Table Of ContentGreening Trade 19/4 8/5/01 12:41 pm Page i
Greening Trade and Investment
Environmental Protection Without Protectionism
Eric Neumayer
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For my parents, in gratitude
First published by Earthscan in the UK and USA in 2001
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Copyright © Eric Neumayer, 2001. Published by Taylor & Francis.
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A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Neumayer, Eric, 1970-
Greening trade and investment : environmental protection without
protectionism / Eric Neumayer.
p. cm.
Includes bibliographical references and index.
ISBN 1-85383-787-3 – ISBN 1-85383-788-1 (pbk.)
1. Free trade–Environmental aspects. 2. Investments, Foreign–Environmental
aspects. 3. Environmental policy–Economic aspects. 4. Environmental
policy–Developing countries. 5. Environmental protection–Developing countries.
6. World Trade Organization–Developing countries. I. Title.
HF1713.N42 2001
333.7–dc21
2001001379
ISBN-13: 978-1-853-83787-6 (hbk)
ISBN-13: 978-1-853-83788-3 (pbk)
Typesetting by PCS Mapping & DTP
Cover design by Richard Reid
Greening Trade 19/4 8/5/01 12:41 pm Page iii
Contents
List of Tables and Boxes iv
Preface v
List of Acronyms and Abbreviations vi
Introduction viii
Part One: Foundations
1 Globalization: Investment, Trade and the Environment in an
Integrating World Economy 3
2 The Current Multilateral Trade and Investment Regimes 21
Part Two: Investment
3 Pollution Havens: Do Developing Countries Set Inefficient
Environmental Standards to Attract Foreign Investment? 41
4 Regulatory Chill: Do Developed Countries Fail to Raise
Environmental Standards Because of Feared Capital Flight? 68
5 Roll-back: Do Foreign Investors Use Investor-to-State Dispute
Settlement to Knock Down Environmental Regulations? 79
6 A Case Study: The Failed Attempt to Conclude a Multilateral
Agreement on Investment 91
Part Three: Trade
7 Trade Liberalization and the Environment 103
8 GATT/WTO Dispute Settlement and the Environment 118
9 WTO Rules and Multilateral Environmental Agreements 158
10 Conclusion and Summary of Policy Recommendations 185
Appendix: Environmental Provisions in Regional and Bilateral
Trade and Investment Agreements 190
Notes 194
References 202
Index 223
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List of Tables and Boxes
Tables
1.1 Ratios of merchandise trade to GDP in per cent 5
1.2 Ratios of merchandise trade to merchandise value-added in
per cent 7
3.1 Developing countries’ environmental standards relative to
developed countries’ standards under efficiency conditions 50
3.2 Developing countries’ environmental standards relative to
developed countries’ standards under non-efficiency conditions 51
3.3 Evaluation of policy options addressing the ‘pollution haven’
problem 66
4.1 Evaluation of policy options addressing the ‘regulatory chill’
problem 78
10.1Summary of policy recommendations 186
A.1 Overview of environmental provisions in regional and bilateral
agreements 192
Box
2.1Eco-labelling schemes and WTO rules 27
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Preface
Foreign investment and international trade are regarded with great suspicion
by some environmentalists. They fear that a free flow of capital and goods
and services might significantly harm the environment. Consequently, they
demand that the multilateral investment and trade regimes should allow
nation states to intervene for the protection of the environment.
Representatives from developing countries in turn regard these demands
with great suspicion. They fear that the developed countries will use strong
interventionist rights to their own advantage and to the detriment of devel-
oping countries. Consequently, they oppose most, if not all, demands for a
‘greening’ of the multilateral investment and trade regimes.
As someone who cares about the environment, believes in the merits of a
liberal investment and trade regime, and is sympathetic to the concerns of
developing countries’ representatives, it was no easy task to write this book
on investment, trade and the environment. I have tried to show ways in which
the multilateral investment and trade regimes could be made more environ-
mentally friendly without unnecessarily restricting the free flow of capital and
goods and services, and without detriment to the economic development
aspirations of developing countries. Winning developing countries’ support is
the greatest challenge ahead for a successful greening of the multilateral
investment and trade regimes – a challenge that this book tries to meet.
I hope that I have written a book that is accessible to many people without
prior specialist knowledge in the issues. However, this book would not have
been possible without the help of many. It has benefited much from construc-
tive comments from others. My special thanks go to Duncan Brack from the
Royal Institute of International Affairs in London, Dan Esty from the Yale
Center for Environmental Law and Policy, Jonathan Krueger from the John F
Kennedy School of Government at Harvard University, David Pearce from
University College London, Nick Mabey from WWF, Tim Forsyth, Gilles
Duranton and Simon Batterbury from the London School of Economics and
Political Science, as well as several anonymous referees. Thanks for their
support also go to Jagdish Bhagwati, Vudayagi Balasubramanyam, Steve
Charnovitz and Aaron Cosbey, and finally to the Earthscan team. All errors
are mine, as are all the views expressed in this book.
Shorter and revised versions of various parts of this book have been
previously published in journals. My thanks go to the editors of these
journals for their willingness to accept publication of these articles.1
Dr Eric Neumayer
London School of Economics and Political Science
London, March 2001
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List of Acronyms and Abbreviations
AEA American Electronics Association
AFL-CIO American Federation of Labor-Congress of Industrial
Organizations
AFTA ASEAN Free Trade Area
APEC Asia-Pacific Economic Cooperation
ASEAN Association of Southeast Asian Nations
BDI Bundesverband der Deutschen Industrie
BIT Bilateral Investment Treaty
BSE bovine spongiform encephalopathy
BTA border tax adjustment
BTU British Thermal Unit
CAFE corporate average fuel economy
CARICOM Caribbean Community
CBD Convention on Biological Diversity
CEC Commission for Environmental Cooperation
CEPA Canadian Environmental Protection Act
CFC chlorofluorocarbon
CITES Convention on International Trade in Endangered Species of
Wild Fauna and Flora
CO carbon monoxide
CO carbon dioxide
2
COMESA Common Market for Eastern and Southern Africa
CTE Committee on Trade and Environment
DDT dichlorodiphenyltrichloroethane
DSB dispute settlement body
DSU dispute settlement understanding
EC European Communities
EC European Community
EFTA European Free Trade Association
EKC Environmental Kuznets Curve
EPA Environmental Protection Agency
EU European Union
FDI foreign direct investment
FTAA Free Trade Area of the Americas
GATS General Agreement on Trade in Services
GATT General Agreement on Tariffs and Trade
GCC Global Climate Change Coalition
GDP gross domestic product
GMO genetically modified organism
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List of Acronyms and Abbreviations vii
GNP gross national product
HCFC hydrochlorofluorocarbon
IBRD International Bank for Reconstruction and Development
ICC International Chamber of Commerce
ICSID International Center for the Settlement of Investment Disputes
IDCP International Dolphin Conservation Programme
IISD International Institute for Sustainable Development
IMF International Monetary Fund
ITO International Trade Organization
IUCN World Conservation Union (formerly International Union for
Conservation of Nature and Natural Resources)
LCA life-cycle analysis
MAI Multilateral Agreement on Investment
MEA Multilateral Environmental Agreement
Mercosur Mercado Común del Sur
MMPA Marine Mammal Protection Act
MMT methylcyclopentadienyl manganese tricarbonyl
MTBE methyl tertiary butyl ether
NAAEC North American Agreement on Environmental Cooperation
NAFTA North American Free Trade Agreement
NGO non-governmental organization
NO nitrogen dioxide
2
NO nitrogen oxides
x
ODA official development assistance
ODS ozone-depleting substance
OECD Organization for Economic Co-operation and Development
PCB polychlorinated biphenyl
PIC Prior Informed Consent
POP persistent organic pollutant
PPM process and production method
SADC Southern African Development Community
SME small and medium enterprise
SO sulphur dioxide
2
SO sulphur oxides
x
SPS sanitary and phytosanitary
TBT Technical Barriers to Trade
TED turtle excluder device
TNC transnational corporation
TREM Trade-Related Environmental Measure
TRIM Trade-Related Investment Measure
TRIP Trade-Related Intellectual Property Right
UN United Nations
UNCED United Nations Conference on Environment and Development
UNCLOS United Nations Convention on the Law of the Sea
UNCTAD United Nations Conference on Trade and Development
UNEP United Nations Environment Programme
UPOV Union for the Protection of New Varieties of Plants
US United States
WEO World Environment Organization
WTO World Trade Organization
WWF formerly known as World Wide Fund For Nature
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Introduction
At the start of a new millennium, humankind finds itself confronted with
many challenges, one of which is to find a solution to the environmental
problems that are manifold both within nation states and internationally.
Developing countries in particular are faced with severe environmental
problems that directly affect human health and welfare: restricted access to
clean drinking water and sanitation; heavy air and water pollution; erosion
and destruction of local renewable resources, to mention just a few. The
problem of global ozone depletion has more or less been resolved through
successive international agreements but the community of nation states is
only beginning to formulate an adequate response to international and global
environmental problems such as climate change, biodiversity loss and toxic
pollutants.
Greening Trade and Investment examines how this environmental
challenge is affected by a phenomenon commonly referred to as ‘globaliza-
tion’. The term describes the fact that countries are increasingly linked with
each other via foreign investment and international flows of trade. Many
environmentalists and academics alike fear that globalization will affect the
environment negatively and will render a successful meeting of the environ-
mental challenge more difficult, if not impossible (Daly 1993; Nader 1993;
Røpke 1994; Mander and Goldsmith 1996). They also regard the multilat-
eral investment and trade regimes – that is, the institutions and rules that
have been set up to govern the international flow of investment and trade –
as well as their representatives as insensitive or even hostile towards environ-
mental interests.1 This book provides an analysis of these fears and will be
guided by the following questions. First, what are the issue areas, where
significant environmental problems caused by foreign investment or trade
allegedly exist? Second, what is the evidence with respect to these allega-
tions? Third, what policies can be recommended to solve these problems?
In examining these questions, much emphasis is put on the multilateral
investment and trade regimes and, consequently, on whether or not these
regimes need to be reformed. However, a solution to environmental problems
is not the only challenge to be met by humankind. Billions of people in devel-
oping countries live in appalling conditions and, due to population growth,
many more are about to join them. They all have a basic human right to a
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Introduction ix
decent standard of living. In my view at least, the fate of people in develop-
ing countries has to be taken into account when considering how the
multilateral investment and trade regimes can be made more environmen-
tally friendly. We need to ensure that the ‘greening’ of the multilateral
investment and trade regimes can be reconciled with rising living standards
via increased foreign investment and trade for developing countries, which
in general are rather hostile towards any form of ‘greening’. The challenge is
to make investment and trade regimes more environmentally friendly,
without opening the floodgates for potential protectionist abuse by the devel-
oped world.
Greening Trade and Investment differs from other writings on the subject
with respect to two major aspects. First, it takes a comprehensive approach
and examines both investment and trade together. The vast majority of
authors concentrate on one (mostly trade), thereby neglecting the interlink-
ages between investment and trade. Second, the book’s objective is to derive
policy proposals for a greening of the multilateral investment and trade
regimes that can be acceptable to developing countries. The real challenge is
to overcome their hostility towards such greening, which can only be met if
the suggested policies do not endanger the economic development aspira-
tions of developing countries.
Greening Trade and Investment is based on the implicit assumption that
foreign investment and international trade will lead to a narrowing of income
disparities among nations and to an alleviation of poverty in poor countries
if the multilateral trade and investment regimes are not biased against devel-
oping countries and adequate policies are put in place. There is much
evidence in favour of this assumption, as discussed and summarized compre-
hensively in Ben-David, Nordström and Winters (2000). Nevertheless, it is
contested by opponents to and critics of foreign investment and trade liber-
alization (Dunkley 1997; Oxfam 1999). It would be beyond the scope of
this book to provide a detailed justification for this assumption or a discus-
sion of the wider issues. In the following, it will therefore simply be assumed
that the assumption holds true.
The structure of the book’s analysis is as follows. Chapter 1 portrays
foreign investment and trade in an integrating world economy in historical
perspective. It shows that while the world has seen already a similar form of
globalization at the transition of the 19th century to the 20th century (which
was aborted abruptly with the outbreak of the First World War), the current
wave of globalization is exceeding this first wave. The extent and quality of
the integration currently taking place are a consequence of the major institu-
tions and the rules that came to govern the multilateral investment and trade
regimes after the Second World War and which had no equivalent counter-
part in the first wave of globalization. Chapter 1 briefly introduces these
institutions and Chapter 2 describes in detail the rules embodied in the multi-
lateral investment and trade regimes. Together Chapters 1 and 2 provide the
foundations for the major discussion of the ideas put forward in the book.
