TRADE AND ENVIRONMENT

A RESOURCE BOOKEdited by

Adil Najam, Mark Halle and Ricardo Meléndez-Ortiz

An excerpt from

Environmental Services – Mahesh Sugathan and Johannes Bernabe

Expert Opinion:Making trade liberalization

work for the poor – Sitanon Jesdapipat

ISBN 978-1-895536-99-7

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Paragraph 31 (iii) of the Doha MinisterialDeclaration which calls for the “the reductionor, as appropriate, elimination of tariff andnon-tariff barriers to environmental goodsand services” has raised more questions andspeculation on possibilities than any otheritem in the Doha negotiating agenda ontrade and environment. During the negotia-tion process, the issue has taken on dimen-sions that might not have been anticipated atthe time the issue was originally singled outfor liberalization and there continue to beuncertainties about how to proceed.Negotiations related to environmental goodsare primarily taking place in the Committeeon Trade and Environment (CTE) and theNegotiating Group on Market Access(NGMA), and issues related to environmen-tal services are being negotiated within theSpecial Sessions of the Council for Trade inServices.

Before focusing on the specifics of the envi-ronmental services discussions, it might beuseful to start with a two-fold conceptualiza-tion of environmental goods and services(EGS), as a category. The first is the conven-tional view that focuses on treating a specificenvironmental problem through the end-useof a particular good or service. This charac-terizes the traditional classification of EGSand includes goods such as wastewater treat-

ment equipment or solid waste disposal serv-ices. The second conceptualization is broaderand includes environmentally preferableproducts (EPPs) and services. The environ-mental benefits may arise from the moreenvironmentally benign production method,during the course of it use—e.g., throughlesser pollution and energy-consumption—or during the disposal stage of the product. Inmany, if not most, cases these will have non-environmental counterparts and this raisesthe question of like products and services.There may also be an overlap between thesetwo categories and some EPPs may be used toprevent or treat environmental problems aswell. (See related discussion on EnvironmentalGoods.)

Both these conceptualizations of EGS areimportant in the context of trade, environ-ment and development. Trade liberalizationin EGS both narrowly and broadly definedcould enable a freer flow of goods and servic-es relevant to environmental protection.However whether this will translate intogreater access to these goods and services indeveloping countries remains to be seen. It ishere that the role of suitable flanking policiesand their mainstreaming into WTO rulesmay be important.

Arguably, greater and cost-effective access toenvironmental services in developing coun-

Issues and Debates

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IIEnvironmental Services Mahesh Sugathan and Johannes Bernabe

•“Arguably, greater and cost-effective access to environmental services in developing

countries would potentially help them progress towards implementing theJohannesburg Plan of Implementation and achievement of key MDGs…”

•

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tries would potentially: (a) help developingcountries progress towards implementing theJohannesburg Plan of Implementation andachievement of key MillenniumDevelopment Goals (MDGs) particularlythrough the provision of critical services suchas clean water and sanitation aided by appro-priate goods and technology; (b) provide ameans of employment and economic activityparticularly in the case of trade in environ-mental services via Mode 3 (commercial pres-ence); (c) enable developing country firms toeconomize on resource and energy use; and(d) increase access to new technologies andknowledge.

Interests and Fault LinesThe mandate for negotiating liberalization oftrade in environmental services arose out ofthe built-in agenda stipulated under ArticleXIX of the General Agreement on Trade inServices (GATS), which provides for succes-sive rounds of progressive liberalization acrossall services sectors, with the first round begin-ning in January 2000. In this context, nego-tiating proposals of WTO Members with akeen interest in this sector, such as theEuropean Union (EU), Canada, Switzerland,Australia, Colombia and Cuba, were submit-ted to the Council for Trade in ServicesSpecial Session (CTS-SS), with a view to pre-senting these countries’ vision of how envi-ronmental services should be liberalized.

Subsequently, requests were put forward byMembers in the framework of the bilateralrequest and offer process whereby oneMember can ask another Member to open upcertain sectors to which the Member willrespond with a specific offer.

Moreover, under the plurilateral requestprocess initiated at the 2005 Hong KongMinisterial meeting as a complement to thebilateral process, a group of countries—ledby the EU and including Australia, Canada,Japan, Korea, Norway, Switzerland, ChineseTaipei and the United States—circulated acollective request in February 2006 for a

number of large developing countries to openthe environmental services markets.

While some Members’ offers have includedliberalization of trade in environmental serv-ices, it is fair to say that the breadth of coun-tries as well as the depth of these offers fallquite short of the expected levels. This situa-tion is of particular concern for someMembers—most especially, the EC—whoview liberalization of environmental servicesas a fundamental element of any successfuloutcome. Although a fair number (48) ofWTO Members made commitments in envi-ronmental services during the UruguayRound, proponents of liberalization in thissector had hoped that this situation wouldimprove under the Doha Round of servicesnegotiations, through an increase in thenumber of Members undertaking commit-ments as well as in an improvement in thebreadth and scope of commitments. This hasnot materialized. Moreover, there is a contin-uing lack of substantive engagement bydeveloping countries in the discussions andnegotiations, especially by those who regardthis issue as one where they have primarily adefensive interest. These may in large part beattributed to the factors discussed below.

Classification

The main stumbling block in substantive dis-cussions relates to classification issues.Traditionally, the basis for most Members’commitments in environmental services hasbeen the WTO Services SectoralClassification list (W/120), which in turncross-refers to the UN Provisional CentralProduct Classification (UN CPC). SomeMembers however argue that the W/120classification is no longer consistent withcommercial reality of the way industry oper-ates.

Hence, even before the launch of the DohaRound of services negotiations, theEuropeans made a submission proposing toupdate the classification system used for envi-ronmental services. They argued that W/120

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did not reflect changes in the environmentalindustry, which was developing beyond tradi-tional end-of-pipe/pollution control/remedi-ation/ clean-up towards integrated pollutionprevention and control, cleaner technologyand resources and risk management. Theyproposed an alternative classification whichreferred to (i) “core” environmental services,or those which can undisputedly be classifiedas “purely” environmental and where theservices are classified according to the envi-ronmental media (i.e., air, water, solid andhazardous waste, noise etc.); and (ii) environ-mental related sub-sectors which could be thesubject of “cluster” negotiations togetherwith the services in the “core” environmentalactivities. These sub-sectors pertained to serv-ices which have an environmental end-use orcontribute to the production of an environ-mentally-friendly good or service, such asdesign, engineering, research and develop-ment, and consulting services.

This approach has, however, elicited reserva-tions from a number of WTO Members,who are particularly concerned with the riskof making unintended, crosscutting commit-ments in a broader set of services activitiesthan had been originally envisaged. Forinstance, under the European proposal,architectural services, integrated engineeringservices, consulting services for tourism,transport, fishing, sustainable land use etc.—insofar as they may have an environmentalcomponent when performed in conjunctionwith certain activities—would be the basisfor a more “holistic” approach towards liberal-izing environmental services. Other countriesfear that the inclusion of such “environment-related sub-sectors” would necessarily includeall activities, whether or not they have anenvironmental component. In the course ofnegotiations, the EC has refined their pro-posal on the “cluster” approach, and clarifiedthat it intended the cluster of activities to beused primarily as an aide memoire or a check-list of activities which Members can refer towhen they engage in bilateral request-and-

Environmental Services

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IIMaking tradeliberalizationwork for thepoorBy SitanonJesdapipat

When read carefully,the General Agreementon Trade in Services(GATS) is simply an investment agreement indisguise. The modes of liberalization and clas-sification of environmental services are so com-prehensive that one wonders how the fate ofdeveloping countries can escape the fine net ofthe private sector.

Unbridled liberalization can create a one-waystreet for the private sector to take away serv-ices traditionally provided by the government,and place high price tags on them. It repre-sents a costly recourse for developing coun-tries, once they are committed to the process.Although access and affordability are widelyand often questioned, other inevitableimpacts have not yet been adequatelyaddressed. Local communities, for example,can be deprived of their right to help them-selves, to innovate and reap the benefit fromappropriate technologies; such as, for exam-ple, cheap, simple and cost-effective end-of-pipe water treatment. Instead, expensive,complex and sometimes outdated “white ele-phant” technologies exclusively importedfrom foreign producers are not only encour-aged, but often mandated.

Not only is it difficult to tame privatization—especially when local capital weds foreigncapital—it can also force local communitiesand individuals to unnecessarily becomedependent on foreign technology, the choiceof which is often driven by the needs of theinvestor rather than those of the users. Theinability to innovate and self-help marks theend of development in its truest sense. Thetrue social and environmental costs of liberal-ized trade can be significant for developingcountries, especially if local innovation isforegone for the sake of increased foreigninvestment at all cost.

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One, therefore, wonders if freer trade at anycost is really good for developing countries.Given the nature and extent of the depend-ence it can create, can this really be a lastingmotor of sustainable development? A morepertinent question, perhaps, is how to inno-vate a global policy that can ensure more thana short-term win-win outcome for privateinvestors and host countries.

If trade is to be an instrument for deliveringimproved human well-being and if the profitmotive is to be used as a vehicle for sustain-able development, then the processes, instru-ments and end results all have to be realignedto be humane. This is different from thenotion of human development that empha-sizes efficiency, empowerment, participationand equity—which are necessary but insuffi-cient conditions for humane development.

Specifically, if freer trade is to be an instru-ment for humane development, then partici-pation and democratization of negotiations ontrade in services must be a precondition, withdue respect for systems of local governance,local priorities and local innovation. It isobvious that unequal capacity to negotiatecannot ensure a fair and efficient outcome.Because trade in services can often affectbasic human necessities such as water, it iscritical that prior to negotiations on free tradein services, careful and transparent assess-ments of the potential impacts of liberaliza-tion be conducted and broad structured par-ticipation be ensured—or even mandated, ifthe North are to practice the good governancethey preach.

Importantly, communities and consumers ofenvironmental services—particularly the poor-est and most vulnerable communities—must be

allowed to use maximum flexible safeguards toprotect their long term interests in the processof implementation. Moreover, domestic capaci-ty needs to be enhanced to adequately imple-ment commitments. Otherwise, developingcountries may become victims of their ownnaïve, honest, but poorly informed negotiat-ing positions.

The final text of a negotiation, however, isnot the sole indication of freer services trade.The consequences of an agreement are thetrue test of the value of free trade—that is,the extent to which weaker parties stand tolose or gain from an unequal balance of powerin the negotiating process. Equally importantare how injuries are redressed and win-winexpectations actually realized. Given that thedistribution of benefits may not be fairly andjustly managed, it is also crucial that a redis-tribution of benefits is dealt with as an inte-gral part of the final package of the tradenegotiations. Otherwise, freer trade will notsucceed in serving the objectives of sustain-able development, and might even workagainst such a goal.

While all of this is true for most trade negoti-ations, it may be most true for negotiationsrelated to trade in environmental services.This is because such services are often thefoundation of the most basic human needs,and bring large multinational corporationsface-to-face with poor and vulnerable popula-tion groups in the most unequal negotiations.The poor can often have the most to lose fromsuch negotiations, and it is their intereststhat must be protected above all else.

Sitanon Jesdapipat, from Thailand, is aTechnical Advisor for the Red Cross/RedCrescent Climate Centre in the Netherlands.

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offer negotiations on the environmental sec-tor, or when they negotiate other sectorswhere these related services may fall under.

Among developing countries, Colombia hasproposed that the following additional activi-ties be included in the list of environmentalservices: (i) the implementation and auditingof environmental management systems, (ii)the evaluation and mitigation of environmen-tal impact, and (iii) advice in the design andimplementation of clean technologies. In thisrespect, Colombia implicitly acknowledgedthat the W/120 classification scheme needsupdating and needs to incorporate new serv-ices not envisaged in W/120. Such a revisedmodel would then be used for the negotiationof environmental services, with the caveat thatthe services to be negotiated must be specificto the sector and should not duplicate activi-ties listed elsewhere in W/120.

However, none of the proposed alternativeclassification schemes appear to have yetgained acceptance among the general mem-bership of the WTO. Deliberations at theWTO Committee on Specific Commitments,which provides the main forum for technicaldiscussions on classification and schedulingissues on services trade, remain at a standstill.Given this and that Members are free to makeuse of their own classifications, it is likely thatMembers will continue to decide unilaterallytheir own classification and schedulingapproach and will use W/120 by default;though perhaps with a few commitments onadditional environmental services culled bycross-reference to other specific activities con-tained in the UN CPC that are not presentlydetailed in W/120.

Environmental Infrastructure Servicesand the Issue of Water

It has been argued that foreign commercialpresence through Mode 3 could help ease theconstraint on domestic resources in develop-ing country provision of safe water as well astreatment of polluted water. Some see theGATS as a suitable instrument to offer bind-

ing and predictable market access for foreigninvestment in this sector. Others includingmany developing countries question thevalue of this, particularly as it raises issues ofaffordability to poorer sections of the popula-tion as well as fears about private ownershipand control of water.

These fears were brought into focus when theEuropean Union proposed that “water forhuman use and wastewater” should be includ-ed under “environmental services” in its alter-native classification. The proposal marked ashift away from the W/120 classification whichdoes not address water at all and mentions onlysewage treatment and tank emptying.

General obligations under the GATS such asthe most favoured nation (MFN) or nationaltreatment do not apply to “services suppliedunder government authority” that are notsupplied on a “commercial basis” or in “com-petition with other service suppliers.” In thecase of water supply, for instance, only if thesector already has private actors or if the solestate entity in charge supplies water on thebasis of commercial considerations, would aWTO Member be required not to discrimi-nate between water supply service providersfrom different Member states or grant themthe same treatment as domestic entities.Assuming that private participation andcommercial considerations do exist in thedelivery of environmental infrastructure serv-ices, Members may wish to preserve regulato-ry “policy space” and incorporate adequatesafeguards in their GATS commitments so asto facilitate other models for delivery of waterand the use of policy instruments, such assubsidies or tax incentives.

In response to widespread concerns raised bycivil society groups and some developingcountries, the EU subsequently retracted itsproposal and the plurilateral request explicit-ly excludes any request for water for humanuse (i.e., the collection, purification and dis-tribution of natural water).

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Domestic Regulations

Detailed knowledge of domestic regulatoryand administrative regimes will be relevantfor trade negotiations in environmental serv-ices as in other services. This is becausedomestic regulations touch upon provision ofservices through Mode 3 (commercial pres-ence) and Mode 4 (movement of natural per-sons) through foreign investment, health,environment, immigration and intellectualproperty rights laws and regulations.

WTO Members should therefore assessongoing negotiations in the WTO WorkingParty on Domestic Regulation in light oftheir regulatory requirements. It is arguedthat various kinds of contractual arrange-ments, such as build-operate-transfer (BOT),are actually a combination of governmentprocurement and market access concessions.Any future disciplines on government pro-curement and subsidies could have implica-tions for market access commitments alreadymade.

Environmental Services of ExportInterest to Developing Countries

The prevalent proposals on the classificationof environmental services reflect sectorswhere developed countries enjoy a compara-tive advantage, as many of these sectors arecapital and technology-intensive. However,many developing countries are interested inmarket access for environmental services thatthey could possibly export, particularly inMode 4. Cuba for instance—where servicesegments such as environmental studies,assessments and consultancy services are par-ticularly well developed—has exported suchservices to Brazil, the Dominican Republic,Haiti, Mexico, Nicaragua, Spain andVenezuela. Assessing the opportunities in thissector will however imply as assessment of theimpact of foreign immigration regulationsthat are a part of domestic regulation, as wellas other requirements such as quality assur-ance and educational requirements. Provisionof consultancy services through Mode 1

(cross-border supply) could also hold outopportunities for developing countries forexport of environmental services.

Trends and FutureDirectionsAs in the case of environmental goods, theoutlook for trade liberalization in environ-mental services remains cautious and uncer-tain. Very few commitments have been madeby developing countries in environmentalservices. Their reluctance, according to severaldelegates, is largely attributable to prevalentuncertainty particularly on regulatory auton-omy in key services such as water supply. Thisis despite the increasing need for environ-mental services in all developing countries,and particularly in rapidly growing countriessuch as China. Moreover the rapidly expand-ing environmental service industry in devel-oping countries such as those based on con-sultancy and Mode 4 need to be reflected inthe market access commitments of developedcountries.

The key challenge is to get Member countries,especially developing countries, excited aboutthe issue and for them to take a more proac-tive, as opposed to defensive, stance on envi-ronmental services. This will require signifi-cant investments of analysis and research onthe part of developing countries themselves.

Finally, it is important to stress the need toadopt a coordinated strategy between envi-ronmental goods and services as they are fre-quently inter-linked. At present Membershave not agreed to adopt a single strategywithin the context of the WTO negotiationsbut are likely to tailor individual strategies torespond to specific country interests in bothgoods and services negotiations. Some havesuggested that Paragraph 51 that calls uponthe CTE and Committee on Trade andDevelopment (CTD) to identify and debatethe environmental and developmentalaspects of the Doha negotiations should playa more useful role in this regard.

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