought the cost down to the realm where governmental programs and donors can make these drugs available to infected citizens.

Another positive step is that several countries have conducted environmental assessments of the potential impact of a successful round, including the European Union and Canada. The EU conducted an assessment of the overall impact—as well as specific ones on fisheries, forestry, environmental services, pharmaceuticals, and agriculture—and the EU studies do raise some specific problems that would need to be addressed as the negotiations progress. For example, the study on the forestry sector concludes that “trade liberalization could accentuate negative sustainability trends unless appropriate forest governance systems are in place and enforced.

Cumulative impacts and the threshold effect mean small incremental changes could result in significant negative impacts in individual countries with sustainability and governance problems. In biodiversity hotspot countries such as Brazil, Indonesia, the Congo Basin countries and Papua New Guinea possible negative impacts could be irreversible.”[22]

The Doha Round had also sought to make progress in better reconciling trade and the environment in two other areas, but unfortunately these are unlikely to be achieved given the failure of the Doha Round.  The first of these relates to the problem of overfishing. A number of countries that are major exporters of fish provide an estimated total $30 to $34 billion in subsidies to their fishing industries, according to a study by the University of British Columbia’s Fisheries Center. Most of these subsidies have gone to expand fishing capacity, which has contributed to far too much fishing capacity globally.

Although estimates of the seriousness of this problem vary, a study published in Science projected that 29 percent of the species that are fished commercially had collapsed by 2003. The environmental community describes the current situation as “too many boats chasing too few fish.” In addition to its environmental impact, overfishing also has serious repercussions for maintaining an acceptable diet in many developing countries, which often depend on fish as a major protein source. Overfishing off the coast of many of these developing countries is threatening the sustainability of this critical food source for these nations.

To help address this problem, the United States and others have been pressing for a code in the Doha Development Round that would prohibit fisheries subsidies that lead to overcapacity. Under the draft text published November 30, 2007, subsidies that support acquisition, construction, repair, renovation or modification of fishing vessels, or support operating costs such as fuel or bait, or price supports for products of wild capture fishing all would be prohibited.[23]

Subsidies that assisted sustainable fishing would be permitted, for example, retraining workers into occupations unrelated to fishing or decommissioning fishing vessels. The least-developed-countries would be exempted from most of the disciplines of the draft code, and the developing countries would be permitted to subsidize inshore operations and subsidies for boats not greater than 10 meters in length for marine fishing.

Currently several MEAs would require parties to the agreement to curtail subsidies that contribute to overcapacity. The advantages of a WTO code, however, are that all WTO members would be obliged to curtail these subsidies, and a workable and effective dispute settlement procedure would be in place that could result in harsh sanctions for violations.

A number of countries—including South Korea, Taiwan, Japan, Portugal, France, and Italy—all subsidize their fishing fleets. Without an overall trade agreement whereby everyone agrees to forgo these subsidies simultaneously and in which they gain offsetting concessions, these countries will continue to subsidize overbuilding of capacity, and the survival of more and more species of fish will be in doubt.

The second area where trade negotiators had been hoping to reach an agreement that can benefit both trade interests and promote better environmental stewardship is by eliminating barriers to trade in environmental goods and services. The United States and EU tabled a proposal in 2007 to eliminate trade barriers on 43 products related to climate change and 153 goods associated with manufacturing or generating energy in an environmentally friendly way. (Developing countries would have “special and differential” treatment under the United States–EU proposal.)

Brazil would add biofuels to the list of barrier-free products; however, the United States has a high duty on imported biofuels and opposes this.

Agreements to limit subsidies that promote overfishing and to eliminate trade barriers on environmental goods and services should be high priorities in future negotiations.

Conclusion: Almost There

The environmental community strongly opposed trade agreements after some dispute settlement decisions in the GATT/WTO and NAFTA in the mid-1990s that seemed to show a disregard for measures taken to protect the environment. As a result, environmentalists marched with labor unions and other opponents of globalization in the Seattle streets in 1999 in an effort to block the launch of a new round of trade negotiations.

Shortly after the adverse dispute settlement panel decisions, however, the WTO Appellate Body reversed the panel decisions that were particularly egregious, and the United States and some other nations agreed to regularly undertake assessments of the potential environmental impact of proposed trade agreements. Additionally, the Doha Round promised to take additional steps to better reconcile trade liberalization with protection of health and the environment. To get developing countries to agree to a new trade round, negotiators had to agree to ease the TRIPS rules on compulsory licensing so that small poor nations could more easily import generic drugs in the event of a national emergency. They also committed to negotiations in two areas that could have positive effects for environmental stewardship: a possible agreement to end subsidies that contribute to overfishing, and a possible agreement to reduce trade barriers on environmental goods and services.

Meanwhile, U.S. FTAs have made significant progress in reconciling trade liberalization and environmental protection. Following the NAFTA precedent, all U.S. agreements require the parties to commit not to lower their environmental regulations to gain a commercial advantage. Many of our agreements include side provisions that the United States will provide funding for capacity building to alleviate environmental concerns identified in the assessment process. The United States’ more recent agreements require the parties to implement their obligations under some of the MEAs or be subject to dispute settlement. Another major step has been taken in the negotiations for the TPP agreement, where U.S. negotiators have submitted proposals to positively benefit both forest and fisheries resources.

However, one area where trade policy needs to better recognize the legitimate concerns of the environmental community is to conduct environmental assessments of the likely impact of the United States’ agreements on its developing-country partners. Although the United States must respect the sovereignty of these countries, it could offer to fund a study of the possible impact on the environment of its developing-country partners, and it could encourage an international organization, such as the United Nations Environment Program, to undertake such assessments.

Overall, however, in view of these developments since the mid-1990s, it can be said that trade and environmental protection are now uneasy neighbors. Some mainstream environmental groups have moved back to accepting further trade liberalization but continue to cast a wary eye on the negotiations to ensure that there is continued progress in making trade and environmental stewardship genuinely synergistic.


[1] A quotation from by A. V. Ganesan, a former commerce secretary of India and a nongovernmental delegate to the Seattle Ministerial, gives a flavor of developing country objections to including environmental provisions in trade agreements: “Environmental degradation is being caused by two segments of people: the affluent and the poor, or the greedy and the needy. The former are polluting the environment by excessive levels of consumption and the latter are forced into unsustainable practices by poverty. The approach needed to tackle these two varieties is different, but trade rules applied in a simplistic manner can hardly solve the fundamental problems.”  Quoted in the Washington Post, December 5, 1999.

[2] Progress on integrating trade and environment so far in regional trade agreements has been substantial, while progress in the WTO has been far less. As the Organization for Economic Cooperation and Development put the matter: “While RTAs have contributed to better integration of trade and environment at bilateral and regional levels, this progress is not yet visible in the multilateral arena. Indeed, it is striking that a number of countries have been prepared to incorporate environmental provisions in RTAs, but are not prepared to countenance similar outcomes at the multilateral level.” Organization for Economic Cooperation and Development, “Environment and Regional Trade Agreements, 2007,” 17.

[3] The language of GATT Article XX relevant to the environment is the following: “Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures:. . . (b) necessary to protect human, animal or plant life or health; . . . (g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption. . . .”

[4] When Mexico failed to push the GATT decision, the European Community filed its own case against the United States, and in May 1994 the GATT again ruled that the U.S. law violated the United States’ trade commitments.

[5] The agreements given precedence over the NAFTA rules were the Convention on International Trade in Endangered Species (known as CITES), the Montreal Protocol on Substances that Deplete the Ozone Layer, and the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal, and two bilateral agreements, one with Canada regarding transboundary movement of hazardous wastes, and one with Mexico on cooperation on protecting the environment in the border area.

[6] In October 2001, the Appellate Body ruled in favor of the United States in a complaint brought by Malaysia in what is known as Shrimp-Turtle II. Following the first ruling, the United States sought negotiations with the Southeast Asian nations and allowed sufficient flexibility in compliance by requiring other country programs simply to be comparable in effectiveness to the U.S. program, rather than essentially the same.

[7] The Ministerial Declaration is available on the WTO Web site,

[8] Smita B. Brunnermeier and Arik Levinson, “Examining the Evidence on Environmental

Regulations and Industry Location,” Journal of Environment Development 13, no. 1 (March 2004): 6–41, at 38.

[9] Organization for Economic Cooperation and Development, “Environment and Regional Trade Agreements,” 27.

[10] Executive Order 13141 is available at

[11] “Guidelines for Implementation of Executive Order 13141 are available at

[12] The Final Environmental Review of the FTA with Jordan is available at

[13] Organization for Economic Cooperation and Development, “Environment and Regional Trade Agreements,” 58.

[14] For a listing of environmental reviews, see WTO Committee on Trade and Environment, “List of Environmental Reviews,”, October 28, 2008.

[15] Organization for Economic Cooperation and Development, “Environment and Regional Trade Agreements,” 81–82.

[16] Ibid., 80.

[17] Ibid., 100.

[18] Organization for Economic Cooperation and Development, “Environment and Regional Trade Agreements,” 48.

[19] U.S. Department of State, press release,


[20] Available at

21] Available at

[22] European Commission, Directorate-General for Trade, “Trade SIA of the

Forest Sector under DDA Negotiations: Position Paper,” Brussels, June 26, 2006, 3.

[23] A copy of the U.S. proposal is available at



Chapter Updates



Chapter 1: U.S. Trade Policy in Crisis

Chapter 2: America's Trade Agreements

Chapter 3: Trade Agreements and Economic Theory

Chapter 4: Trade Agreements and U.S. Commercial Interests

Chapter 5: Foreign Policy: The Other Driver

Chapter 6: Economic Development: A Missed Opportunity

Chapter 7: Uneasy Neighbors: Trade and the Environment

Chapter 8: The Labor Dilemma

Chapter 9: The Way Forward

For more information or questions contact William Krist at