MEAS SHOULD USE "POSITIVE MEASURES", SAYS UNCTAD

6:02 AM Nov 7, 1995

MEAS SHOULD USE "POSITIVE MEASURES", SAYS UNCTAD
Geneva 6 Nov (TWN) -- Multilateral Environmental Agreements (MEAs) should use "positive measures" aimed at supporting developing countries in implementing more stringent environmental standards rather than "trade restrictive measures", the secretariat of the UN Conference on Trade and Development has advocated.

The Secretariat's recommendation is in its report -- "Environment, International Competitiveness and Development: Lessons from Empirical Studies" -- to the Third Session of the Ad Hoc Working Group on Trade, Environment and Development meeting here this week.

The report recognises that whilst all MEAs may have trade and competitiveness effects, those containing trade provisions are likely to have more significant effects - some of which higher for developing countries than for developed countries.

"Effects may be more significant for developing countries for a number of reasons," the report notes.

"Firstly, whereas the unit costs of developed countries may be the same between developed and developing countries (or may be higher for developed countries, on account of higher development costs of technologies), the overall difference in income levels would make the relative costs of adjustment higher in developing countries.

"Secondly, growth and export patterns of countries tend to be such that during the early stages of industrialization they may be more reliant on the exports of products which are banned or restricted by MEAs.This hurdle may in turn affect their growth prospects".

The report also drew attention to the fact that the need to comply with external environmental policies arising from MEAs, could in fact divert funds from investments in social infrastructure and public utilities which may yield higher environmental benefits.

Given the economic costs imposed upon developing countries through the use of trade measures and the fact that their contribution to environmental problems has been lower than that of developed countries, the use of positive measures are justified, argues the report.

Whilst acknowledging the role of trade measures in tackling global environmental challenges, the report also points out that where MEAs "already have a large number of signatories including those that are significant current and potential contributors to the problem, their use may be of limited relevance".

But the main concern of developing countries relates to the possible adverse effects of environmental requirements, particularly those arising from external markets, on their export competitiveness. According to the report, on average, approximately a third of the value of total exports and about a half of the value of manufactured exports of developing countries originate in sectors which are potentially affected by environmental requirements.

"This aspect may be particularly relevant for Asian developing countries, since over 60% of their manufacturing exports, in value terms originate in such sectors. For example, textiles and electronics account for a high share of Asian exports to the developed countries. These are the sectors often simultaneously targeted by export promotion strategies and by environmental policies".

While generally developing countries are faced with higher adjustment costs in implementation of MEAs, the report points out that some MEAs - for instance the Basel Convention on hazardous wastes - imposes a greater onus on developed countries.

The report also recognises the concerns of developing countries regarding the insertion of environmental regulations/standards in sectors where comparative advantage is moving from the developed countries to the developing countries.

"The comparative advantage of developing countries lies in labour-intensive, low value-added products which are now becoming subject to environmental regulations in the OECD countries. Moreover, many of these sectors are those in which tariffs have been reduced during the Uruguay Round, leading to fears that the gains achieved in the Uruguay Round may be eroded if environmental and other standards are to lead to significant increases in production costs".

"The competitiveness effects of external environmental policies," the report says, could become more significant for small-scale firms and for firms in particular sectors, such as textiles, footwear, electronics and furniture, many of which are of export interest to developing countries.

These two aspects together indicate a certain degree of vulnerability of exports from developing countries to environmental regulations of developed countries," the report adds.

The report also points out that specific external environmental requirements emerging from external markets may be of only limited environmental benefit to developing countries. The diversion of scarce resources from more urgent environmental problems in the domestic sector of the economy to the export sector, may "constitute a suboptimal allocation of scarce resources".

According to the report, positive measures would also assist developing countries in meeting their international commitments under existing MEAs. The report suggests that positive measures could be directed at alleviating sectoral vulnerability of developing countries, arising from the high level of export concentration on a relatively small number of products/sectors, based on comparative advantage, and the emergence of environmental policies, standards and regulation in the same sectors in the developed countries;

There could also be positive measures in the shape of special support measures for small and medium scale firms (SMEs) as they are less able to adapt to new technologies, provide training or engage in research and development activities, as well as their limited access to capital.

"Among the major difficulties faced by SMEs in complying with environmental standards and regulations are: insufficient access to inputs, information, technology and finance, relatively low quality consciousness, as well as lack of infrastructure," says the report.

"In order to comply with environmental standards and regulations, SMEs would have to incur proportionally higher investment and operating costs than modern, large scale plants. Under these circumstances, enforcement of stringent environmental standards would result in massive closing down of SMEs in these sectors, unless efforts are intensified towards finding cooperative solutions..."

The report also advocates positive measures for mitigating trade and development effects of MEAs.

According to the report, the extent or degree of trade and competitiveness effects on developing countries depend on factors such as the rate of economic growth, availability of substitutes, technological changes, as well as amendments to agreements which impose additional obligations on parties. As a consequence, provisions in MEAs should allow for interim assessments which would take into account these variables.

Further, the report states, "...greater financial and technology transfers may be needed in the early stages... and the timing of financial and technological requirements is of material importance".

The report also suggests that incentives which encourage trade in and use of environmentally sound alternatives could be incorporated into the agreements.

It was worth considering whether ways and means for providing incentives for the application of environmentally sound technologies, including those in the context of foreign direct investment could be designed to encourage the provision of substitutes and technologies to developing countries.

On the effects of MEAs on the competitiveness of developed countries, the report stated that:

* Overall exports were not necessarily affected by environmental standards. The stringency of environmental regulations have not been seen to have adverse effects on competitiveness.

* The data on investment flows provided little, if any, support for the hypothesis that transnational corporations (TNCs) tended to relocate their environmentally "sensitive" operations to countries which had low environmental standards.

* Studies do not indicate that firms with better environmental standards and performance are either more or less profitable than similar firms with inferior environmental standards. The correlation between profitability of firms and their environmental standards is weak.

* Likewise, the relationship between environmental regulations and productivity is also not clear. Whilst studies in the United States indicate that heavier polluters tended to have lower productivity levels and slower productivity growth, the effects were rarely significant or consistent across industries.

On the experience of use trade measures in MEAs, the report has analyzed three MEAs -- the Montreal Protocol on Ozone, The Basel Convention on Hazardous and Toxic Wastes, and the Convention on International Trade in Endangered Species (CITES) -- and found the experience on the use of trade measures was diverse. As a result, UNCTAD says, it is difficult to formulate general conclusions from the analysis of a particular MEA.

Instead, the environmental effects of the use of trade measures be analyzed on a case-by-case basis.

With regard to the provision of financial and technical aid in MEAs, the report found that greater technical and financial assistance may be necessary in the initial stages of the implementation of MEAs.

Lastly, in addition to compensatory mechanisms such as the Multilateral Fund of the Montreal Protocol, the reports recommends that further studies be undertaken to consider the efficacy of economic instruments such as tax refunds, subsidies and trade permits within the context of MEAs.