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The Launch of an Environmental Goods Agreement: A Timid Agenda

Jaime de Melo

Recognizing that “the global challenges we face, including environmental protection and climate change, require urgent action,” the 14 countries who had announced five months ago in Davos that they would start negotiations to reach a free trade agreement on environmental goods (EGs) and environmental services (ESs) officially launched trade talks on July 8 in Geneva. Without outlining a specific time frame for the discussions, beyond that the talks will start this week, the group expects that this planned Environmental Goods Agreement (EGA) will represent a significant step to “achieve our shared goal of global free trade in environmental goods.”

EGs are products and technologies necessary to reduce environmental damage (wind turbines, for instance) and ESs are services that control and prevent pollution (such as sewage services). Both are difficult to define, and countries disagree on the products and services that qualify as EGs and ESs.

At the meeting, participants shared a sense of optimism, often stating that the EGA would help both tackle climate change and provide a lift to the multilateral system, as they expressed hope that the agreement will reach the ‘critical mass’ threshold necessary to be brought into the World Trade Organization (WTO) as a most-favoured-nation agreement. (According to the APEC list, the group accounts for 86 percent of world trade in EGs which is close to the 90 percent threshold reached in the previous WTO plurilateral Information Technology Agreement (ITA)).

Looking Beyond Tariffs

The negotiations, at least in the initial stages, will only focus on tariffs.  This narrow focus might help build badly needed support to broaden the agenda by, for instance, agreeing to impose a moratorium on trade remedies deployed in the renewable sector involving the European Union, China and the U.S. But a reality check suggests that an EGA covering only tariffs in EGs leaving out Non-tariff barriers (NTBs) and, more importantly, leaving out Environmental Services (ESs)–covered by the ongoing  Trade in Services Agreement (TISA) negotiations—falls far short of expectations.

First, even if the Asia-Pacific Economic Forum (APEC) list (54 goods) were to be extended to the WTO ‘combined list’ (411 goods)
[1]
which will be difficult if the wrangling over the submission lists at Doha is a guide, the average tariff (import weighted) among the 13
[2]
participants stands at 2.2 percent. Even taking into account tariff dispersion (there are a few tariff peaks at 35 percent), the tariff structure in EGs would be equivalent to a 3.4 percent uniform tariff. (With the APEC list, the uniform tariff equivalent is a negligible 1.8 percent!). In the negotiating group, four countries have free-trade in EGs, and only two countries China (7.8 percent) and Korea (4.7 percent) have average tariffs above 4 percent (all figures in this blog are here).

Will other developing countries join in to reach the threshold needed by the EGA to qualify as Most-favored Nation-type (i.e., non-discriminatory) WTO agreement? Recall that developing countries refrained from submitting lists during the Doha Round, fearing they would be invaded by imports from industrial countries. This may happen again. Yet, response estimates derived from Harmonized System six-digit (HS-6) level import elasticity suggest that, were low-income countries to reduce their tariffs on EG imports by 50 percent from their current levels, on average, imports would only increase by 8 percent, far from their feared invasion of imports.

Negotiators have eschewed including NTBs on the agenda. This may be shrewd since, unlike tariffs, not all NTBs are welfare-reducing as some correct for market failures. Moreover, it is difficult to estimate their tariff equivalents. Nonetheless, for the ten negotiating countries with estimates, for the APEC list that is the starting point for the negotiations, the average tariff equivalent of both measures (tariffs and NTBs) is 5.2 percent, equivalent to a 14.8 percent average uniform tariff—the estimate reflecting a high dispersion in the tariff-equivalent estimates of NTBs. These are rough estimates, but they suggest that unless the ‘Davos 14’ include NTBs and extend the goods list beyond the APEC list, they have very little to ‘offer’ each other at the negotiating table. At the very least, if the APEC list is not extended, NTBs would have to be on the agenda.

It is widely accepted that commitments at the General Agreement on Trade in Services (GATS) –for those countries that made commitments—merely consolidated members’ existing services policies: so far, no liberalization of trade in services has really taken place on a multilateral basis. And for developing countries that did not make commitments at the GATS, trade liberalization in services has only occurred as part of North-South Regional Trade Agreements (e.g. the U.S. and the EU with Southern partners). Extending the agenda to include ESs would be a great step forward for participants because of the extensive packaging of goods and services in environment-related projects. Here a first, difficult task will be to work around the current W/120 list drawn from the UN Central Product Classification (CPC), which describes the 165 sub-sectors that were negotiated at the GATS and in which only four sub-sectors are categorized as environmental services. Unfortunately that list is exclusive so that services sub-sectors like engineering services and telecommunications cannot appear twice as a ‘standard’ Service sector and as an ES sector.  

As for low-income countries–the greatest beneficiaries of freer trade in green goods and services– receiving MFN status among signatories of the EGA would still not mean much. Their export capabilities in EGs and ESs are limited. To benefit they would have to participate by lowering barriers to their imports of both EGs and ESs. Reducing barriers to trade on both would be important because, as mentioned above, trade in EGs involves products and technologies that are packaged in environmental projects that include ESs (for example, wastewater management services, water collection and purification, recycling). Even with a more appropriate list of ESs, because it is harder to monitor the fulfilment of commitments to liberalization, disincentives to negotiate on services will be strong, especially when negotiating partners lack trust in each other. Mutual equivalence might then be easier to achieve than mutual recognition or harmonization.

Three Steps to Success

Author

Sticking to the announced negotiating agenda this week, a meaningful EGA would need to reach three landmarks: the “critical mass” threshold; a list of products beyond the 54 APEC product list; and some reduction in NTBs. And for the environment, the agenda would have to be extended to include reductions in barriers to trade in Environmental Services. Participation by heavyweight developing countries (such as India and Brazil) will be crucial here as these countries have export capabilities in environmental projects, so their participation would increase both their exports and imports of EGs and ESs. The challenges are great but a deeper engagement on the reduction of barriers on goods trade, combined with participants exchanging the best commitments they have made in Preferential Trade Agreements so far for environmental services, would be a powerful signal that the WTO can help build the cooperation that will be needed to achieve environmental sustainability.


[1] Several lists including the WTO list of 411 products are here
[2] Trade data is missing for Chinese Taipei.

The findings, interpretations and conclusions posted on Brookings.edu are solely those of the authors and not of The Brookings Institution, its officers, staff, board, funders, or organizations with which they may have a relationship.

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