The State of Agricultural Commodity Markets 2022

Trade and the rules that promote openness in global markets can contribute to negative externalities and calls are made for measures that reduce trade. Nevertheless, reducing trade would result in a change in the allocation of production across countries, generating different pressures on natural resources and the environment than the ones the world is experiencing today. It could also reduce trade’s efficiency-enhancing role in the use of natural resources.

Trade policy approaches are being revisited, a process that presents challenges and opportunities. A part of the ongoing debate about globalization and sustainable development revolves around how to ensure that trade policies and environmental protection are mutually supportive. Under the WTO rules, members can adopt trade-related measures aimed at protecting the environment.

The scope of RTAs is also evolving.^ad RTAs have progressively advanced from facilitating purely economic exchanges to promoting deeper integration and are becoming an instrument to foster policy convergence in partner countries, such as better labour standards, human rights and environmental conservation (see also Part 4). Many RTAs have included extensive environmental provisions to provide incentives to producers to adopt sustainable practices in order to gain and maintain access to new markets.¹⁹⁹ Other methods are also being pursued, for instance, by enacting national legislation to ensure that imports do not generate negative environmental externalities (see Box 3.2).

Multilateral principles and World Trade Organization rules

The 1992 United Nations Conference on Environment and Development adoption of the Rio Declaration underscores that to achieve sustainable development, environmental protection should constitute an integral part of the development process and countries should cooperate to transferring any harmful activities that may cause severe environmental degradation.^ae Similarly, the United Nations 2030 Agenda for Sustainable Development in 2015 emphasizes the role of trade in promoting inclusive economic growth and as an important means to achieve the SDGs. The United Nations Framework Convention on Climate Change (UNFCCC) Paris Agreement reiterates that an open international economic system can strengthen the global response to the threat of climate change in the context of sustainable development.

Efforts to address the linkages between trade and the environment are concerted by the WTO at the multilateral level. Sustainable development, protection and the preservation of the environment are key objectives of WTO agreements. The Marrakesh Agreement sets out the WTO’s aim to reduce trade barriers and eliminate discriminatory treatment in trade, and it also identifies trade as a tool to help countries achieve important public policy goals, including the sustainable use of the world’s resources and environmental protection.

Within the WTO agreements, countries carry a significant degree of autonomy in determining their environmental objectives and the environmental legislation they enact and implement, to the extent that it respects the WTO principles (see also Part 4).²⁰⁰ For example, non-discrimination, a guiding principle of the WTO, specifies that a country shall not discriminate between “like” products from different trading partners, giving them equally most favoured nation (MFN) status as noted in GATT Article I. In addition, non-discrimination means that a country must provide “national treatment” and shall not discriminate between its own and “like” imported products, as contained in GATT Article III.^{af, 201}

WTO rules allow members to adopt trade-related measures for the protection of the environment, including through Article XX of GATT on General Exceptions,
which allows members to take all necessary measures to protect morals, human, animal or plant life or health, or relating to the conservation of exhaustible natural resources.^ag Trade-related measures that protect the environment may not be implemented if they restrict trade in a way that is arbitrary and results in unjustifiable discrimination between countries. The WTO rulings in the Shrimp-Turtle and the Brazil-Retreaded Tyres cases, as shown in Box 3.3, illustrate the multilateral mechanism that addresses trade-offs between trade and environmental objectives.²⁰²

Regional trade agreements and the environment

RTAs have rapidly increased in terms of number and regulatory coverage and evolved directly referencing sustainable development and including environment-related provisions (ERPs).^ah RTAs offer an opportunity for like-minded countries to agree on disciplines that address environmental issues. With respect to WTO rules, RTAs can provide an additional layer of discipline by reaffirming the WTO rules, agreeing to deepen or expand multilateral commitments, or agreeing to refrain from taking counteractive actions between the signatories of the agreements.²⁰³

Countries have increasingly used trade agreements to cooperate on environmental matters in the past few decades. In fact, the first agreement to include a provision related to the environment dates to 1957, when the Treaty of Rome establishing the European Economic Community included a general exception allowing a party to prohibit or restrict imports, exports or goods in transit on the grounds of protecting the health and life of animals or plants if such prohibitions or restrictions were not arbitrary or discriminatory.^ai Since then, environmental provisions started to rise slowly, and between 1957 and 2019, out of the 318 trade agreements that were established, 131 included at least one ERP (See Figure 3.4). Of these 131 agreements, 71 incorporate provisions that display an interaction between the environment and agriculture.^aj

FIGURE 3.4Agreements with Environment-Related Provisions, 1957–2019

NOTE: The provisions that were analysed are obligations that are outside the current mandate of the WTO.
SOURCE: Mattoo, A., Rocha, N. & Ruta, M. 2020. Handbook of Deep Trade Agreements. Washington, DC, World Bank.

Today, many RTAs contain some reference to the environment, and the inclusion of ERPs followed a pattern that has evolved over the years (see Figure 3.4). Prior to the early 2000s, the number of RTAs with substantive environmental clauses was limited, with some notable exceptions, for example, NAFTA, which became effective in 1994 and its successor, USMCA, which became effective in 2020.

A significant change in this trend can be observed from 2005 when RTAs started to include more specific ERPs.²⁰⁴ This is especially relevant for the RTAs negotiated by some developed countries, such as Canada, the European Free Trade Association (EFTA) countries, the European Union, and the United States of America. Many RTAs with higher environmental standards were negotiated between developing and developed countries, with the latter being among the active proponents.²⁰⁵ Likewise, ERPs are included more often when the trade agreement has a vast and diverse geographical scope and encompasses a significant market size.²⁰⁶ This is the case with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). ERPs also tend to be more comprehensive in those agreements negotiated between countries with a significant difference in their environmental performances, suggesting an attempt to ensure that trade results in positive environmental outcomes.²⁰⁷ Over time, developing countries started to include these types of provisions in their RTAs with other developing partners, as in the case of the East African Community.

The number of agreements and the level of detail of these provisions have expanded since 2012 and address specific environmental issues, including biodiversity, sustainable management of forests and fisheries, and climate change. Moreover, depending on the structure of the inclusion of the environmental-related provisions, some directly refer to agriculture. For instance, the Common Market for Eastern and Southern Africa (COMESA), where the parties commit to take steps to control transboundary, air and water pollution arising from mining, fishing and agricultural activities, and to discourage the excessive use of agricultural chemicals and fertilizers.^ak

Designing the scope of environment-related provisions

Many of the environment-related provisions are defined as WTO-plus provisions, as they set commitments that go beyond the WTO agreements. Other environmental exception clauses in the main type of WTO-like agreements are modelled on Article XX of the GATT, or on Article XIV of the General Agreement on Trade in Services (GATS).²⁰⁸ In practice, most RTAs with environment-related provisions include a combination of both the WTO-like and the WTO-plus environment-related provisions.

The reasons for including environment-related provisions in RTAs are manifold. Countries may have policies requiring the inclusion of ERPs in RTAs to match domestic legislation that limits environmental externalities and fosters harmonization of related non-tariff measures between trade partners.²⁰⁹ Others may be pressured to include ERPs in response to concerns by domestic industry or consumers.²¹⁰ Countries may also wish to avoid having their trade partners lower their domestic environmental protection levels to increase production and attract investments.²¹¹

The lack of ERPs could strengthen competition from trade partners with less stringent environmental requirements making them more price competitive. This would displace domestic producers and other exporters that comply with environmental standards resulting in negative environmental outcomes.^al This is reflected in some ERPs that strive for a balance between fulfilling environment-related policy objectives and trade/investment goals, such as RTAs between Canada-Colombia, Canada-Honduras and NAFTA (as shown in Figure 3.5). This is more nuanced in the EFTA-China, Hong Kong SAR agreement, which discourages weakening environmental protection laws in order to gain competitive trade advantage (see the excerpt from the agreement in Table 3.1).

FIGURE 3.5Selected agreements with a range of types of environment-related provisions

SOURCE: Monteiro, J. & Trachtman, J. 2020. Environmental Laws. In Mattoo, A., Rocha, M., Ruta, N., eds. Handbook of Deep Trade Agreements. Washington, DC. World Bank.

TABLE 3.1CLASSIFICATION OF FORMATS OF THE INCLUSION OF ENVIRONMENT-RELATED PROVISIONS IN REGIONAL TRADE AGREEMENTS

NOTE: Types of options include: side agreements, which are separate agreements from the trade treaties they accompany, and which provide the institutional space for strong proactive environmental agendas covering capacity building, harmonization of regulation, cooperation and monitoring; an environment chapter within an agreement, which can deal with trade-related environmental matters such as failure to enforce domestic environmental laws in ways that affect trade, trade-related environmental commitments related to MEAs (such chapter embedded within the agreement allows for such commitments to be enforceable through the main agreement’s dispute settlement mechanism, if the signatories choose to use it); sustainable development chapters may include both environmental and labour commitments, as some European Union agreements do, or may simply set environmental commitments within a broader context of sustainable development; and side letters, which may set out joint commitments that are difficult to achieve within the context of the agreement, either because there are multiple parties that cannot agree, or because their content is too sensitive to form a part of the legally agreed treaty.
SOURCE: Compiled by FAO based on the original trade agreements.

ERPs in RTAs differ in terms of their scope and take a range of shapes and forms in terms of the extent of the environmental issues covered and the actions to address them.²¹² The location of the clauses in the agreement also differs. ERPs can be included in the preamble and the main body of the agreement, in an annex, a protocol, a side agreement – as for USMCA – or be clarified through a letter exchange, such as the Canada-Peru letter on Understanding Regarding Biodiversity and Traditional Knowledge (see Table 3.1).²¹³ Some ERPs are aspirational and include language adhering to multilateral environmental agreements (MEAs), such as the Paris Agreement.^am Several RTAs explicitly include provisions related to MEAs, such as those of the United States of America-Republic of Korea, NAFTA, and Canada-Colombia. In fact, the United States of America-Republic of Korea agreement has nine different provisions related to complying with MEAs (as shown in Figure 3.5 under the MEA Compliance category of provisions).²¹⁴ Other RTAs make specific commitments based on domestic environmental law, while restating the right of the parties to regulate environmental matters.

Many RTAs overtly mention cooperation in environmental issues, as for example, the agreement between New Zealand and China in which the parties consider their national priorities and available resources, agree to cooperate on environmental matters and jointly decide specific environment cooperative activities (See Table 3.1). RTAs that aim at deeper integration, adopt a more concrete approach, and they include clauses establishing stronger cooperation, including on environmental regulations and standards. This is the case with many recent agreements negotiated by the European Union, Canada and the United States of America. For example, the United States of America-Central America Free Trade Agreement-Dominican Republic (US-CAFTA-DR), where the parties agree to cooperate to protect, improve and conserve the environment, including natural resources, and specify the establishment of a framework for such cooperation among the parties (See Table 3.1).

Often, these types of agreements foresee the set-up of ad hoc institutional arrangements to facilitate the enforcement of commitments, such as environmental committees to discuss and oversee the implementation of the ERPs, and mechanisms to solve the disputes related to the environment arising between the parties.²¹⁵ In fact, many RTAs with a comprehensive environment chapter or a side agreement, for example, the Canada-Colombia and United States of America-Republic of Korea agreements, establish such ad hoc institutional arrangements and have four different types of provisions related to enforcement mechanisms (see Figure 3.5).

Enforcement mechanisms are included in RTAs mostly through dispute settlement procedures that allow signatories to identify, demonstrate and retaliate against any violations of an agreement within a framework indicated by the agreement. The language on enforceability of ERPs varies across RTAs, as some are nuanced in non-binding terms, while others are formulated in binding terms.²¹⁶

Dispute settlement mechanisms can be an effective way to enforce compliance with ERPs. Enforcement measures may differ in relation to the ability of countries to impose monetary remedies or trade sanctions. For instance, the procedure established under the environmental chapters of many RTAs signed by the United States of America usually includes the possibility of imposing retaliatory actions. On the contrary, those shown under the sustainability chapters of the most recent RTAs enacted by the European Union explicitly exclude the possibility of imposing trade sanctions.²¹⁷

Environmental impact assessments are instrumental in assessing the impacts of ERPs.^an Such assessments trace the potential impacts of ERPs on markets, technology and regulations, and are currently mandated for all agreements signed by Canada, the European Union and the United States of America.²¹⁸ Many ERPs establish a mechanism to review such impact assessments.²¹⁹

The process by which ERPs are negotiated, implemented and monitored at the national level is vital. For example, public participation enables stakeholders from all potentially affected sectors to contribute.²²⁰ This is especially important for addressing environmental issues, since public participation may be limited during the negotiation process of trade agreements and sectors, such as the environment, may be often underrepresented (see also Box 4.2).²²¹