CHAPTER 7:
SUSTAINABLE DEVELOPMENT AND THE ENVIRONMENT

The issues of global survival ... dwarf the petty mercantile concerns of the free traders. But the free traders got all the tools to ensure compliance. ... [W]e have the power to embarrass, and that's all. The imbalance between effective ... trade rules and weak global environmental agreements would not be fatal if the trade issues and environmental issues stayed neatly in separate boxes. But the world is considerably more messy ... If corporate interests fail to thwart an environmental regulation at the domestic level, the GATT and NAFTA provide another route of attack. One man's environmental regulation is another man's non-tariff trade barrier. [Elizabeth May, 29:1555]

The Economy-Environment Nexus

The environment happens to be our, as well as other species' life support system, functioning as a resource supplier, waste assimilator and direct source of aesthetic value. These functions are carried out in what can be conveniently called a closed economic system in which everything is an input into everything else. This is a simple fact flowing from the first law of thermodynamics, wherein we cannot create or destroy energy; it can only be converted or dissipated into some other form, and, therefore, all natural resource exploitation activity ultimately ends up or remains in the environment in the form of waste until assimilated. When we find the appropriate balance between the harvest and natural regeneration rates of our renewable resources and keep the consequent waste flows within the assimilative capacity of the environment, it can be said that we have achieved "sustainable development." Under these conditions, the natural state of the environment can be maintained indefinitely for future generations (who will hopefully not squander them).

Identifying and describing sustainable development in such a general way is one thing, achieving it is quite another. For instance, market systems obtain an efficient allocation of resources, man-made or environmental, when the prices of all resources reflect their scarcity values, which would include the costs related to the right to use our common life support system. Put another way, the pollution costs of economic activities must be factored into the pricing of resources, otherwise there is little incentive to economize and tame our polluting ways. In general, a policy of free trade is better able to complement the marketplace in achieving this allocative objective - in fact, it extends it across the globe - as tariffs and non-tariff barriers discriminate against the efficient use of resources, and, obviously, the inefficient use of resources is neither friendly to the economy or the environment.

Since economic activity first began, but particularly since the industrial revolution, man has been able to exploit most natural resources on a grand scale without directly paying for the life support functions undertaken by the environment. We have been able to do so because the environment is, in most situations, common property and free for the taking. The world's economy has, therefore, benefited from an environmental subsidy, resulting in the over-exploitation of natural resources and often leading to excessive air, water and solid waste pollution, the breakdown of existing ecological systems, the destruction of wildlife habitat and species extinction. Left unchecked, the life support activity undertaken by nature will degrade, possibly in certain locations to a point beyond repair or restoration in our and many future generations' lifetimes.

Governments of all political stripes have, therefore, chosen to step in and supplement the market in a variety of ways to achieve a better environmental result, using command-and-control instruments (mandatory pollution abatement technologies, regulated effluent discharge rates, toxic substances disposal rules and direct funding of recycling programs) as well as market-based instruments (transferable pollution permit or quota systems and tax-cum-subsidies). On the international front, governments have committed to improving the environment through several recently signed multilateral environmental agreements (MEAs). Thus, in the name of protecting the environment, human health and all life-forms, governments have interrupted the marketplace and substituted private-sector value judgments of resource scarcities with their own, with varying degrees of allocative success.

The nexus between the economy and the environment is unquestionably complex and dynamic - ignorance abounds. Getting and maintaining a firm handle on economic-ecological interaction has become a perennial social concern. About all that can be said with some acceptable measure of confidence is that organisms, humans included, are not only the result of, but are also the causes of, their environmental habitats and their changes. From an economic perspective, then, without accurate cost estimates of the environmental damage inflicted by our behaviour, but more importantly by our industrial activities, and more certainty on their linkages, the possibility of market failure (i.e. the Exxon Valdez fiasco), on the one hand, and government failure (i.e. the commercial East Coast cod fishery collapse), on the other, will inevitably persist. Indeed, it is hard to put a finger on what institutions best preserve the environment and its assimilative capacity without better knowledge.

Trade and Environment Policies in Perspective

There is no inherent conflict between the trade policy objective of efficient allocation of global resources and the environmental policy objective of sustainable development. They are complementary in theory and when properly put into practice. Indeed, apart from eliminating trade-distorting and efficiency-impairing tariff and non-tariff barriers, trade institutions have frowned on subsidies, particularly export subsidies, and have worked progressively to reduce and eliminate them. These measures are widespread in agriculture and fishing sectors, where excessive production capacities have built up over time yielding adverse environmental impacts on soil quality and fish stocks.

Liberalizing trade in environmental goods and services provides yet another positive cleavage between international trade and the environment, whereby a policy of free trade lowers the costs to governments of pursuing quality improvements in environmental infrastructure. Investment liberalization also makes it possible for firms from developed countries to export their more environmentally-sensitive production processes and "state of the art" managerial practices to developing countries that cannot afford them.

Finally, trade liberalization fosters economic growth for developed and developing countries alike. The wealth generated by having greater access to foreign markets and more efficient production promotes the ability of countries to develop and maintain sustainable development policies. Wealth and environmental protection are clearly related - positively so - as the wealthier countries have demonstrated by their willingness to preserve nature as they have come to know it for personal health reasons, as well as for its aesthetic beauty in the advent of the burgeoning eco-tourist industry.

While nobody appearing before the Committee disputed these compatibilities, some witnesses feared the "race to the bottom" scenario: domestic environmental standards would be lowered or suffer lax enforcement in the wake of companies shifting production locations and jobs to the jurisdictions with lower environmental standards and lax enforcement. Though the Committee has its doubts. The Committee refers to the Dun and Bradstreet study, which found that 80% of the Canadian companies surveyed spent between 0-2% of their budgets on environmental protection. A similar study, for the United States Trade Representative found that pollution abatement costs average about 1.1% of value-added for all United States industries, and 86% of all industries have abatement costs of 2% or less.1 When one further factors in the observed industrial clustering phenomenon (for example, the new high-tech companies in Kanata, Ontario, steel companies in Hamilton, Ontario, and Pittsburgh, Pennsylvania, and film studios in Hollywood, California) which likely stems from extant agglomeration economies that appear to dominate pollution abatement cost considerations, the Committee is not surprised that these critics could not provide any evidence of environmental migrant companies.

Again, while no one disputed the compatibility between a policy of free trade and sustainable development, there was also no shortage of criticism levelled at trade experts with regard to their competency in handling complex environmental policy matters. Even when sufficient information of the trade-environment issues existed, trade experts invariably sided with trade priorities over those of the environment whenever there was a conflict. Indeed, these new trade deals provide industry with the added ability of challenging existing environmental measures.

The first was a Venezuelan challenge against measures under the U.S. Clean Air Act to reduce emissions for reformulated gasoline. The challenge was brought by the Venezuelan government, but the real pressure to change the regulation came from the subsidiaries of the same multinational oil and gas companies that had failed to keep the regulation out in Washington. The challenge to the WTO provided another route of attack. It succeeded, and as a result U.S. air is dirtier. [Elizabeth May, 29:1600]

These actions, as opposed to claims of being supportive of environmental issues, led many witnesses to the conclusion that the existing trade institutions, most notably the World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA), are not environmentally friendly.

Institutional Management of Trade and Environment Issues

Throughout the Committee's hearings there was considerable reference to trade court rulings involving environmental issues, perhaps none more forcefully expressed than the following:

[U]nder the World Trade Organization, we have seen the tuna-dolphin case, the turtle-shrimp case, the beef hormone case, and under NAFTA the raw log export case - Canada cannot insist on controls against the export of raw logs to keep jobs in Canada and reduce stresses on our forests. Under the FTA, the salmon-herring case similarly said that Canada could not ban the export of unprocessed salmon and herring, even though it had importance in conserving fish stocks and protecting jobs. [Elizabeth May, 29:1600]

By and large, this Committee does not quarrel with the decisions taken by trade courts in these cases and takes issue with these criticisms. The beef hormone, tuna-dolphin and turtle-shrimp cases involved a potential non-tariff trade barrier disguised as a health or environmental protection measure that was clearly an issue for the trade courts to sort out. The beef hormone case depended, of course, on the corroborating scientific evidence and the appropriate precautionary principle and, in the end, the courts decided in favour of Canada and the United States and against the European Union's import ban. The tuna-dolphin and turtle-shrimp cases again involved a powerful country - this time the United States - that imposed a ban on imports that infringed on a foreign country's sovereignty to establish environmental standards appropriate to it. It must be remembered that the quintessential issue for trade courts is not whether the activity in question adversely affects the environment - almost all industrial and resource exploitation activities adversely affect the environment - but whether these specific fishing methods are distorting trade through non-conformity with the environmental standards that the country has established and to which it is contractually committed.

Furthermore, the Committee is not at all surprised that trade courts sided against the two Canadian resource cases. The fact that these policies were put in place to protect domestic jobs and value-added commerce, something that was openly conceded, should have raised red flags. Banning the export of unprocessed logs and fish may have been acceptable environmental policies in the past when forest practices did not reflect "sustainable yield," let alone "sustainable development," principles and total allowable catches, or TACs as they are called in fishing circles, did not accurately reflect fish stock and recruitment estimates, respectively. However, within the confines of today's state of the art resource management tools and practices, these policies would obviously be viewed by trade courts as purely protectionist, discriminatory and in violation of national treatment commitments. These environments could clearly have been protected by other, non-discriminatory means, as they are elsewhere in Canada and across the world.

As a concluding comment on these cases, the Committee would have the public understand that a trade court decision to strike down an environmental or health measure deemed to be discriminatory and contrary to international commitments is not the end of the issue. The offending party has three courses of action and one course of inaction left open to it: replace the discriminatory environmental measure with alternative non-discriminatory measures; negotiate a compromise with the agrieved parties; simply revoke the discriminatory measure; or it could do nothing, and retain the offending measure while accepting retaliation of "equivalent commercial effect." In two of these four options, there is no apparent, direct or indirect, environmental or health implication; only in the case of a negotiated compromise or in the failure to replace the measure is there an environmental or health implication, but the sovereign government making this choice remains answerable to its electorate - an important issue for environmental protection to which the Committee will return below.

Mutually consistent policy instruments, of course, require coordination between international trade and environment institutions, which appears to be lacking, given some of the case references above. Although a satisfactory explanation was advanced:

I think the difficulty we have with respect to three multilateral environmental agreements, for example, which at first blush appear to have trade provisions within them that are not in accord with the provisions of the GATT but are not tested ... is that members of those environmental agreements do not have a dispute settlement process within their own agreement. I'm thinking of Basle, for example, which does not have its own dispute settlement process. That is unfortunate, because if there is a disagreement between nations at the end of the day and they are forced to go to the World Trade Organization, for example, they will not necessarily be in front of environmental experts; they will be in front of trade experts. [Gordon Peeling, 30:1705]

Virtually all environmentalists appearing before the Committee confirmed this fact and complained about the lack of enforceability of MEAs.

The largest ever summit of world leaders took place in June 1992 in Rio de Janeiro, with commitments made to protect global climate from disastrous destabilization caused by greenhouse gases, to protect the world's genetic and species and ecosystem diversity, to increasing global aid flows to assist the developing world, and to the precautionary principle to ensure the protection of health and well-being of humans and our life support systems. But seven years after Rio, those multilateral environmental agreements, or MEAs ..., are notable for the failure of many governments to honour their commitments.

Meanwhile, since 1992, the World Trade Organization, which did not even exist at the time of Rio, has achieved an impressive record of enforcing its trade regime. The new implementing agency for the GATT, created through the long Uruguay Round of multilateral trade negotiations, has been obeyed, and where failure to meet its terms is suspected, trade disputes and effective, swift, and merciless trade sanctions follow. [Elizabeth May, 29:1555]

As many witnesses suggested, there appears to be a lack of political will to deal with environmental issues at the international level. Trade courts put in place to enforce trade agreements should not be made scapegoats when unenforceable MEAs fail to protect the environment; although an admittedly less effective policy complement has emerged since the NAFTA:

That's why we look at sidebars. ... We think there are many benefits that can arise out of these agreements and, indeed, out of the overall promotion of trade liberalization. We think that with economic development, the expansion of trade, job creation, the new generation of wealth, and the ability of governments to capture additional rents. ... It all leads to a strengthening of institutions, which can then play out in improved environmental performance and enforcement of environmental regulations and health, safety ... and we believe that those benefits outweigh the cost. [Gordon Peeling, 30:1705]

The promotion of environmental and labour standards should be considered as separate and distinct issues from the FTAA investment or trade agreement and should be treated on a parallel track, i.e. as side-bar agreements. [Gordon Peeling, 30:1615]

These "sidebars" can partially correct for the lack of enforceability of MEAs and provide some balance between trade and environment objectives. Some basic principles were advanced:

The NAFTA regime does indeed work in accomplishing the sustainable development win-win of trade liberalization, combating protectionism in our major markets abroad, and also providing ecological protection and enhancement. ... First, we need to focus on preambular principles, the basic normative aspirations of the regime itself. And here, ... it is worth noting that the core NAFTA trade text ... affirms at the beginning that the overall goal, amongst some others, of the NAFTA trade liberalization is the promotion of sustainable development and the strengthening of environmental laws and protection. Trade liberalization is a means to this higher end, so says the core NAFTA text. Secondly, the core NAFTA text also affirms the primacy of multilateral environmental agreements, some with trade-restricting provisions, over the trade liberalization brought by NAFTA itself. And here, I think, we have to carry that principle forward and look more sharply into the multilateral realm. ... Thirdly, environmental enforcement is a complex topic. Canada did succeed in the NAFTA architecture in saying we would not allow broad-based trade restrictions to be used to enforce the environmental objectives of the agreement. Mexico and the United States were unable to escape that threat to the basic thrust of the trade liberalization regime. [John Kirton, 122:940-945]

Environmentalists, however, are not impressed with the current design of these supplementary environmental agreements.

I have trouble seeing any concrete benefit that has yet been achieved by the NAFTA environmental side agreement. In the time that the commission has existed, it has issued two reports that have been of benefit by identifying major polluting jurisdictions in North America ... Aside from that ... one doesn't see much achievement. I simply don't think that's the way to go, and I reiterate that if you read the agreements and see the provisions of the agreement that bind government's capacity to set standards, that's not going to be fixed by any kind of side agreement. [Michelle Swenarchuk, 30:1730]

If there is an incompatibility between trade and the environment, as may have been borne out in the Venezuela-U.S. Clean Air Act and the beef hormone cases, it lies with the policy instruments and supporting scientific knowledge. The Committee recommends:

11. That the Government of Canada seek to ensure that adequate national environmental standards and norms established in applicable international agreements are respected throughout the Americas. That the Government of Canada, in negotiating the terms of the Free Trade Area of the Americas agreement, work towards clarifying the rules to uphold obligations under multilateral environmental agreements and provide for better multilateral disciplines governing trade-related environmental and health measures.

And

12. That the Government of Canada seek to ensure that trade officials have access to the most up-to-date scientific environmental data.

The Committee was provided with conflicting advice on the rules that should guide an FTAA environmental accord. On one hand:

Canada [should] strive toward the clarification of existing rules, and I'm thinking here of the trade and environment interface. The transparent development and application of environmentally based standards and other measures should be the goal while, at the same time, they disallow unwarranted discrimination or unilateral extraterritoriality with respect to production processes. ... [T]he precautionary principle [is supported] where international technical regulations or standards do not exist or are inappropriate, provided that the alternative domestic regulations or standards fulfil an assessment of risk and provided that this risk is based on sound science and technical evidence, with the scientific information to be gathered within a reasonable period of time. [Gordon Peeling, 30:1610-1615]

On the other:

[W]e will draw attention to two environment-related trade matters only. The first concerns process and production methods, PPMs, which we believe need to be included in WTO deliberations as a "new issue." PPMs are presently not taken into consideration by the WTO. In other words, an importing country cannot discriminate on goods that are manufactured in an environmentally-destructive fashion. With its almost exclusive focus on the physical characteristics of a good, the WTO is, we believe, at odds with efforts to create rules of international commerce that encourage sustainable production and consumption. The current WTO interpretation on PPMs seems very much to protect producers rather than the public at large. We believe the process and production methods used to produce a good to be a key environmental concern that should in certain carefully defined circumstances be valid grounds for restricting imports. [Simon Rosenblum, 122:1215]

Clearly, environmentalists would criticize the first set of opinions above for maintaining the status quo in terms of the burden of scientific proof, which is placed on those promulgating health and environmental standards, as well as in adopting the much more narrow product characteristics basis, rather than the full production-consumption cycle, for evaluating environmental implications. However, the Committee is convinced that, if one were to step back from all the confusing detail and reflect on the broader issues at play, one would conclude that this approach provides greater administrative flexibility for countries to pursue their own environmental priorities, which may not be those of others. Consider the following situation which is likely to be a sign of the times for the future in sustainable development decision making:

Let's all just take a decision under the World Trade Organization ... and ban the use of lead in gasoline. ... That bears a certain cost, and if you were to look at some large southeast Asian nation ... their issue for health is potable water for a population; they're incurring so many deaths per annum. ... That is their health priority ... and lead in gasoline is about 110 on their health issues list. How can they possibly move it up? They don't have the financial resources, and it would be at the expense of one of those other ... much more important issues. [Gordon Peeling, 30:1715]

Some witnesses clearly recognized the superiority of this approach:

On the issue of trade and national environmental responsibility, it's our strongly held view that Canada's position ... must in no way undermine the sovereign ability of nations to manage their own natural resources and impose environmental regulations designed to protect these resources. ... The issue is one that requires a delicate balance. On the one hand, environmental concerns should not be used as a protectionist measure to impede or circumvent free trade provisions. On the other hand, harmonization of national objectives through multilateral environment agreements must take place in a manner that is cognizant of and integrated with the international trade regime. [Colin Isaacs, 110:915]

The Committee agrees that greater flexibility in the establishment of domestic priorities will not only prevent the use of environmental measures as disguised trade protectionism, it will also bring higher standards for the environment and we, therefore, recommend:

13. That the Government of Canada ensure that the rules governing a Free Trade Area of the Americas agreement do not in any way impair the Government's sovereign right to regulate in the public interest.

In the absence of political will to enforce MEAs, it appears that such a regime will best resolve the conflict between trade and environmental objectives.

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1 NAFTA Environmental Review Committee, North American Free Trade Agreement: Canadian Environmental Review, Government of Canada, Ottawa, October 1992, p. 62; and Office of the United States Trade Representative, Review of U.S.-Mexico Environmental Issues, Washington, D.C., February 25, 1992.