Yardsticks for “Trade and Environment”: Economic Analysis of the wto panel and the Appellate Body Reports regarding Environment-oriented Trade Measures



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The Jean Monnet Program
Professor J.H.H. Weiler

European Union Jean Monnet Chair

Jean Monnet Working Paper 14/01


Kohei Saito
Yardsticks for “Trade and Environment”:

Economic Analysis

of the WTO Panel and the Appellate Body Reports

regarding Environment-oriented Trade Measures

All rights reserved.

No part of this paper may be reproduced in any form

without permission of the author.

The Jean Monnet Working Papers are published under the auspices of the

Jean Monnet Program

hosted at Harvard Law School from 1995 to 2001

and now based at New York University School of Law


ISSN 1087-2221

Kohei Saito

Yardsticks for “Trade and Environment”:

Economic Analysis

of the WTO Panel and the Appellate Body Reports

regarding Environment-oriented Trade Measures

Kohei Saito*

Abstract


This paper uses an economic perspective to analyze the WTO Panel and Appellate Body Reports regarding “Trade and Environment”. In particular, this paper focuses on a tendency that, when a country restricts international trade to protect the environment, the trade-restricting country puts a heavy burden on other countries because the measure-invoking country does not have an incentive to take into account the interests of other countries. This paper evaluates the use of judicial tests such as the “least trade restrictive alternative” test and the “means and ends” test by the Panel and the Appellate Body in terms of whether the invocation of these tests appropriately corrects the behavior of the measure-invoking countries. This paper also analyzes the essence/application dichotomy, which the Panel and the Appellate Body have invoked in the context of GATT Article XX interpretation, and the allocation of the burden of proof in the “trade and environment” cases. The paper concludes that, in general, the jurisprudence of the Panel and the Appellate Body is economically justifiable even though some modifications and clarifications should be done.

Table of Contents
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List of Tables 8

List of Abbreviations 9

Introduction 10

II Recent Cases Regarding “Trade and Environment” 20

A. Article XX of the GATT 20

1. Paragraph (b) 22

2. Paragraph (g) 24

3. Chapeau of Article XX 28

4. Burden of Proof 33

B. SPS Agreement 39

1. Introduction 39

2. Article 5.5: Arbitrary or Unjustifiable Distinctions 43

3. Article 5.6: LTRA Test 49

4. Burden of Proof 51

C. TBT Agreement 56

III Economic Analysis of Judicial Tests 60

A. Potential Pareto Efficiency (PPE) 60

B. Costs and Benefits of ETMs 62

C. Analysis of the LTRA and “Means and Ends” Tests 70

D Evaluation of AB&P’s Use of the LTRA and “Means and Ends” Tests 73

1. Critiques of PPE 74

2. The LTRA Test 76

3. The “Means and Ends” Test 82

4. Conclusion 85

IV The Essence/Application Dichotomy 88

V Allocation of the Burden of Proof 96

A. Burden of Proof 96

B. Burden of Pleading 102

VI Conclusion 106

Bibliography 108


List of Tables


Table 1: Three Available ETMs 60


Table 2: Divergence between PW and WW 61


List of Abbreviations


AB Appellate Body

AB&P WTO Appellate Body and Panel

CITES The Convention on International Trade in Endangered Species of Wild Fauna and Flora

ETMs environment-oriented trade measures

GATT The General Agreement on Tariffs and Trade

The LTRA Test The “least trade restrictive alternative” test

MMPA The U.S. Marine Mammal Protection Act

The SPS Agreement The Agreement on the Application of Sanitary and Phytosanitary Measures

The TBT Agreement The Agreement on Technical Barriers to Trade

WTO The World Trade OrganizationI


Introduction

Since the 1970s, international environmental problems have become prominent issues. In order to deal with these problems, the international community has adopted numerous international agreements and some countries have legislated a variety of laws and regulations. As one of the methods for protecting international environments, some of these domestic statutes and international treaties provide trade-restrictive measures. The Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES), for instance, requires its signatories to limit trade in species that are threatened with extinction under Article III, IV, and V of the Convention.1

The General Agreement on Tariffs and Trade (GATT), since its establishment in the 1940s, had emphasized the significance of free trade and the lowering of tariff and non-tariff barriers.2 The GATT and its contracting parties had paid little attention to environmental problems in their discussions until the beginning of the 1990s. Environmental protection and free trade had been discussed separately and few had pointed out the possibility that their interests might come into conflict with each other.3

However, this innocence stopped abruptly when the GATT Dispute Settlement Panel found that an embargo of the United States on tuna imports based on the U.S. Marine Mammal Protection Act (MMPA) was inconsistent with the GATT.4 The MMPA includes provisions which prohibit the imports of tuna which is captured with fishing methods which result in the incidental death of marine mammals.5 The Panel found that the U.S. import ban violated GATT provisions such as Article III, which establishes the national treatment obligation, and Article XI, which prohibits quantitative import restrictions.

This finding provoked public anti-trade sentiment. Environmentalists were outraged by this Panel ruling and began to argue that the promotion of free trade undermines environmental protection. This suspicion by environmentalists was a setback for the GATT, which was, at that time, conducting the Uruguay Round of negotiations, the most complicated and largest trade liberalization negotiation in its history. Some trade experts expressed hostility towards the environmentalists’ idea that some trade restrictions should be permitted in order to preserve the environment.6

Another dispute involving the MMPA arose in 1994. The European Community (EC) and the Netherlands brought complaints jointly when it became clear that Mexico, the complainant in Tuna/Dolphin I, would not push for the adoption of the Tuna/Dolphin I Panel report in the GATT because of ongoing NAFTA negotiations. The EC focused on the MMPA’s “second embargo”, which prohibited the imports of tuna into the U.S. from countries engaging in tuna trade with embargoed countries such as Mexico. Once again, the Panel found that the U.S. measure was inconsistent with GATT.7

In both Tuna/Dolphin I and Tuna/Dolphin II, the U.S. invoked GATT Article XX, which permits several exceptions from the GATT obligations based on such social reasons as environmental protection and preservation of public morality. In particular, the U.S. argued that its measures could be justified because they fall into the scope of Article XX (b), measures “necessary to protect human, animal or plant life or health”, and XX(g), measures “relating to the conservation of exhaustible natural resources”.8 In Tuna/Dolphin I, after pointing out that Article XX should be construed narrowly and that the burden of proof should be placed on the party invoking it, the Panel stated that the scope of Article XX is limited to measures taken to conserve the environment within the jurisdiction of the party invoking them.9 As a result, the Panel found that the U.S. measure which aimed at protecting dolphins living outside of U.S. jurisdiction could not be justified under Article XX of the GATT.10 The Panel in Tuna/Dolphin II rejected the geographical limitation which the Tuna/Dolphin I Panel adopted.11 However, the Panel found that the U.S. measure in question was effective only when the embargoed countries changed their conservation policies and that such a measure could not be permitted under Article XX because otherwise “the balance of rights and obligations among contracting parties, in particular the right of access to markets, would be seriously impaired.”12 That is, both Panels interpreted Article XX so narrowly that almost no environment-related trade measures which violate the provisions of the GATT can be justified under Article XX at all. Some point out that both Panels viewed the promotion of free trade as the preeminent value and overlooked the importance of non-trade values such as environment protection.13

However, since the establishment of the World Trade Organization (WTO) in 1995, the interpretation of Article XX has been loosened. The Appellate Body (AB), which is a permanent dispute settlement body in the WTO to review Panel decisions, adopted balancing approaches in the cases involving environment-related trade measures such as United States - Standards for Reformulated and Conventional Gasoline (hereinafter Gasoline)14 and United States - Import Prohibition of Certain Shrimp and Shrimp Products (hereinafter Shrimp/Turtle).15 In these cases, the AB paid attention to balancing the promotion of free trade with environmental protection when interpreting GATT Article XX. One of the reasons why the AB discarded the Panels’ approaches in Tuna/Dolphin I and II vis-à-vis GATT Article XX is the change in the preamble of the WTO Agreement16 from that of GATT 1947.17 As opposed to the GATT 1947, the preamble of the WTO Agreement acknowledges the importance of environmental protection. It provides that a purpose of the WTO is to accomplish “the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development”.18 As a matter of fact, in Shrimp/Turtle, the AB interpreted the term of Article XX (g) in the light of the preamble of the WTO Agreement.19



These discussions regarding the relationship between trade and environmental policies can be “economized”. From a viewpoint of economic theory, environment-oriented trade measures (ETMs)20 could be justified based on the existence of externalities or common property goods.21 As a matter of general proposition, externalities arise when the economic activities of economic entities such as consumers and producers cause effects which are not directly reflected in the market. Externalities can be either negative, such as when the activity of a party impose costs on another party, or positive, when the action of a party benefits another party. When negative (positive) externalities arise, the amount of the activity which causes the externalities would be excessive (less than optimal) since the actor does not take into account the costs (benefits) of the other party. In the context of international trade, negative externalities occur when a state exports products which inflict detrimental effects on the importing state’s nationals. These negative externalities would be “internalized” by restricting or controlling the imports of the products. However, there is vigorous debate as to what extent the WTO should permit externalities as a justification for ETMs since 1) ETMs are not the only method for “internalizing” externalities and 2) externalities are very difficult to define.22 Common property goods are those to which everyone has free access. As a result, they tend to be overutilized since, when economic entities use common property goods, they do not take into account how their use would affect the opportunities of others. In the context of international trade, the preservation of the global environmental commons would be the most significant issue; global commons are defined as “physical or biological systems that lie wholly or largely outside the jurisdiction of any of the individual members of society but that are valued resources for many members of society”23. For example, atmosphere, the ozone layer, and endangered species can fall within the category of the global environmental commons. It would be possible to deal with the problems of overutilizing the global environmental commons by invoking ETMs. For example, in Shrimp/Turtle, the U.S. tried to preserve seven kinds of sea turtles, which are listed in Appendix 1 of CITES, by banning the imports of shrimps from those countries which did not adopt regulatory programs comparable to those of the U.S. in order to prevent the incidental capture of sea turtles by shrimp trawlers. This U.S. measure can be regarded as an ETM aimed at dealing with problems concerning the overutilization of a common environmental good. Once again, it is also hotly discussed to what extent ETMs for preventing the overuse of the global environmental commons should be allowed under the WTO.

Many have discussed whether the use of ETMs should be allowed under the WTO from an economic viewpoint.24 Some argue that trade restriction is not usually an appropriate method for dealing with environmental problems,25 and others refute their opinions.26 However, the primary concerns in these discussions are limited to only two types of ETMs: ETMs which aim at coercing the countries targeted by the ETMs to improve their environmental behavior beyond the jurisdiction of the ETM-invoking countries; and ETMs which try to compensate for the targeted nations’ less strict environmental regulations by imposing tax or countervailing duties.27 These two kinds of ETMs do not represent all environmental measures which would affect international trade. States invoke environmental measures which aim at protecting the safety of nationals or the environment regardless of purporting to change other countries’ environmental policies. For example, states prohibit the production and consumption of certain kinds of products which bring about risks to human health. In order to render these prohibition effective, states also ban the imports of these products. Even though these environmental measures do not intend to change environmental policies of other states, they would also cause pernicious effects on international trade. As a matter of fact, this kind of ETM became the issue in the most of the disputes that have been involved in “trade and environment” since the establishment of the WTO. For instance, in European Communities – Measures Affecting Asbestos and Asbestos -Containing Products, Canada complained about the French import ban of asbestos, a measure which was an aspect of France’s general prohibition of the sale, use, and manufacture of asbestos in France.28 Although this French measure does not purport to change the Canadian environmental policy, it causes harmful effects on the Canadian export of asbestos. Also included in this category of ETM are most of the sanitary and technical measures which fall under the scope of the Agreement on Technical Barriers to Trade (hereinafter the TBT Agreement)29 and the Agreement on the Application of Sanitary and Phytosanitary Measures (the SPS Agreement).30 These agreements came into force when the WTO was established and aim at preventing technical regulations and sanitary measures of the members from “creat[ing] unnecessary obstacles to international trade”.31 Even though these agreements attempt to “minimize… the negative effects [of sanitary and technical regulations] on trade”32, it is crystal clear that they do not intend to deprive the sovereign right of the WTO members to enact sanitary and technical regulations in order to protect human health. Therefore, when we analyze this type of ETM (i.e., measures aimed at preserving the environment without intending to change other countries’ environmental policies), it does not make sense to discuss whether this kind of ETM should be allowed under the WTO. Rather, the concern of this paper is that ETM-imposing countries tend to choose measures which impose a heavy burden on international trade because they do not have an incentive to take into account the trade harms on other countries. This paper will primarily discuss whether the judicial tests which have been adopted by the Appellate Body and Panel (hereinafter the AB&P) in the WTO in the analysis of the SPS Agreement, the TBT Agreement, and GATT Article XX33, for example, the “least trade restrictive alternative” test and the “means and ends” test, could appropriately “correct” the behavior of ETM-imposing countries so as to achieve the “optimal use of the world’s resources.”

In analyzing these “judicial” tests, we are going to take into account two additional issues: the application/measure dichotomy, and the allocation of the burden of proof. In the analysis of GATT Article XX, the AB&P have adopted the dichotomy between the essence and the application of a measure. This distinction would have certain effects to render the AB&P’s scrutiny more deferential to ETMs. The allocation of the burden of proof would also have significant effects in determining how moderate or stringent the AB&P’s analysis on ETMs is. For example, their analysis would be more deferential to ETMs if they impose the burden of proving the unjustifiablity of the ETMs under GATT Article XX on complaining countries and vice versa.

This paper will begin with a discussion in Chapter II regarding the findings in the WTO cases involving the SPS Agreement, the TBT Agreement, and GATT Article XX. Chapter III will analyze above-mentioned judicial tests such as “least trade restrictive alternative” test and the “means and ends” test from an economic viewpoint. Chapter IV will examine the essence/application dichotomy which the AB&P have adopted. Chapter V will discuss the allocation of the burden of proof in the contexts of GATT Article XX and the SPS Agreement. Chapter VI will conclude.

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