Defining ‘Free Trade’ Down: Environmentalism and Trade in the Clinton and Bush Administrations

Defining ‘Free Trade’ Down: Environmentalism and Trade in the Clinton and Bush Administrations

April 03, 2001

Remarks of Gregory Conko

Remarks of Gregory Conko

Director of Food Safety Policy

Competitive Enterprise Institute

Speech before the Atlas Foundation conference

Toward Free Trade in the Americas: The Legal and Regulatory Barriers

Punta del Este, Uruguay

 

Abstract: In the United States, the Clinton Administration (1993-2001) made the inclusion of strict environmental and labor standards a priority for the negotiation of bilateral, regional, and multilateral trade agreements. Such standards distort free trade by providing an element of hidden protectionism. Additionally, especially for developing nations, such standards also slow considerably the path toward economic development upon which genuine improvement of environmental protection depends. The North American Free Trade Agreement (NAFTA) between Canada, Mexico, and the US, was the first US trade agreement to incorporate environmental and labor standards. Though NAFTA’s side agreements were relatively weak, each subsequent bilateral trade treaty negotiation–particularly the recently completed Jordan trade agreement–has incorporated incrementally more strict standards built upon the NAFTA precedent. Once each one of those treaties was completed, the level of environmental strictness it included represented a baseline under which the next agreement could not fall. The Administration of George W. Bush is expected to be less inclined to link environmental and labor standards with the negotiation of trade treaties, but domestic political interests may make negotiation of the Free Trade Area of the Americas dependent upon such linkage. Nevertheless, Latin American nations should insist that the Uruguay Round GATT agreements (which include the lowest level of trade distortive environmental elements) be used as the baseline for FTAA negotiations and insist that the negotiations not be linked to environmental or labor restrictions.

 

Good afternoon. It is a pleasure to be here. I want to thank the conference organizers for inviting me to speak today, about the role of environmentalism in trade negotiations and what can be expected from the Bush Administration in the United States.

 

Let me begin by acknowledging that it’s entirely appropriate to have this conference here in Punta del Este, which could be described as the spiritual birthplace of the modern free trade era. It was in this very city where many of the discussions of the last round of GATT negotiations took place, creating a worldwide partnership of 140 nations dedicated to the understanding that reducing trade barriers is among the most important prerequisites to advancing global economic progress.

 

In the wake of the Uruguay Round, literally dozens of bilateral and regional trade agreements have been negotiated. There are more than 200 such agreements, among nations from the North and South; Industrialized and Developing; Rich and Poor.

 

Yesterday’s opponents of trade viewed the act as a zero-sum game: believing that exports were necessarily good and imports necessarily bad. Although it is wise recognize that there are still many opponents of trade, we know that even many skeptics have come to acknowledge that this is a false dichotomy–that both imports and exports are good in and of themselves; and that trade advances the well being of participants on both sides of the import-export equation by giving us more and better choices in both the workplace and the marketplace.

 

So, at the dawn of the 21st Century, we may be lulled into a false sense that the theoretical battle for trade is now over, and that the forces promoting free trade have won. And so, we view the on-going Free Trade Area of the Americas negotiations with the optimistic hope that by the year 2005 our countries will create a hemispheric free trade zone from Alaska to Tierra del Fuego.

 

But as we creep ever closer to that goal, we ought to be wary that the forces of anti-liberalism have not gone away–they simply have changed their plan of attack.

 

Today, the major threats to real free trade are heavily moralistic arguments that–while acknowledging that trade clearly improves economic efficiency–such efficiency comes at great cost to the environment and at the expense of low-skilled workers in less developed countries. During the past decade, there has been a growing interest in the globalization of these social issues, and a consequent interest in linking environmental and labor standards into trade agreements.

 

My presentation today will focus on the environmental linkages, and on the activists who presume:

 

·         that freer trade means more resource depletion and degradation of the natural environment;

·         that freer trade and investment encourages the relocation of environmentally degrading industries to countries with lower environmental protection standards and leads to greater transport activity, both of which increase environmental impacts;

·         and that freer foreign investment reduces the incentive to develop environmentally friendly technologies.

 

Not coincidentally, traditional advocates of protectionism, such as labor unions and uncompetitive industries, find much to agree with in at least the latter two of these charges. Of particular concern to labor unions is the fear that lower costs from environmental or labor rules in developing nations could result in corporations shifting productive endeavors (and thus jobs) from relatively high-cost countries to low-cost ones. And the fear of domestic industries is that lower costs from environmental rules could allow a form of “environmental dumping” of lower-priced goods onto the market in countries with comparatively strict environmental rules.

 

Protectionism-minded actors are not motivated by the same religious-like faith in the moral value of environmental rules. But these interests do find it politically helpful to lobby for the linkage of environmental and labor restrictions in trade agreements. Since asking for outright protection is no longer “politically correct”, they have shifted instead to lobbying for environmental standards within trade treaties that raise production costs for their competitors abroad.

 

In highly industrialized nations–particularly the United States, Canada, and the countries of western Europe–the coalescence of social activists in the environmental camp, with more traditional protectionist interests tends to make for a very powerful political bloc in opposition to genuine trade liberalism.

 

For example, nearly ten years ago, when President William Jefferson Clinton first entered the White House, he inherited the nearly complete North American Free Trade Agreement and Uruguay Round GATT agreements from the prior republican administrations. But, fearful of alienating environmentalists and protectionist political constituencies, Clinton very nearly thwarted those accomplishments.

 

It was too late to turn back the GATT. But under pressure, Clinton insisted upon the negotiation of so-called “side agreements” to NAFTA, relating to environmental and labor standards. He also allowed the opportunity for additional progress on other trade liberalization efforts to founder–the failure to begin a new round of GATT negotiations in Seattle in 1999, is one noteworthy example. Thus, Clinton functionally sacrificed a real trade agenda to domestic environmental and labor interests on an altar of moralistic social reform.

 

Of course, most of you here today will understand that the Clinton Administration, being of the Democratic Party, was far closer and far more beholden to the environmental movement in the United States. Yet, while we might be tempted to see the Bush Administration as a ray of light brightening the dismal trade climate of the Clinton years, one should not forget that the same interest group dynamic that made the Clinton Administration push so strongly for environmental and labor rules will work to keep the Bush Administration from backing away from Clinton’s earlier promises. And, with the US Congress nearly evenly divided between Democrats and Republicans, that potent anti-trade coalition could even push President Bush in the direction of stronger environmental restrictions.

 

So, it is important, now more than ever, for advocates of trade to put forth a strong and united front in favor of free and open trade, and in opposition to the linkage of environmental and labor restrictions.

 

This is not to suggest that environmental stewardship and labor conditions around the world are ideal. Nor is it to suggest that pursuing improved conditions on those fronts is inappropriate. But we should not be surprised that there is a vast difference in the ways countries at different levels of economic development approach environmental policies and labor standards. Policy differences are a natural part of the developmental process, as are differing cultural preferences for the inherent tradeoffs that exist between economic development and these social goods.

 

As international economic integration increases, there is bound to be a concomitant rise in pressure to harmonize social norms. But before we give in to moralists decrying what they see as “unacceptably low” standards in less developed countries, we should remind them that trade sanctions are a poor way of achieving these important social goals, because they do not directly affect the root cause of environmental or labor problems. Trade doesn’t create those problems; poverty does. And, therefore, trade restrictions are unlikely to cure them.

 

But perhaps the most important point to be made in this regard is that environmental and labor standards are low in developing countries because there are far more pressing developmental needs. Even if those countries were forced to address those social goals, they lack the economic wherewithal to bring them about effectively. Less developed nations can not be expected to escape the endless cycle of poverty that traps them into conditions of low environmental standards until they are allowed to trade. And, as communities develop economically, they will tend to increase their demand for, and their ability to implement, improved environmental conditions.

 

Now, I’d like to spend some time focusing more specifically on the trade agreements themselves. But before we turn our attention to the Free Trade Area of the Americas, I’d like to take a closer look at the series of events that have taken us down the road in the direction of trade and environmental linkage, focusing specifically on the Uruguay Round GATT agreements, NAFTA, and the recently negotiated bilateral trade treaty between the United States and Jordan.

 

By the end of the Uruguay Round GATT negotiations, the United States, Canada, and the countries of the European Union had successfully negotiated for a number of mechanisms to address environmental and public health goals within the World Trade Organization.

 

Those familiar with GATT and the WTO will note that, on the plus side, the agreements themselves, in particular the nondiscrimination requirements of Articles I and III, preclude any country from using trade measures to penalize other countries for having lower environmental standards.

 

However, Article XX of the GATT provides exceptions to those general rules, and permits WTO members to restrict imports when the restrictions are “necessary to protect human, animal, or plant life or health” or when they “relat[e] to the conservation of exhaustible natural resources,” provided that these rules are not “applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination.”

 

To prevent Article XX from simply being used to mask trade protectionism, the GATT agreements insisted that countries have fairly strong, scientifically based justifications for their environmental rules.

 

The prime intent of these limits was to ensure that a country’s environmental regulations did not discriminate between imports and domestic products–this especially included requiring non-discriminatory treatment on the basis of production methods. As a consequence, under the GATT, regulations have to be based upon whether or not a specific item is itself reasonably judged to be unsafe, using tangible scientific evidence. Judgments cannot simply be based upon speculation about potential hazards, nor can environmental rules prohibit the import of goods solely on the basis of the production methods used to create them. The WTO’s now infamous Shrimp-Turtle case is a good example of a production method dispute.

 

In that case, the WTO over-ruled a US ban on shrimp imported from certain developing countries because the fishermen there didn’t use turtle-excluder devices in their nets–an environmental rule designed to protect endangered sea turtles. It is worth noting, however, that this case, which is often decried by environmentalists as an instance of the WTO rejecting environmental protections, is in fact much more nuanced than one might be led to believe.

 

The WTO’s review committee and appellate board specifically ruled that the goal of protecting endangered sea turtles was a valid one under Article XX of the GATT. They only found the US restriction invalid because it would have forced fishermen in the exporting countries to use a specific technology to achieve that goal and because it would have precluded all imports from those countries even if only some fishermen were found not to be using the devices.

 

This case highlights several positive aspects of GATT’s Article XX environmental rules. They are primarily designed to give individual nations the freedom to set high domestic environmental rules, but they simultaneously limit a country’s ability to force other nations to enact similarly strict rules. Furthermore, there are a number of institutional mechanisms created under GATT to promote this goal.

 

One of the mechanisms is to place the burden of proof on the importing country, which must demonstrate that its rules are based upon a scientific assessment of risk. Another is that the GATT agreements stipulate that measures taken to protect human health or the environment be limited to the least restrictive means of achieving a particular safeguard.

 

The presence of such limits suggests strongly that GATT was designed to make any attempt at disguising protectionism behind a façade of environmentalism extremely difficult. The North American Free Trade Agreement, on the other hand, seems designed to do just the opposite.

 

NAFTA was the first ever US trade agreement that specifically included provisions for promoting the “upward harmonization” of environmental laws within the member nations. Under NAFTA, the US, Canada, and Mexico are specifically “discouraged” from reforming existing environmental laws when the reforms could be perceived to be sacrificing the environment for competitive purposes–what is sometimes called “environmental dumping.” The environmental side agreement specifically allows countries to have higher standards than agreed to under NAFTA’s harmonization procedures, but not lower standards. And it specifically bars nations from lowering their standards to advance harmonization.

 

Next, Article 104 of the agreement holds that, when conflicts arise between NAFTA and any multilateral environmental agreement to which NAFTA members are a party, the environmental agreement should prevail.

 

Finally, NAFTA provides for unprecedented participation by non-governmental actors in trade disputes involving environmental laws. Under NAFTA, environmentalists and corporations are encouraged to scrutinize the environmental rules of member governments to ensure that they are not “unfairly subsidizing” their industries with low environmental compliance costs. And NAFTA empowers any citizen, corporation, or environmental group to call for an investigation at any time.

 

To deal with such investigations, the environmental side agreement established the North American Commission for Environmental Cooperation (or CEC as it is known), a tri-national body based in Montreal that is staffed by the functional equivalents of environmental regulators and Greenpeace activists. It provides a mechanism both for investigating allegations of non-enforcement of national environmental laws and for monitoring the adverse environmental impacts of the NAFTA trade system. Although the CEC has no real enforcement authority, its goal is to act as a lobbying mechanism to badger NAFTA governments into creating more and stronger environmental rules.

 

In fact, there are no strong enforcement mechanisms anywhere in NAFTA to ensure that the side agreement’s environmental rules are actually implemented. There is no direct recourse within the trade agreement that gives countries the power to retaliate against other governments charged with environmental dumping.

 

It’s worth noting that the US environmental movement now views the NAFTA side agreement as functionally worthless. The environmental lobby has an enormous level of political power in the United States, so powerful that it conceivably could have scuttled the ratification of NAFTA in the US Senate. But it didn’t even try. Instead, most of the mainstream environmental organizations in the US actually supported NAFTA’s ratification. The reason is that environmentalists saw NAFTA as a stepping-stone to still higher environmental standards in the next trade treaty.

 

And indeed, the environmental movement was able to keep the Clinton Administration from negotiating any other trade agreements until it would agree to include strong environmental restrictions, with equally strong penalty mechanisms.

 

Enter the US-Jordan Free Trade Agreement–finalized in October 2000, but not yet ratified. If approved by the US Senate, the Jordan agreement would be the first trade treaty ratified by the United States that includes specific environmental and labor rules within the trade text itself, and which includes specific penalty mechanisms–in the form of trade sanctions–for non-compliance.

 

What is striking about this agreement is that there seems to be no apparent concern within the major US lobby groups about Jordan’s environmental standards. So, why go to the time and effort to include environmental penalty mechanisms in what would otherwise be seen as a relatively unimportant trade treaty?

 

The rationale is that the agreement’s political advocates hope to use the precedent established in the Jordan FTA to push for a broader and more ambitious agenda with other agreements–especially including the Free Trade Area of the Americas. Environmentalists have spent an inordinate amount of political capital to advance the Jordan agreement because they know that, once the precedent of tying environmental and labor standards into the trade agreement itself is set, it will become politically difficult, if not impossible, to reverse it.

 

It is reasonable to expect that the Bush Administration will be disinclined to support strong environmental rules when negotiating future trade treaties. But domestic political interests may force the Bush Administration to make such inclusion a priority. If the Jordan agreement is approved–and it appears that it will be–it will represent a baseline of environmental strictness under which future agreements will not be permitted to fall.

 

Fortunately, the nations of Latin American have already been advancing the proposition that the Uruguay Round GATT agreements be used as the baseline for FTAA negotiations. They are also on record as opposing environmental and labor linkages. For the United States, however, actual completion of the Free Trade Area of the Americas agreement could be dependent upon such linkage. Latin American nations must be clear that they will stand firm against inclusion of environmental and labor standards, even if it means ultimately rejecting the FTAA.

 

Why? Let me offer three reasons. First, holding the developing countries of Latin America to the same environmental rules that are enforced in the United States could quickly destroy one of the key aspects of the Latins’ comparative advantage in manufacturing and agriculture.

 

Second, in a world of proliferating bilateral and regional trade agreements, the Latin American countries will find themselves in increasing competition with other nations who will not impose such provisions on their trade partners.

 

And third, regional trade agreements are already inferior to multilateral ones, and agreeing to a flawed FTAA could serve to undermine nearly four decades of progress under GATT.

 

All of which brings us back to the central point of my argument that GATT, while not perfect, is certainly better than the alternatives. And while it may seem to accommodating of the industrialized nations of the north–especially so to countries looking forward to an atmosphere of genuine free trade–at least the GATT’s primary goal has been to advance real free trade, not to make a pretense of advancing trade while simultaneously encouraging protectionism.

 

Allowing the United States to smuggle environmentalism into the Free Trade Area of the Americas would be detrimental to the countries of the south. Environmental linkage is not free trade; it is protectionism–however well disguised. Rather than subject themselves to irrational environmental rules, it would be prudent for all the countries in the Americas to reject any agreement that includes environmental linkage.

 

Lest I seem totally pessimistic, I ought to acknowledge that we can expect a positive attitude from the current Bush Administration. Already, US Trade Representative Robert Zoellick, Bush’s top trade negotiator, has expressed concern about environmental linkages with trade and suggested that the Bush Administration might try to have the US-Jordan FTA renegotiated to remove the environmental and labor rules.

 

Although Bush will face an uphill battle in the US Senate, this clear sign in opposition to environmental linkage is highly encouraging. But keeping the United States from imposing its protectionist environmental policies on the countries of Latin America will take a unified front and a strong commitment against linkage.

 

Together, the nations of Latin America can make their own moral arguments–against linkage and for free and open trade. The campaign to include environmental rules into trade agreements like the FTAA is clearly designed to advantage the economies of the northern industrialized nations at the expense of the south. While we know that restrictions on trade hurt all people–both north and south–their biggest impact is on the world’s poor, who need the opportunities offered by trade to develop their economies and raise their living standards.

The countries of the north have been able to develop by taking advantage of their wealth of natural resources, by producing goods themselves, and by trading. It would be barbaric to prevent the nations of the south from doing the same.