D.

PETER STONEHOUSE

A REVIEW OF WTO AND ENVIRONMENTAL ISSUES

(Accepted February 28, 2000)

ABSTRACT. Multiple negotiating rounds of the General Agreement on Tariffs and Trade
(GATT) and World Trade Organization (WTO) since 1947 have conferred economic bene-
fits through liberalized international trade. A growing body of evidence also points to
linkages between liberalized trade and damage to the global environment, ecology, and
natural resource base. Ironically, the increased economic well-being conferred by trade
liberalization ultimately provides the basis for improved environmental protection. It is the
interim environmental damage due to trade liberalization that is controversial and needing
amelioration. The proposition here is to promote further trade liberalization, but only as
long as environmental ethics and sustainability issues are satisfactorily addressed. Trade
liberalization should not be permitted at the expense of adequate environmental protection
and sustainability. Future WTO rounds need to address both development benefits and
environmental ethics issues in a net social welfare maximization setting.

KEY WORDS: Compromise solutions, computerized general equilibrium models,

economic development, externalities, environmental damage, freer international trade,
jurisdictional responsibilities, multi-disciplinary approaches

PROBLEM OVERVIEW A N D OBJECTIVES

Since its birth on October 30, 1947, the General Agreement of Tariffs and
Trade (GATT), later superseded by the World Trade Organization (WTO),
has been the focal point for multilateral negotiations aimed at liberalizing
international trade and conferring the ensuing economic benefits on the
GATT signatories. Countries that join the WTO gain security and predict-
ability in their trade relations, and gain the assurance of equal access to the
dispute settlement system. The timing of the inauguration was propitious,
coming at the end of a destructive World War II, which in turn had been
instrumental in ending the deepest economic downturn recorded in human
history. Relatively little attention was being paid in 1946 to environmental
issues, and no attention at all was being paid in those days to linkages
between international trade and the environment.
After eight "Rounds" of negotiations since 1947, considerable progress
has been made in reducing industrial tariffs. GATT encompassed $5,300
billion of world merchandise trade in 1997. Currently, the WTO has

Journal o[ Agricultural and Environmental Ethics 13: 121-144, 2000.

9 2000 Kluwer Academic Publishers. Printed in the Netherlands.
122 D. PETER STONEHOUSE

132 member governments, and 31 countries are on the waiting list for
membership (WTO, 1998).
The Uruguay Round trade agreement in 1994 was the latest of these
international trade negotiations, and some 110 countries participated. Agri-
culture was a major agenda in the Uruguay Round Agreement. The Round
called for domestic and border policies for agricultural products to be
brought within the rules of GATT, and placed constraints on govern-
ments' freedom to pursue issues of national and sectoral interest without
caring about their harmful international consequences (Josling et al.,
1996; MacLaren, 1995). The limitations of the Round for agriculture
were the following: free trade in most agricultural products continued to
be restricted; export subsidy programs were allowed to continue; tariff
barriers remained high; and domestic budgets were constrained due to the
re-instrumentation of farm policies (Josling et al., 1996; IATRC, 1994).
Free trade is viewed as significant to environmental reform in that it is
associated with urbanization and industrialization, both of which reduce
population growth rates and provide the financial means of support for
environmental protection measures (Yu, 1994). However, the assumption
that free trade would lead to efficient resource allocation, and thus be better
for the environment, is erroneous, because it is misleading to link effi-
cient resource use with environmental quality without stringent disclaimers
(McClain, 1994). In an economic sense, environmental quality is a luxury
good. Developing countries are able to manage the environment better due
to their "new" increase in income that comes from freer trade (Seale and
Fairchild, 1994). At the same time, demand for basic services and social
programs has to be met before environmental protection and regulation can
claim a large share of a government's budget (McClain, 1994).
Although the Uruguay Round did include some environmental care
provisions, environmentalists and consumer groups remain dubious about
their effectiveness. They were concerned about an erosion of standards
in the name of freer trade (IATRC, 1994). These concerns covered land-
scape aesthetics, conservation of resources, water and food quality, and
animal welfare (MacLaren, 1995). The environmental concerns in the
agrifood sector ranged from the impact of chemical residue, biotechno-
logy, production processes, packaging, animal welfare, and animal disease
(Oxley, 1994). Environmental quality is not necessarily provided, secured,
or enhanced through a market outcome (McClain, 1994).
The objective of this paper is to review environmental protection in
the context of increasingly free trade being obtained through successive
GATT/WTO Rounds. At issue is the extent to which freer trade can
provide for or detract from adequate protection of the environment, and
 A REVIEW OF WTO AND ENVIRONMENTAL ISSUES 123

to what extent environmental protection measures can thwart freer trade

provisions. A brief history of GATT, and the major Rounds of Agree-
ments, is followed by an overview of environmental issues. Attempts
are made to reconcile the needs of freer agricultural trade and the needs
for environmental protection. Finally, methodological considerations for
modeling trade and environmental linkages are analyzed in a bid to bring
about such a reconciliation of freer trade and environmental protection
needs.

BRIEF HISTORY OF THE GATT

Emphasis in the early rounds of negotiations was on reduction of tariff

barriers to trade in industrial goods. The GATT signatory governments
desired to avoid the trade protectionism policies of the 1920s and 1930s
and to expand and secure the advantage of gaining access to countries
from trade (Jackson, 1969). Excluded from negotiations were trade in all
(financial, transportation, and other) services and intellectual property, and
reductions in non-tariff barriers. Early attempts to include trade in agricul-
tural goods in the negotiations were thwarted because of United States
Congressional opposition on principle to liberalized agricultural trade,
based supposedly on national security considerations, but more likely
based on self-serving political considerations in response to domestic farm
sector lobbying power.
In view of the political and economic hegemony enjoyed by the United
States from the 1940s to the 1970s or so, American interests and desires
were typically reflected in the tone and direction of the early rounds of
GATT negotiations. As a result, domestic American market protection
measures predominated, distortions to market prices, production, and trade
in the international agricultural sector proliferated, and US agricultural
surpluses grew (Warley, 1988).
Taking their cue from the United States, other developed countries
revealed that they preferred an orderly and regulated marketing and trade
system for agriculture over a laissez-faire system, and adopted protective
measures for their own agricultural sectors. The formation of the European
Common Market (ECM) by the 1957 signing of the Treaty of Rome
was predicated upon Franco-German industrial co-operation and equally
importantly on the creation of a common agricultural policy (CAP). The
CAP was implemented in 1962. Central to the original CAP were (a) vari-
able import levies, designed to support (b) minimum import prices, and
confer protection from third-country competition and (c) export restitu-
tions, designed to assist ECM farmers in covering some of the difference
124 D. PETER STONEHOUSE

in unit product prices between the higher ECM-protected levels and world
market levels.

1960-1962: THE DILLON ROUND

The fifth (or Dillon) Round of negotiations (1960-1962) was divided

into two phases: the first was concerned with negotiations with EC
member states for the creation of a single schedule of concessions for
the Community based on its Common External Tariff; and second was a
further general round of tariff negotiations.
Perceiving a threat to its export markets in Europe and in third coun-
tries, the United States modified its stance on agricultural trade restrictions,
and sought an agreement that imposed common external tariffs equiva-
lent in value to those already committed to by member countries of the
European Community (EC). The EC vigorously pursued its CAP stance
on behalf of the grains sector, which it saw as central to its regional
security strategy and for which it harbored self-sufficiency designs. The
EC position had prevailed over the objections of the United States and
other net food exporters like Canada, Australia, and Argentina. It was in
the net food exporters' interests to have more open access to EC grains
markets. Objections were raised because of the open-border position of the
EC only for oilseeds and a few other (minor) agricultural commodities. In
fact, by the early 1980s, the CAP had led to EC self-sufficiency, and even
to net exporter status, across a much wider range of agricultural products.
The earlier concerns of the net food exporters would seem to have been
vindicated. The import levy and export restitution instruments of the EC's
CAP had protection and self-sufficiency in mind. These instruments were
at basic variance with the guiding principles adopted by GATT signatories
for developing freer and fairer trade (Conklin and Thor, 1993):
1. non-discrimination among all GATT trading partners in terms of
access to markets;
2. transparency of any trade barrier measures that are used, by having
GATT signatories adopt visible and measurable tariff barriers over any
non-tariff barriers, such as quotas, licenses, standards, and the like;
3. sanctioning of measures that are against unfair trade practices;
4. the application of surveillance and consultations to all trade sections.
Throughout the Dillon Round of GATT negotiations (1960-1962) and
the subsequent Kennedy Round (1964-1967), increasing reference was
being made to environmental issues, and particularly to the damaging
impacts of agricultural production and trade activities on the environment.
 A REVIEW OF WTO AND ENVIRONMENTAL ISSUES 125

High technology agriculture, with its increased possibilities of specializ-

ation and intensification, was acknowledged as being highly productive
and efficient, but also was beginning to be associated with causing
environmental damage.

1964-1967: THE KENNEDY ROUND

In the Kennedy Round, and for the first time in the history of the GATT,
a linear method of cutting tariffs for industrial goods was introduced.
Separate agreements were reached on grains, chemical products, and a
Code on Anti-Dumping. In this sixth Round of GATT negotiations, the
EC focus for agriculture was on determining the self-sufficiency levels
for various food commodities acceptable to EC members and to their
trading partners. Having failed in the previous (Dillon) round to reduce
the extent of import protection under the CAP, the new US emphasis
was on legitimizing these import protection measures, but also on limiting
their extent. The concept of self-sufficiency levels inevitably expanded the
scope for distortions to market prices, production, and trade (Josling et al.,
1996; Warley, 1988). These distortions at the hands of the EC's CAP were
further exacerbated by agricultural protection measures adopted by other
developed countries, such as Canada, Australia, and New Zealand. Canada,
for example, introduced supply management policies with absolute import
protection implied for dairying in 1967, for egg production in 1972, for
broiler chickens in 1975 and for turkeys in 1977.
The only GATT provision specifically relevant to environmental issues
by the end of the 1960s was Article XX, which related to measures
to protect human health and plant and animal life, as well as to meas-
ures to conserve exhaustible resources. Until the Uruguay Round, Article
XX remained the sole GATT provision directly related to the environ-
ment (Hemmer, 1992). This provision recognized the fight of each GATT
signatory to exercise its national sovereignty in matters of the environ-
ment, and to place priority on public health and environmental protection
goals over liberalized trade goals, so long as certain provisos were met
(Eglin, 1992). These provisos, relating to legitimacy and proportionality,
required environmental protection measures to be invoked only according
to scientifically-accepted principles and to be compatible with domestic
market production and consumption patterns and rules. This ensured that
there was no discrimination between imported and domestically produced
commodities.
126 D. PETER STONEHOUSE

1973-1979: THE TOKYO ROUND

The Tokyo Round of GATT negotiations concentrated attention on (a)

non-tariff barriers to trade and (b) extension of GATT provisions to the
agricultural sector. On the former issue, there was an attempt through an
agreement on technical barriers to trade (TBT agreement) to minimize
trade restrictions imposed by differences in national standards and tech-
nical regulations, including packaging, marking, and labeling requirements
(Elgin, 1992). The use of international standards was encouraged, with
national standards permitted to exceed international standards as long as
those created no unnecessary obstacles to trade. This led to a clearer set
of rules for implementation of the so-called "Standards Code." In essence,
Article XX evolved to represent a mechanism for allowing exceptions to
GATT rules prohibiting technical barriers to trade (TBT), but one designed
to prevent the use of human health/environmental protection policies from
becoming international trade barriers, according to the standards code
(Hemmer, 1992; Eglin, 1992; Conklin and Thor, 1993). The standards
code related only to final products, and not to product processing and
methods (PPM), thereby allowing ample and controversial scope for differ-
ences in production procedures and environmental damage between GATT
signatories (Conklin and Thor, 1993).
Seventh Round agreements were reached on subsidies and coun-
tervailing measures, TBT, government procurement, customs valuation,
import licensing, a revised anti-dumping code, and trade in bovine meat,
dairy products, and civil aircraft. The first concrete result of the Round
was the reduction of import duties and other trade barriers by industrial
countries on tropical products from developing countries.
On the issue of extending liberalized trade to the agricultural sector,
the United States was particularly anxious to restrict the extent of
minimum import protection measures and application of subsidies to
support domestic production and exports. On the other hand, the EC
was increasingly concerned about retention of its CAP provisions as
the principal means of achieving its food self-sufficiency goals. Mean-
time, Canada was keen to maintain its newly introduced protectionist
measures for supply-managed industries. With such divergent views and
with apparently no room for compromise, the Tokyo Round of negoti-
ations failed completely to extend liberalized trade to agriculture. On the
contrary, by default, protectionism in and regulation of agricultural produc-
tion and trade became accepted and entrenched. The Americans, Western
Europeans and other member nations of the Organization for Economic
Co-operation and Development (OECD) were then the architects of the
 A REVIEW OF WTO AND ENVIRONMENTAL ISSUES 127

price, production and trade distortions not only for their own agricultural
sectors, but also for those of every other country throughout the global
trading system.
The potential for progress on environmental issues was created with the
November, 1971 appointment by GATT of a special Group on Environ-
mental Measures and International Trade (GEMIT), charged with the task
of investigating any trade policy aspects of measures to control pollution
and protect the human environment, and of reporting the findings to the
GATT Council (GATT, 1993). After having lain dormant for all practical
purposes for some 20 years, the GEMIT has re-emerged in the 1990s as
an important GATT/WTO body, with considerable potential to contribute
usefully to trade-environment interface issues (Eglin, 1992). In addition,
an understanding was reached in 1979 on notification procedures in the
context of dispute settlements under the TBT Agreement of the Tokyo
Round (GATT, 1993).

1986-1994: THE URUGUAY R O U N D

The eighth Round covered the most wide-ranging and ambitious agenda
of any other Round. The first meaningful step toward WTO Agreement on
Agriculture was negotiated during the Uruguay Round and was made up
of several elements, which sought to reform trade in this sector. Agree-
ments were reached on a comprehensive program of agricultural reform,
including liberalization commitments on tariffs, domestic support, and
export subsidies; and the replacement of all quantitative restrictions and
other non-tariff measures by tariffs. One of the main aims of the Agreement
was to improve predictability and security for importing and exporting
countries alike.
The entrenched protectionism and regulation of the 1970s resulted
during the 1980s in increasing self-sufficiency levels and surpluses in
and subsidized export by the EC. This led to reduced commercial export
opportunities for the US and other agricultural exporters. More vigorous
demands ensued by the US to have liberalized agricultural production and
trade brought to the negotiating table at the inauguration of the Uruguay
Round in 1986. The US position was strongly supported by other countries,
especially other agricultural producing and exporting nations. Australia,
New Zealand, Canada, and Argentina, along with others, formed the Cairns
Group of 14 smaller agricultural producers and exporters at a 1986 meeting
in Cairns, Australia.
The emphases of the Uruguay Round were liberalization of trade in
the agricultural sector and additional reductions in tariff barriers for indus-
128 O. PETERSTONEHOUSE

trial products. Also sought were reductions in non-tariff barriers to trade

in industrial goods, and trade liberalization in the services sector and the
intellectual property rights sector. Additional burdens to the agenda were
felt because environmental issues emerged as topical, controversial, and
potentially important for trade.
The Uruguay Round of negotiations was concluded in April, 1994.
Neither liberalization of agricultural trade nor provisions for environ-
mental protection were successfully completed, largely because of ongoing
controversy surrounding both sets of issues. The US remained adamant
about the need for inclusion of the agricultural sector within the purview of
the GATT proceedings, and the need to adhere to the provisions of the Blair
House Accord on the extent of liberalization. The EC, particularly France,
seemed equally intransigent about the need to maintain its CAP protec-
tionist and regulatory provisions in place, and about the need to dilute the
extent of liberalization through a re-negotiation or re-interpretation of the
Blair House Accord. In November 1992, the EU and US settled most of
their differences on agriculture in a deal known informally as the "Blair
House Accord" (WTO, 1998). While both the US and the EC agreed in
principle that the agricultural sector be included in the Uruguay Round, the
negotiating difficulty stemmed from divergence of views about the extent
to which the provisions of the Blair House Accord, supposedly already
agreed to by both parties in November 1992, had to be strictly abided by,
or could be modified. At stake on the American side was the chance to
gain access for its farm exports to a potentially rich EC market. At stake on
the EC side, beyond the obvious loss of self-sufficiency, were the political
repercussions associated with reduced agricultural support levels required
by the Accord. Also at stake were further farm structural adjustments with
rural community viability consequences, and a range of socio-economic
problems attendant upon reduced levels of protection and support for agri-
culture. All these stemmed from the political problems devolving from
reduced self-sufficiency and support levels.
There was, however, much more at stake in the Uruguay Round
than simply an initial liberalizing of agricultural production and trade.
The Cairns Group of nations was desperate for a settlement with some
diminution of protectionism and regulation in agriculture, because their
commercial agricultural export programs had been devastated over the
decade 1986-1995. The Uruguay Round proposals to eliminate or reduce
a wide range of non-tariff barriers for industrial goods, to extend trade
liberalization into the service sector (for example, banking, finance, and
insurance), and to institute new regulatory procedures and rules covering
intellectual property rights (such as patents, trademarks, copyrights, etc.)
 A REVIEW OF WTO AND ENVIRONMENTAL ISSUES 129

were used as bargaining levers. The Cairns Group went as far as linking its
members' signatures to any Uruguay Round agreement to some degree of
liberalization in agricultural sector trade. Developing country signatories,
meanwhile, made their accession to the Uruguay Round agreement, espe-
cially one dealing with intellectual property rights, contingent upon further
liberalization in industrial sector trade, and in particular upon obtaining
improved access to developed country markets. It is perhaps just as
important to have production and trade liberalization extended to the agri-
cultural sector of developing countries as it is to those of developed coun-
tries. While protectionist and regulatory measures in developed nations
have artificially raised market prices of agricultural commodities, taxation
and export restriction measures applied to agricultural sectors in devel-
oping countries have artificially reduced market prices for agricultural
commodities. These price distortions have resulted in production distor-
tions, with surpluses in developed countries and deficit food production
in developing countries, and trade flow and volume distortions across all
GATT signatories (McCalla, 1989).
The emergence of environmental issues as being important within the
Uruguay Round occurred for a number of reasons. First, there is a growing
body of literature documenting evidence of increasing environmental
damage from human activity (see for example, Ervin, 1997; Napier et
al., 1994; Sfeir-Younis and Dragun, 1993; WCED, 1987). Second, there is
growing public awareness of the mounting level of environmental damage,
largely through increasing political and media attention to the issue. This
public awareness, and its associated concerns, are particularly acute in
the developed nations, in accordance with the well-established positive
correlation between per-capita income levels and desires for increased
environmental protection (see, for example, Hemmer, 1992; Anderson and
Blackhurst, 1992; Sutton, 1988). Third, there is an expanding core of liter-
ature linking, at least in theory, trade issues with environmental issues
(Button, 1993; Anderson and Blackhurst, 1992; Low, 1992; Arntzen et al.,
1992; Sutton, 1988). Although not yet extensively supported by empirical
evidence, especially for the agricultural sector (Dean, 1992), the arguments
are persuasive that trade policy instruments can affect the environment
and its quality (see for example, Anderson, 1993; Hemmer, 1992), and
that in turn, environmental protection policy instruments can affect trade
and the potential for economic efficiency gains through trade liberalization
(Dunmore, 1993; Segerson, 1988). WTO rules allow a member country
to restrict trade if necessary to conserve the natural resources within its
territory, and if corresponding restrictions are placed on domestic produ-
cers. However, there is no provision for governments to protect domestic
130 D. PETER STONEHOUSE

producers by restricting imports produced under less stringent environ-

mental standards (Sinner, 1994). Further progress in trade liberalization,
whether at the international level through subsequent WTO negotiating
rounds or at the regional level through, for example, EC integration or
the North American Free Trade Agreement (NAFTA), would appear to
be at least in part a function of simultaneously addressing environmental
issues (Redclift et al., 1999). The questions concerning procedures are: (a)
should there be linkages forged between environmental and trade issues;
and (b) are trade negotiating bodies or some other institutional forum/fora
more appropriate for discussion and evaluation of environmental issues
and linkages between environmental and trade issues?

RESOLVING E N V I R O N M E N T A L ISSUES IN THE WTO

Whether or not trade negotiating bodies are viewed as appropriate for

addressing environmental issues as these impinge upon or are affected
by trade, there were increasing numbers of demands by the late 1980s
to have environmental issues included in the Uruguay Round negoti-
ations. This was perhaps unfortunate and inappropriate for several reasons.
First, as noted previously, the Uruguay Round was already burdened with
the most ambitious set of trade liberalization undertakings in its history.
Second the WTO, as originally envisaged in its former GATT form, had
no mandate to deal with environmental issues, and therefore has no institu-
tional infrastructure designed to evaluate environmental problem situations
or adjudicate environmental protection differences (Ballenger, 1993). Such
a mandate was introduced to the WTO through the Uruguay Round in the
form of a sanitary and phytosanitary (SPS) agreement (see below). Third,
with a relatively short history of experience in dealing with environmental
matters, and with no jurisprudence established prior to the Uruguay Round
either through the WTO or through other international institutions such as
the OECD, the EC, NAFTA, etc., any WTO ruling would be precedent-
setting. Fourth, there are inherent problems in making appropriate rulings
about environmental issues because of the difficulty in predicting a priori
the environmental impacts of freer trade, and the trade effects of intro-
ducing environmental protection policies, and therefore of total net social
welfare impacts (Dean, 1992; NRLO, 1992).
The way in which environmental issues such as these impinge upon
trade liberalization is nevertheless having to be contended with by the
WTO. The reasons already mentioned are growing public concerns and
evidence of trade-environmental linkages. Because there is so far only an
incipient institutional infrastructure for dealing with international environ-
 A REVIEW OF WTO AND ENVIRONMENTAL ISSUES 131

mental issues as these might affect international trade, the WTO becomes
an adjudication body on a well-defined, limited basis. Trans-boundary
environmental problems, such as regional acid rain or watercourse pollu-
tion issues, can be dealt with at the regional institutional level, for example
through EC or NAFTA infrastructure. The point is, first, the appropriate
institutional infrastructure is still in process of development, whether the
international context is global or regional. Second, there are those environ-
mental protection specialists who argue against any further liberalizing of
international trade on grounds that environmental damage will inevitably
increase; these adherents in fact argue (incorrectly) that less trade should
be occurring (Hathaway, 1993). Third, on the other hand, are the arguments
(also erroneous) of those who view imposition of environmental protec-
tion policies as automatically being inimical to freer trade, or of those
who consider trade policy measures as appropriate tools for environmental
protection purposes. For these, and perhaps other reasons, it is felt that
linkages between the environment and trade are likely to grow (Redclift
et al., 1999). Whether the WTO will be called upon to deal with issues
associated with these linkages is still a matter to be resolved.
Despite the lack of appropriate institutional infrastructure and previous
experience in dealing with environmental issues, some claim that WTO is
robust enough to steer the signatories toward the achievement of liber-
alized trade, while meeting the needs for environmental protection (as
long as these do not adversely affect trade). For example, it was claimed
that proposed reductions in domestic agricultural protectionism and regu-
lation under the Uruguay Round would decrease incentives to employ
intensive production techniques, and that this would reduce damage to the
environment (Wolter, 1993). The SPS agreement negotiated as part of the
Uruguay Round agricultural package for the first time provided for greater
compatibility between trade liberalization and environmental protection
goals. The SPS agreement was designed to ensure trade liberalization goals
were not made subservient to environmental protection in the form of
greater food safety for humans and protection of health for animals and
plants. WTO signatories, through the agreement, can invoke environmental
protection measures, but only on the basis of sound scientific principles
having been used and scientific evidence presented to show just cause.
In this way, the SPS agreement was designed to ensure environmental
protection measures were not used as unjustified barriers to trade. The
SPS agreement was intended to clarify and improve upon provisions of the
Standards Code, adopted under the TBT Agreement within the 1973-1979
Tokyo Round.
132 D. PETER STONEHOUSE

Even the Uruguay Round SPS Agreement was separate from the Agree-
ment on Agriculture but it had close connection with it. The Agreement
on SPS did not specify any quantitative requirements nor regulate any
specific policies. It only established "general" guidelines for an individual
government's behavior and interpretation. Regulations on the use of bovine
somatotropin in dairy production, food irradiation, and food labeling as
these affect trade liberalization, are examples of disputable issues (IATRC,
1994). Test cases, some leading to successful resolution, have so far
been indicative of the robustness of the SPS agreement guidelines and
principles.
The seriousness with which the GATT Council began treating envir-
onmental issues in the early 1990s was epitomized by the reactivation
of the special working Group on Environmental Measures and Interna-
tional Trade (GEMIT) and by the appointment of a Committee on Trade
and Development (CTD). Both these GATT/WTO bodies were designed
to undertake sequel work addressing environmental problem areas left
unresolved by the 1992 United Nations Conference on Environment and
Development (UNCED) in Rio de Janeiro. The CTD was charged with
the responsibility for reviewing, discussing, and negotiating trade issues of
interest to developing countries. Increased trade liberalization was envis-
aged as an important vehicle for achieving more efficient allocation of
resources with more sustainable development, less wastage and environ-
mental pollution, and therefore for making available more resources for
raising environmental protection standards (GATT, 1993a). The GEMIT,
effectively dormant from its 1971 creation until its 1991 reactivation, was
given a 3-part working agenda. The first part concerned the evaluation of
trade provisions of such existing multilateral environmental agreements as
the Montreal Protocol on Ozone Layer Depletion, and the Basel Conven-
tion on Trade in Hazardous Wastes, in the context of compatibility with
GATT/WTO principles. The second part centered on ensuring compli-
ance with the transparency provisions of all trade-related environmental
measures including assessments of the adequacy of existing notification
requirements concerning impending or intended new measures, and evalu-
ation of additional information needs and provision mechanisms. The third
part focused on the specifics of evaluating potential impacts on interna-
tional trade of packaging and labeling regulations, especially those due
to any inter-country differences in regulations and those emanating from
increased re-use and recycling provisions for packaging materials and from
so-called eco-labeling (GATT, 1993, 1993a).
The combined efforts of the CTD, the GEMIT, and the TBT Committee
were seen as playing a crucial role in helping to establish and test the kind
 A REVIEW OF WTO AND ENVIRONMENTAL ISSUES 133

of institutional infrastructure needed to improve GATT's/WTO's relevance

to a world seeking greater economic efficiency through liberalized trade,
whilst ensuring better protection of the environment (Wolter, 1993). Some
consider it effective to regulate polluting activity at the source. National
and international welfare and economic efficiency can be maximized when
governments require polluters to bear the costs of pollution, according to
the polluter pays principle (PPP) (Sinner, 1994; Low and Safadi, 1992).
Others believe that all pollution is global pollution and remedies should
depend upon the type of pollution and its impacts on the environment
where it occurred (Seale and Fairchild, 1994). They also believe that PPP
is not an efficient way to lead to optimal environmental quality. They
concluded that rich countries should help in paying for environmental
quality of poorer countries because poorer nations may not able to bear the
cost of reaching the environmental standards "desired" by rich countries
(Seale and Fairchild, 1994).
The issues inherent in the preceding discussion are profound and
complex. Many economists, myself included, believe that liberalized trade
is the best way to attain economic efficiency globally, but that trade
liberalization can increase environmental damage (VanDeVeer and Pierce,
1986). This leads many environmentalists to oppose trade liberalization.
Environmentalists are arguably missing the point about the economic effi-
ciency benefits from trade liberalization. Increased wealth creation glob-
ally provides the vehicle not only for improved quality of life for humans,
but also (eventually) for improved environmental protection including
preservation of other species. It is what happens in the interim, while we
await the application of trade liberalization benefits to improved environ-
mental protection that seems so contentious. For economists can arguably
be viewed as missing a major point about substitutability of human-made
and natural capital goods. Many economists argue that the welfare of
present and future generations can be sustained, or even enhanced, by such
human-made capital goods as new knowledge or superior technologies
substituting for natural species or special landscapes eliminated by human
activity (Solow, 1998; Beckerman, 1998). The issue inherent is whether
human-made and natural capital goods are really substitutes or comple-
ments. This raises a further issue of assigning values to these lost natural
capital goods (Freeman, 1986). It furthermore, requires value judgements
to be made on behalf of future generations, a hazardous task (Freeman,
1986).
I prefer to view natural capital goods as unique and irreplaceable
entities. I support the (apparent minority economists') view that human-
made and natural capital goods be treated as complements, not substitutes
134 D. PETER STONEHOUSE

(Daly, 1998). This still allows me to support trade liberalization, but

within the confines of minimizing environmental damage. I agree with
VanDeVeer and Pierce (1986, pp. 208ff) that freer trade needs to be
encouraged on economic efficiency grounds, but only up to the point of
market failure and the need for environmental protection. I part company
with economists who use anthropocentric reasons alone for environ-
mental protection. In my value judgement, natural capital goods are worth
preserving for their own sakes and on moral grounds. Economists, then,
are not in a position to resolve the trade liberalization versus environ-
mental protection dilemma on economic efficiency grounds alone; ethics,
morals, and aesthetics need also to be considered. As well as environ-
mental ethics issues, freer trade can also pose problems with respect to
societal distributions of the benefits. For example, egalitarians would argue
that unfettered trade tends to concentrate wealth at the expense mainly of
society's worst-off members (Rawls, 1971). Communitarians go so far as
to hold that individuals should not benefit from trade at the expense of their
local community members (see, for example, Thompson, 1991). While
such distributional problems are acknowledged as important, they are not
central to the main focus here on trade liberalization and environmental
ethics issues. As an advocate of both trade liberalization and environmental
protection, mine is a search for some compromise solution and for the best
institutional means of implementation. Along the way, I am encouraged
by the view that, carefully orchestrated, trade liberalization can actually
enhance environmental protection. For example, were subsidized timber
harvesting and forest land clearance for ranching purposes to be outlawed
as trade protectionist measures, environmental protection might easily be
conferred as a by-product of liberalized trade (Yu, 1994).
Strengthened by the SPS and TBT agreements from the Uruguay
Round, the WTO institutional infrastructure is better positioned to resolve
the complexities of the trade-environmental interface. Help is afforded by
the increasing harmonization of standards across countries (viz the Inter-
national Standards Organization 9000 and 14000 standards). Moreover,
the standards that exist apply not only to final consumer products but also
increasingly to product processing and methods (PPM). More recently,
the WTO introduced a system enabling signatories to establish, free from
counter actions by other signatories, subsidy programs aimed at protecting
the environment, helping disadvantaged regions, and promoting research
and development (WTO, 1998d).
Whether or not the WTO has the necessary institutional infrastructure
and adequate resources to deal with such contentious trade-environmental
issues, the GEMIT within the WTO opined that the WTO was not the
 A REVIEW OF WTO AND ENVIRONMENTAL ISSUES 135

appropriate forum for establishing environmental standards nor for devel-

oping global environmental policies (GATT, 1993, p. 7). This and other
special working groups within WTO are just as clearly responsible for
dealing with issues at the interface between trade and the environment.
These interface issues can best be addressed by establishing a framework
to define the relationship between the WTO and the many multilateral
environmental agreements (such as the 1989 Montreal Protocol on strato-
spheric ozone layer protection) that aim to protect the environment (WTO,
1998c).
Meantime, while adequate and appropriate institutional arrangements
for resolving trade-environment issues are being made, there is much
common ground among scientists and policy researchers about theoret-
ical aspects of linkages between trade and the environment. The following
points of agreement may contribute toward developing a relevant theoret-
ical framework for empirical analyses of trade-environment linkages.
1. Environmental Policies Affect Agricultural Production and Trade
through the imposition of environmental taxes, subsidies, standards,
or prohibitions and their influences on:
9 short-run costs of production, shifts in supply curves, and changes
in excess supply or demand curves;
9 terms of trade, trade patterns, and trade volumes;
9 longer-term shifts in supply curves via technological progress stim-
ulation;
9 longer-term shifts in demand curves via changes in consumer pref-
erences; (Dunmore, 1993; Segerson, 1988; Chambers and Reicheld-
erfer, 1988).
2. Production and Trade Policies in Agriculture Affect Natural Resources
and the Environment through reinforcement or suppression of the
comparative/competitive advantage principles and their influences on:
9 trading patterns and volumes;
9 production intensities, natural and man-made resource use rates;
9 degree of market failures/imperfections and extent of (positive as
well as negative) externalities; (Anderson, 1993; Miranowski et al.,
1991; Sutton, 1988).
3. Trade and Environmental Issues are Reconcilable, as long as:
9 an appropriate theoretical framework and appropriate analytical
model are used in a way that incorporates all relevant aspects of both
trade and environment (discussed more fully under Methodological
Considerations below) (Crosson, 1993; Sutton, 1988);
136 D. PETERSTONEHOUSE

9 appropriate choices of environmental policy instruments are made

using not trade policy instruments, but taxation, subsidization,
standards establishment and controls, or prohibitions, as close to
the actual (production or consumption) source of environmental
damage as possible (Anderson and Blackhurst, 1992);
9 harmonization of environmental policies and emission standards
across countries is not attempted, because neither would allow
adequate account to be taken of inter-country differences in envir-
onment resource endowments (environmental damage absorptive
capacity), or in environmental protection preferences, and because
either might result in the establishment of pollution havens or
the adoption of lowest-common-denominator pollution standards;
alternatively, harmonization of environmental goals/objectives is
appropriate because there would be sufficient flexibility conferred to
allow for inter-country differences in endowments and preferences
(WTO, 1998c; Ballinger, 1993; Rauscher, 1992);
9 a full accounting of all costs and benefits, including externalities,
both positive and negative, forms the basis as far as possible for
evaluation of trade and environmental impacts using measures of
net social welfare that are appropriate, such as total societal benefits
and costs (Shape, 1992; Schmitz et al., 1988).
On the other hand, trade and environmental issues may prove to
be irreconcilable where the full impact of trade and/or environmental
policy introductions on total net social welfare are acknowledged to be
a priori difficult to predict (Anderson, 1993; Dean, 1992), and in some
cases, impossible to measure in monetary terms (Freeman, 1986). Such
instances can only be resolved by making hard choices between the
economic efficiency benefits of liberalized trade and the moral imperatives
of environmental protection.

M E T H O D O L O G I C A L CONSIDERATIONS FOR M O D E L I N G
T R A D E AND E N V I R O N M E N T A L LINKAGES

Given the issues and concerns addressed in the previous sections, an appro-
priate theoretical framework for analyzing interrelationships between trade
and the environment, especially as these relate to the agricultural sector,
should have the following components:
1. computable general equilibrium (CGE) provisions, as in the
Heckscher-Ohlin framework used for traditional international trade
situation analysis (see, for example, NRLO, 1992, p. 81);
 A REVIEW OF WTO AND ENVIRONMENTAL ISSUES 137

2. dynamic adjustment provisions in a long-term time horizon setting, as

in the Ricardo-Viner framework typically used by resource econom-
ists;
3. full accounting provisions, so that all externalities can be included in
a total net social welfare type of evaluation.
The above components suggest the need for hybrid types of theoretical
frameworks and empirical models that bring together the best attributes of
both Heckscher-Ohlin (trade) and Ricardo-Viner (resource/environment)
approaches. The need for a CGE type of modeling framework follows
from a requirement to evaluate trade-environment linkages on a compre-
hensive basis. There needs to be an accounting for intersectoral differences
in resource endowments and requirements, production technologies and
production possibilities frontiers within an economy as well as among
international economies. Such an accounting would serve as the basis
for establishing comparative or competitive advantages and therefore the
reasons for trade. The traditional Heckscher-Ohlin model, while providing
the means for testing the factor-endowments hypothesis as the underpin-
ning of the comparative advantage principle, does so in only a two-factor
world of capital and labor resources, and only in a static framework of
analysis.
The importance of including land as an additional factor for any CGE
model that includes an agricultural sector is tautological. The need for a
dynamic framework for analysis of situations with environmental implic-
ations of agricultural activities in a natural resource setting is perhaps not
as self-evident. Most environmental protection policies, as well as most
agricultural activities, however, tend to have longer-run implications and
consequences for natural resources conservation, as well as both short- and
long-run economic efficiency implications and consequences and changing
externalities over time; hence the need for a dynamic modeling framework.
Important also is the ability to evaluate the long-run dynamic adjust-
ments to resource availability, qualities, usage and associated shadow
prices, and externalities, as a result of changes in environmental protec-
tion or trade policies. These particular attributes are handled better in
a Ricardo-Viner modeling framework. The problem with the traditional
Ricardo-Viner model is that it is typically sectored in approach. One
of the essential outputs of trade-environment linkages evaluations is the
determination of adjustments to resource usage and shadow prices among
alternative sectors within and among national economies resulting from
trade and/or environmental policy changes; hence the need for a CGE
modeling framework.
138 D. PETER STONEHOUSE

The hybrid model, incorporating the resource-endowment hypo-

thesis explanation of comparative advantage reasons for trade from the
Heckscher-Ohlin model, along with the dynamic adjustments and resource
rents/shadow prices attributes and capabilities for assessing environ-
mental externalities of the Ricardo-Viner model, would therefore seem
to provide the best of both individual models. It would provide all the
necessary ingredients for evaluating trade-environment interfaces, except
for those deemed irreconcilable, as for example, in dealing with trade-
related species extinction issues. Attention is drawn to the need to be
rather complete in one's accounting approach. Environmental as well as
economic efficiency consequences of policy changes require inclusion of
(positive and negative) externalities in the overall benefits-costs assess-
ments (Adger and Whitby, 1992). In this way, it is possible to judge the
appropriateness of policy changes on a more comprehensive basis, such
as net social welfare maximization, rather than on the more traditional but
less complete economic efficiency basis. In cases where policy changes
lead to schisms between trade liberalization and environmental protection
interests, I would give priority to environmental protection. The environ-
ment, I argue, is too precious not to be given top priority. There can surely
be found alternative, albeit constrained, ways to liberalize trade whilst
ensuring maximum environmental protection.
These considerations, in turn, bring up further issues. First, there are
alternative judgmental criteria by which alternative policy consequences
can be assessed. As economists, we tend to adhere rather strictly to
our own criteria, using such efficiency measures as maximization of net
social welfare. Biologists may prefer to use criteria such as maxim-
ization of natural resource preservation or maximization of biological
diversity, while environmentalists may choose a criterion such as minim-
ization of environmental damage in physical terms regardless of economic
consequences or the need for decision choices among alternatives. This
issue becomes paramount as it is realized that economists need to co-
operate with biologists, environmentalists, consumers, and producers in
a multi-disciplinary setting. This is a pre-requisite to obtaining realistic
estimates of externalities, which require measurement in technical as well
as value terms. Economists may then find themselves defending their
particular choice of judgmental criterion, or persuading others that an
economics efficiency criterion is most relevant.
A second issue concerns which externalities to include. There are many
both positive and negative, in an environmental context from which to
select (Figure 1). Ideally, all externalities would be included in a single,
but complicated, comprehensive framework. More practically, one would
 A REVIEW OF WTO AND ENVIRONMENTAL ISSUES 139

m~

I.i

~A
~D

e~ >.

<
e,,

E
"V
=.= e-,

~D

_ ee
,,,,t

-.4
B
...-.

.=

o~

O ~ Z
140 D. PETERSTONEHOUSE

need to be selective. For agricultural activities alone, one could select from
among the following:
1. air - carbonation, nitrification, wind erosion of soil, dust particles;
2. water - water-borne soil particles, nitrates and phosphorus pollution,
bacteria (especially from livestock feces and manure), chemical pesti-
cide residues, heavy metals pollution (from industrial/municipal waste
disposal);
3. land - degradation via erosion, organic matter depletion, compaction;
loss to urban and industrial development; deforestation; desertifica-
tion; acidification/salinization;
4. biological diversity - human/agricultural activity encroachment on
wildlife habitat; loss of flora and fauna species;
5. humans - food and water safety reductions; reduced sustainability
of agriculture and food production; health hazards to farm oper-
ators/workers; (positive) improved aesthetics and recreational facil-
ities; abundance and relative cheapness of food; wide range of foods
available.
A third issue revolves around measurement problems. Not all external-
ities are measurable. Where they are, appropriate units of measure must
be selected for (1) technical and (2) economic externality assessments.
These measurements must be considered in a suitable temporal context
and over an appropriate length of time horizon, using a justifiable discount
rate to express economic measures in present value terms. Measurement
of externalities should also be considered in a spatial context. Is the model
attempting to assess trade-environment interfaces globally, continentally,
and regionally? Also in a measurement context, at least some negative
externalities could have damage impacts assessed on the basis of (a)
avoidance or (b) circumvention or (c) remediation. Avoidance assessments
require one to measure physical resource requirements and economic
efforts needed to prevent the externalities occurring at source. Circum-
vention assessments are only relevant where there exist alternative natural
resources such as non-degraded land or unpolluted water, with externalities
measured in terms of moving to or bringing in the alternative resources, or
where trading among sectors and nations in pollution rights is permitted.
Remediation assessments assume that externalities have already occurred
and the damage must be remedied before the natural resource and/or
humans can use the agricultural products produced from the resource.
For externalities deemed not (monetarily) measurable, and therefore not
includable in an economic judgmental criterion, ignoring these external-
ities would not be acceptable. An alternative criterion may be invoked. This
in effect transforms the hybrid CGE model into a constrained optimization
 A REVIEWOF WTO AND ENVIRONMENTALISSUES 141

model. I would argue that a constrained optimization model would provide

the best compromise between trade and environmental interests.
Additional issues and complexities might be thought of. Suffice it
to say that, in dealing with problems as complicated as modeling the
trade-environment interface and the impacts of trade and/or environment
policy changes, a less-than-complete approach will likely be used. The
ideal model having dynamic adjustments for a multi-factor, multi-product,
multi-national situation, all in a constrained optimization computerized
general equilibrium setting with full accounting so that all externalities are
considered would likely be overwhelming. Hard choices will have to be
made in trading off completeness and comprehensiveness against cost and
human resource requirements. In the end, practical choices may be made
simply on the basis of data availability or other pragmatic criteria.

ACKNOWLEDGEMENTS

Thanks are expressed to Prof. dr. Arie Oskam, Department of Agricul-

tural Economics and Policy, Wageningen Agricultural University, for some
helpful comments on an initial draft. Thanks are also expressed to three
anonymous reviewers for their constructive criticisms of and suggestions
for improvements on a second draft.

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Department of Agricultural Economics and Business

University of Guelph
Guelph, Ontario
N1G 2W1, Canada
E-mail: stonehou @AGEC. UOGUELPH. CA