Governance of international trade for the green economy Governance of international trade for the green economy


Ricardo Melendez-Ortiz is Chief Executive of ICTSD. This essay was originally presented for discussion at a meeting of the Pardee Center Task Force on Governance for the Green Economy: Beyond Rio+20 in September 2010 and included in the subsequent book “Beyond Rio+20: Governance for a Green Economy.” It borrows partly from “Trade Governance and Sustainable Development,” Meléndez-Ortiz R. and T. Biswas, in Deere Birkbeck, C. (ed) (forthcoming 2011), Making Global Trade Governance Work for Development: Perspectives and Priorities from Developing Countries, Cambridge: Cambridge University Press.


This essay on governance of international trade for the Green Economy is the first in a series of articles exploring trade-related issues in the lead-up to the Rio+20 conference in 2012. In this context, Ricardo Melendez-Ortiz, Chief Executive of ICTSD, reflects on the means, as well as the limits, of the international trade system to provide solutions for sustainability.


On Economics and Sustainability


In its simplest formulation, the “green economy” refers to economics in the name of sustainability: a system of interactions among markets, environmental forces, and social policies that support human subsistence and freedoms over generations.


Sustainability broadens the study of economics, moving it beyond the assumption that utility sufficiently explains individual behavior and that certain “natural” laws govern market exchanges. It calls for a reformulation of economics in the direction proposed by Amartya Sen, bringing together modern economics and the foundations of the moral philosophy of welfarism, thus welding economics to the natural resource realities of today, to the rapidly integrating global market and the blinding pace of technological innovation supporting it.


If economics intends to “understand, explain, and predict human behavior” to inform “prognosis and policy” in the service of sustainability, tinkering with concepts of classical economic thought may not give us all the tools that we now need . Sustainable development requires that economic actors be guided by an Aristotelian “god-like” aim, not by the “good of man.” In Adam Smith’s words, good citizens promote “welfare of the whole society.” Today, such aims refer as well to an inter-generational imperative .


We need to ensure that institutional arrangements and “decisions should not impair the prospects for maintaining or improving future living standards .” Moreover, by capturing the negative externalities of our natural resource use “our economic systems [should] be managed so that we can live off the dividends.” We need to distinguish “between survivability, which requires welfare to be above a threshold in all periods, and sustainability which requires welfare to be non-decreasing in all time periods .” We need to provide incentives that protect rainforests rather than turn them into charcoal.


We are currently transitioning from a world of plenty into one in which the planet’s resources have been compromised in their ability to sustain our routines. We are also in a world of global economic and social multi-level governance. From the perspective of the trade system of today, how can we get to sustainability?


The governance web


Trade and sustainable development hinge on institutions. In the absence of a formal worldwide authority, governments need to ensure that domestic and international institutions interact constructively to pursue sustainable development goals and not work at cross-purposes. Several crucial sustainable development policies will have ramifications for commercial exchange. Shaping and managing this intersection is the governance challenge. While national governments can establish sustainability directives for ministries, this is not an option available at the multilateral level. Global “governance,” rather than “government,” recognises a system that operates under formal and informal rules and practices arising from multiple sources, and that efforts are accountable to multiple stakeholders. Getting these rules to reinforce each other and work together coherently is critical. To do this, governments will need to work innovatively within and across institutions.


The challenges are manifold. Population growth is concentrated in the poorest countries, where meeting basic human development needs and aspirations entails increased resource use. Increasing wealth in the developing world – a good thing – involves changing diets and boosting demand for resource-intensive food, which puts more pressure on nature and energy systems. Climate change impacts are complicating the picture even more.


New policies governing investment, finance, energy, and knowledge are necessary to harness economic activity into modes of production that favour resource conservation. However, the current trading system – which encompasses the multilateral rules of the World Trade Organization (WTO) together with the growing landscape of bilateral and regional trade agreements – is not yet fully equipped to steer economic activity towards new pathways.


Let us have no illusions about the trading system’s capacity to play a driving role. Most of the decisions necessary to set the planet on a course to sustainability will not be made within the trading system. But virtually all such policy decisions – from the internalisation of environmental costs to policies that encourage innovation – will impinge on trade: what we produce, where we produce it, and how we exchange it. Some policy will overlap with issues now dealt with by international trade rules, such as intellectual property, standards, and protections for foreign investors. There are ample opportunities for policy-makers and influencers to ensure that trade-related policies do not detract from the pursuit of sustainable development.


At the same time, the trading system must remain true to its own principles and not allow environmental policy to become a pretext for governments to engage in discriminatory practices or pander to influential domestic economic actors. Trade and investment policies determine allocation and use of resources, from minerals and labour to knowledge and soil. Individual societies’ ability to govern domestic resources is affected by the international regulatory systems for trade and investment – systems that they in turn can influence.


The idea is simple enough, but governments have a record of taking with one hand what they have given with the other. By conflating development policy with development aid, they have too often ignored the developmental effects of their trade, investment, immigration, and environmental policies. The classic example is levying high tariffs on goods exported by aid recipients. A more complex narrative comes from the incoherence of governments’ pursuit of a fundamental global developmental goal: food security, which has been an international policy objective for decades. Yet, nearly one human in six still does not get enough food to lead a healthy and active life.


One problem linked to trade governance is well-known: rich country farm subsidies and tariffs push down prices and weaken incentives for developing country governments, or the private sector, to invest in agricultural production and build roads and the other rural infrastructure necessary to support it. The Uruguay Round trade talks, which brought agricultural tariffs and subsidies into the scope of multilateral trade rules, failed to correct these practices. Decades of low productivity and low farm prices pushed many small farmers in developing countries to look for other sources of income. In the process, they became net buyers of food. When food prices rose in 2007-08, many developing country farmers got caught in the middle. Correcting these problems requires an evidence-based approach that allows countries to rise above commercial and mercantilist interests and conclude the WTO’s Doha Round. Coherent, cooperative action on land-use across the governance board – whether on forests, water, biodiversity or climate – is another urgent need that must be addressed.


The multi-polar world


It is not possible to look at trade governance processes in isolation from broader governance challenges. Modern international institutions must operate in circumstances they have never had to confront before: an increasingly multi-polar world. No single actor can impose its will on others. Moreover, the worst financial and economic crisis in decades has devastated some of our core assumptions about the global economy. As a result, major powers now disagree on fundamental aspects of how economies should be organised. Concordant beliefs and expectations are necessary to motivate action and change in international regimes.


Even though “policy coherence” is a phrase used too much and followed too little, it is a concept to which we must return. Our collective failure to produce global public goods, such as updated multilateral trade rules that respond better to poor countries’ needs or curb greenhouse gas emissions, has been due at least in part to an inadequacy of what has been called “cosmopolitics” – “global political action transcending a strict state-to-state, or multilateral, basis .”


Doing with what we have – incrementally


The rules and practices embodied in the multilateral trading system offer governments ample potential to take action on current and future challenges linked to sustainable development – it’s just that they have not purposefully taken advantage of it yet. Making trade governance more supportive of sustainable development will require governments to change their behavior. Networks that bring together civil society, business, international organisations, and governments have done sterling work on several challenges, from public health to environmental protection and corruption. But trade institutions largely remain an enterprise between governments.


Moreover, the “legislative” or rule-making function of the WTO and other trade institutions is likely to remain limited to government participation only. Outside input into their ‘ideational’ function – identifying which issues to discuss, and potential solutions – is desirable, especially from non-traditional sources (i.e., those other than business). But here too, governments will play a central role. Even if a “trisectoral network” analogous to the World Commission on Dams were created to bring governments, business, and civil society together to think through problems facing the trading system, any recommendations would have trouble being heard at the WTO unless the initiatives receive member governments’ blessing .


There is ample latitude in pre-existing arrangements to propel a reform and bolster accountability to the public . Dogged inclusion and mainstreaming of sustainability and coherence driven by a universal mandate and vision may do the trick.


To make sense of a chaotic and disorderly system, the hundreds of preferential trade arrangements of various types and coverage is a good place to start. The WTO has failed miserably to bring consistent rules here. A continuing black mark for the trading system is the vastly uneven capabilities among governments to assess their own needs and grasp the implications for global challenges of the complex web of arrangements. One proposal, a review by a new Global Task Force of Ministers, may help minimise inefficiencies and complexities inherent in the current system. This may lower the bar of meaningful participation from Olympian heights and make coherence more plausible.


On this same path, countries need to update trade rules that are not working for sustainable development. The de facto differentiation among developing countries that has emerged in the Doha Round negotiations could become a springboard for a bold experiment in giving nations more policy space to respond to risk, unsustainable situations, or vulnerabilities. Parties to bilateral trade agreements could alter investment provisions so that they are not used as a sword against legitimate health and environmental action. WTO members could act to anticipate potential challenges to trade governance that might arise from governments’ pursuit of sustainable development, enabling a nimble response.


WTO members would do well to build on existing subsidy rules to identify and target government handouts that damage the environment. Also, government procurement rules and standards on process and production methods or measures addressing carbon content should be developed following non-discrimination principles, ensuring prevention of disguised protectionism.


In the past few years, countries have been able to provide expression in trade terms – through particular prescriptions for market access, for instance – to the intractable concepts of food security, sustainable livelihoods, and rural development. They have done it in the context of Doha’s negotiations by recognising and classifying the particularities of specific products in terms of agro-ecological conditions, nutritional intake, employment relevance, and a long list of indicators that despite its hard reality would otherwise be unapparent to multilateral policymaking. While the possibilities are there, countries can only shift direction and rearrange objectives if driven by compelling vision and political leadership.


Broadening the system


Issue-specific cooperation outside trade-related institutions could amplify the contribution that trade governance could make to sustainable development. For instance, while continuing the slow process of reducing rich country farm subsidies inside the WTO, governments collaborating in the Organisation for Economic Co-Operation and Development (OECD) could agree to a ‘tax’ on farm subsidies, with the proceeds directed at funding agricultural research and development and extension services in developing countries .


Having to pay extra for the privilege of subsidising would potentially make governments think twice about lavish farm programmes and their international consequences. Investing a share of subsidy money directly in boosting agricultural productivity in developing countries would amplify the effects of the WTO’s subsidy reform process. A farm subsidy tax may be wishful thinking. But a different trade issue with direct ramifications for food security – including agricultural export bans – will be impossible to address without serious complementary policies.


Sudden bans of farm exports are not good policy-making: not only do they “starve your neighbor,” as the then director of the International Food Policy Research Institute, Joachim von Braun, put it, they discourage investment to boost future production . But export bans do make a lot of sense to a government faced with rioters demanding cheaper food. Similarly, growing rice in solar-powered greenhouses, fed by groundwater and cooled with seawater, seems preposterous from both a cost standpoint and an environmental one. But Djibouti started doing it when it felt that it could no longer trust world markets for its food supply .


Action outside the WTO could enhance the sustainable development impacts of the Doha talks to liberalise trade in environmental goods and services. Research in renewable energies suggests that tariffs are just one in many factors determining whether companies choose to invest in green technology . Other policies, such as “feed-in tariffs” guaranteeing a price for renewable electricity, subsidies for components, and the use of renewable energy tax breaks, matter at least as much. If a group of governments got together and cooperated on these other factors – for instance, by harmonising standards or making them interoperable, and by establishing incentives for the sharing of trade secrets linked to green technology – it would substantially expand the market for environmental goods. Stand-alone initiatives, building on multilateral principles, may be the response in the medium range future to inertia in the WTO.


More immediately, consistency in financing responses becomes urgent as the international community comes to grip with the wants of developing economies in the face of emerging challenges. Importantly, an Aid-for-Trade (A4T) initiative has been established at the WTO, involving major international financial institutions. In 2006-2007 total new commitments from bilateral, multilateral donors and others had reached over $50 billion . At the same time, the Kyoto Protocol unleashed climate mitigation funding for developing countries. Commitments under the United Nations Framework Convention on Climate Change and the December 2009 Copenhagen Accord have lined up $30 billion for immediate release in 2010-2012. This flow of funds is expected to ramp up to $100 billion per year by 2020 to attend to the adaptation and mitigation requirements of developing countries.


Both A4T and climate financing may be addressing similar and synergetic objectives: from specific analytical and policy capabilities, to shifts in production, material needs, and challenges to competitiveness. Operational realities will dictate the obligation of addressing trade and climate financing in a coordinated manner. A sound understanding of needs, ways, and means to effect demonstrable change is still to be fully developed, as is an efficient and responsive governance scheme. Lessons learned in the financing of climate change accords, the elaboration of national adaptation plans of action as well as the World Bank’s endeavour to draw poverty reduction strategy papers as basis for development financing, should inform the push for coherence. Existing mechanisms need to be tested as to whether they are equipped to undertake full carbon or biodiversity impact lifecycle analysis of assistance projects. Moreover, we need to ask what we can do about mainstreaming these imperatives and handling the ensuing costs. Devising an institutional apparatus that brings together donors with recipient countries around the goal of coherence and coordination is a primary task in the governance of trade for the green economy.


Final thoughts on trade and the green economy


Today’s trade system may be incapable of steering the world into a “green economy.” It is, however, a wisely constructed governance device, with valuable principles for the management of interaction among members at different levels of development. Yet, it is a system informed by a theoretical perspective of economics and the homo economicus, which is questionable from a sustainability perspective. In the absence of a review to complement it, tinkering with what we have may move us closer to shifting pathways, but only if societal concerns are introduced in an operative manner and responsive adaptations to the system are added in strategic steps. A firm political will, articulated in the form of a compact for shared vision agreed at Rio +20, may trigger and make reform possible.


Establishing a governance system for trade that supports the green economy would take time – whether ruinously too long is in our leaders hands. And time is the real test.



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