The OECD guiding principles revisited.

I. Introduction

Trade and environment issues are not new and were discussed and debated in the Organization for Economic Co-operation and Development (OECD) more than twenty years ago. At that time, the issues were framed more narrowly and the debate focused on the effects of environmental policies on trade competitiveness, particularly those policies which relate to pollution abatement. The discussions led to what remains the only international arrangement that addresses the general trade aspects of environmental policies - the OECD Council Recommendation on "Guiding Principles Concerning the International Economic Aspects of Environmental Policies"' adopted May 26,1972.(1)

The most famous of the OECD Guiding Principles is the "Polluter-Pays Principle." The other principles pertain to harmonization, national treatment and nondiscrimination, and compensating import levies and export rebates.(2) While these issues remain part of today's debate on trade and environment, the OECD Guiding Principles are somewhat antiquated and require reexamination. At the time they were formulated, global environmental problems were not recognized widely. Trade measures were not put to direct use in achieving environmental goals at the national and international levels. There was little concern about the effects of trade policies in the environment. Further, the non-OECD countries were not, included within the scope of the Guiding Principles. This Essay will review the status of the four OECD Guiding Principles and discuss areas where modifications or new principles may be warranted.

II. The Polluter-Pays Principle

The principle to be used for allocating costs of pollution prevention and control measures to encourage rational use of scarce environmental resources and to avoid distortions in international trade and investment is the so-called "Polluter-Pays Principle." This principle means that the polluter should bear the expenses of carrying out the above mentioned measures decided by public authorities to ensure that the environment is in an acceptable state. In other words the cost of these measures should be reflected in the cost of goods and services which cause pollution in production and/ or consumption. Such measures should not be accompanied by subsidies that would create significant distortions in international trade and investment.(3)

The Polluter-Pays Principle is the fundamental principle for the nonsubsidization of polluters. It is intended both to encourage internalization of environmental costs in prices and markets and to prevent the problem of trade distortions which might result from different pollution abatement financing methods. Under this principle, polluting firms should bear the costs of pollution control and should not benefit from environmental subsidies which might distort trade.

The OECD provides exceptions to the Polluter-Pays Principle by allowing governments to grant environmental subsidies in certain cases. These exceptions are specified in a follow-up recommendation adopted by the OECD Council on November 14, 1974, regarding the implementation of the Polluter-Pays Principle.(4) Governmental assistance for pollution control might be given: 1) to ease transition periods when especially stringent pollution control regimens are being implemented; 2) to stimulate the development of new pollution control technologies; and 3) in the context of measures to achieve specific socio-economic objectives, such as the reduction of serious interregional imbalances.(6) Any assistance granted under the OECD exceptions should be given for a fixed amount of time in a clearly defined program and should not create significant distortions in international trade and investment.

These issues have been revisited in the General Agreement on Tariffs and Trade (GATT)(6) where, in the context of the Uruguay Round, the negotiating group on subsidies and countervailing measures has discussed means of imposing greater discipline on the the use of government subsidies. Originally, it was proposed that environmental subsidies be included in that category of government in trade supports which are generally acceptable (or nonactionable in trade terms) under certain conditions. These conditions were similar to the OECD exceptions to the Polluter-Pays Principle: environmental subsidies would be used only for the adaptation of existing facilities to new environmental regulations or for the development and adoption of new environmental technologies and equipment. Any environmental support would be one-time only, limited to a certain percentage of overall costs and strictly for pollution control. However, the most recent draft of the Uruguay Round text has removed environmental subsidies from the nonactionable category, putting the GATT a odds with the OECD Guiding Principles.(7) There was concern among some countries that acceptance of environmental aids under the GATT Subsidies Code might cause environmental supports to be used as disguised aids to industry. Current studies, however, show that direct pollution prevention assistance is minor, with only a negligible impact on production costs, compared to other types of government aids to industry.(8)

As a means of monitoring environmental aids to industry, the OECD Council Recommendation in 1974 provided a notification and consultation system regarding financial assistance for pollution prevention and control.(9) Four surveys have been carried out under the procedure for Notification of Assistance Schemes - in 1975, in 1978-79, in 1981-82 and in 1987-88.(10) These surveys conclude that the impact on international trade is small or negligible at the macro-level, but note that the effects on trade may be larger at the sectoral level if specific industries benefit from substantial financial assistance for pollution control and that there may be variations and omissions in the types of supports which countries include in reporting on environmental subsidies.(11) Consultations regarding financial assistance for pollution control can take place at the request of any OECD Member country, but no request for consultation has ever been submitted.(12)

The basic concept of the Polluter-Pays Principle, that the private sector should bear the cost of pollution control, has wide-spread acceptance. However, there should be some exceptions to the nonsubsidization principle for environmental needs. Subsidies for transition periods in implementing pollution control measures and for environmental research and development make both economic and environmental sense. Limited use of government subsidies to help underwrite environmental costs can help mitigate demands for trade protection.

More work is needed to define the legitimate exceptions to the Polluter-Pays Principle. Tests must be developed to ensure that environmental subsidies are used for ecological needs and not used solely as protectionist aids to industry. Criteria must be specified for environmental aids to sectors other than industry, such as agriculture and natural resource sectors. The question of how the Polluter-Pays Principle applies to global pollution issues such as climate change, preservation of biodiversity, and ozone layer depletion should be examined. Developing countries especially may need subsidies, both national and international, to combat their severe environmental problems. There must be more international debate on the exceptions to the Polluter-Pays Principle, on improving procedures for monitoring environmental subsidies, and on means for fairly settling trade disputes relating to the use of environmental subsidies.

III. Harmonization Principle

Where valid reasons for differences do not exist, Governments should seek harmonization of environmental policies, for instance with respect to timing and the general scope of regulation for particular industries to avoid the unjustified disruption of international trade patterns and of the international allocation of resources which may arise from diversity of national environmental standards.(13)

The Harmonization Principle recommends harmonization of environmental policies where no valid reasons for differences exist and where trade problems may arise. In these cases, governments should seek common standards for polluting products and agree on the timing and the general scope of regulations for particular products. The Principle also recommends that environmental protection measures be framed in a manner that would avoid the creation of nontariff barriers to trade.(14)

Despite the recommendation for harmonization, the OECD places strong emphasis on the economic and ecological rationale for differing environmental standards. Valid reasons might include different assimilative capacities, different degrees of industrialization and population density, different social objectives, and different priorities attached to environmental protection.(15) For the most part, international harmonization efforts should not fix uniform environmental standards which might reduce worldwide welfare and distort international trade. Varying environmental endowments and preferences are a factor in comparative advantage. The OECD also recognizes that a high degree of harmonization of environmental policies is difficult to achieve in practice.(16)

Harmonization itself does not always mean "uniformization" of standards and policies, but rather it frequently includes methods for increasing the convergence of compatibility of these policies. Such methods include agreements on administrative procedures, mutual recognition and equivalency approaches. Premarket harmonization, such as that carried out by the OECD Chemicals Programme, attempts to converge national procedures for chemicals safety testing before marketing is authorized.(17) The European Community has adopted a system of mutual recognition, whereby member countries must allow entry of products which meet certain standards in other member countries. The U.S.-Canada Free Trade Agreement uses equivalency as the test for measuring the degree of protection provided by national standards. The draft GATT Decision on Sanitary and Phytosanitary Measures directs countries to use international standards, such as those developed by the Codex Alimentarius Commission, as the basis for national rules.(18)

Since the adoption of the OECD Harmonization Principle in 1972, the focus and the purpose of the harmonization of environmental policies has evolved significantly.(19) Most harmonization efforts have been directed to converging health and safety and environmental product standards to facilitate international trade. Now, however, the attention is shifting to increasing the international compatibility of other types of environmental policy instruments, such as ambient standards, process standards, economic instruments and eco-labelling schemes.Most importantly, these newer harmonization efforts are prompted by environmental concerns rather than trade considerations.

Both the environmental and trade groups have priorities for harmonization. As stated in the text of the OECD Guiding Principles, the priorities for harmonization are areas where no valid reason for differences exist and where trade problems abound. For example, environmental priorities include the harmonization of ambient and process standards necessary to confront global environmental problems, such as ozone depletion and global warming. On the other hand, trade priorities might include harmonization in areas which cause trade disputes, such as national eco-labelling and eco-packaging approaches.

The OECD Harmonization Principle must be revisited in light of the growing environmental imperative for harmonization. This imperative stems from the emergence of global and trans-boundary pollution and resource concerns. The Harmonization Principle, driven by trade concerns, was drafted with reference to product standards. While this Principle remains legitimate, its scope should be expanded to include environmental policy instruments, such as environmental quality standards and economic instruments. New approaches to the convergence of policies and review of dispute settlement mechanisms also will be needed to balance the environment and trade facets of harmonization.

IV. National Treatment and Non-Discrimination Principle

In conformity with the provisions of the GATT, measures taken within an environmental policy, regarding polluting products, should be applied in accordance with the principle of national treatment (i.e. identical treatment for imported products and similar domestic products) and with the principle of non-discrimination (identical treatment for imported products regardless of their national origin).(20)

The National Treatment and Non-Discrimination Principle stresses the importance of ensuring that environmental measures are consistent with the GATT principles of national treatment (that imported products are not treated less favorably than similar domestic products) and nondiscrimination (that is, imported products are treated the same regardless of their national origin). This Guiding Principle reflects the continuing concern about the possible use of environmental measures for both protectionist purposes and as deliberate nontariff barriers to trade. The principle was drafted with primary reference to environmental product standards.(21)

The principles of national treatment and nondiscrimination are fundamental to the GATT and to international trade law as one means of determining the fairness of measures which restrict trade. Domestic goods and imports must he subject to the same treatment as imports from all sources. As a general rule for formulating and implementing environmental policies, national treatment and nondiscrimination criteria are valid and useful in preventing protectionist measures based on the unfair or superficial differentiation of products.

However, one aspect of the current trade-environment debate considers how to define the environmental exceptions to the principles of national treatment and nondiscrimination. Possible exceptions are not mentioned in the Guiding Principles, and the word "environment" is not specifically included as an exception under Article XX of the GATT, which does contain exceptions for protection of health, animal and plant life, and conservation of exhaustible natural resources. There is a need to specify what types of and under what circumstances environmental measures might be included as exceptions to both the OECD Guiding Principle on national treatment and nondiscrimination and to GATT Article XX.

Here, both practical and theoretical problems arise. Environmental policies currently encompass numerous forms of regulatory and economic instruments, and it is difficult to judge their equal and nondiscriminatory application to domestic and foreign sources. The extension of domestic product-related environmental regulations to imports is not always clear-cut. In addition, the application of environmental charges and other economic instruments to imported products is often difficult, particularly with regard to the risk of double taxation of imports. Environmental labelling schemes may become nontariff barriers to trade. In addition, environmental rules which comply with the principles of national treatment and nondiscrimination may nevertheless give competitive advantages to domestic producers, as in the case of deposit-refund schemes for beverage containers.

The major dispute, however, is whether countries should be allowed to discriminate against an imported product based on how it is produced. The OECD Guiding Principle on national treatment and nondiscrimination was drafted with reference to product standards and did not discuss how much of a production process may define the traded product. The term "polluting product" is not defined in the text of the principle and might refer to polluting in production, in consumption, or in disposal. The extent to which trade restrictions may be extended to products produced by processes not sanctioned domestically for environmental reasons also is not clear under current international trade rules. The amendments to the GATT Standards Code now being discussed in the Uruguay Round include processes and production methods (PPMs) in the definition of technical regulations and standards.(22)

Trade discrimination based on processes and production methods raises questions of extrajurisdictionality and unilateralism. Here, the importing country could influence the environmental manner by which other countries produced goods. The trade restriction in question would be extrajurisdictional in nature if the restriction attempted to protect environments outside the complete jurisdiction of the importing country. This might jeopardize the sovereignty of nations in choosing means to address their domestic environmental problems. It can be argued, however, that such extrajurisdictional trade measures might be legitimate when the environmental actions being addressed also have extrajurisdictional effects.

This would be the case with regard to certain global and transboundary ecological problems where the environmental actions of one country have extrajurisdictional effects on other countries. Global environmental problems relate to the protection of the global commons, including all resources which are necessary to the continued functioning of the globe as an environmental unit. Transboundary environmental problems are those where pollution, hazardous substances, migrating species and other environmentally-sensitive features cross national borders or have transboundary effects. In these cases, possible exceptions to the Guiding Principle on national treatment and nondiscrimination should be debated.

Extrajurisdictional trade measures that address environmental actions with extrajurisdictional effects are most legitimate within the context of international environmental agreements, such as the Montreal Protocol on Substances that Deplete the Ozone Layer.(23) Environmentalists, however, are arguing for more flexibility to discriminate at the national level against products based on the environmental-soundness of their method of production, (for example when such production is contributing to exjtrajurisdictional environmental damage and when trade discrimination is part of the process leading to an international environmental consensus).

V. Compensating Import Levies and Export Rebates

Principle

In accordance with the provisions of the GATT, differences in environmental policies should not lead to the introduction of compensating levies or export rebates, or measures having an equivalent effect, designed to offset the consequences of these differences on prices. Effective implementation of the guiding principles set forth herewith will make it unnecessary and undesirable to resort to such measures.(24)

The OECD Guiding Principle regarding compensating import levies and export rebates was intended to forestall the use of trade remedies to compensate for the cost of imposing more rigorous environmental standards on domestic industries than those imposed by foreign competitore. The OECD Member countries agreed not to use border adjustments to offset cost differences arising from different environmental policies. More specifically, countries agreed not to adopt border measures to help solve economic or balance of payments problems resulting from the initial phases of implementation of environmental policies.

There is continuing concern that countries with strict pollution abatement regimes might suffer production and trade losses relative to countries with less stringent environmental standards. Adoption of pollution control measures increases industrial costs, which often leads to pressures to adopt protectionist measures to counter competition from countries with lower environmental standards. The drafters of the OECD Guiding Principles felt that such trade protection would not occur if cost increases related to pollution control were fully assumed by firms and passed on in the form of product prices as dictated by the Polluter Pays Principle. In fact, the pressure to use trade protection measures has been lessened in the OECD countries by adherence to the Polluter Pays Principle, provisions for government subsidies during initial phases of implementing costly environmental policies, and increased recognition by industry of the long-term competitive advantages of environmental technologies.

Although the competitive effects of environmental policies continue to be debated, there have been no instances to date of the use of import levies or export rebates to compensate for differing costs of environmental protection. However, proposals continue to be made for legalizing countervailing trade actions against countries who have not fully internalized their environmental costs. In this view, less strict environmental standards should be interpreted as implicit subsidies which would be subject to countervailing duties.

However, trade protection measures consisting of import levies or export rebates adopted to equalize the environmental costs of domestic and foreign producers are difficult to justify in either environmental or economic terms. Trade advantages based on legitimate differences in environmental policies would be regated by such an approach. In addition, the practical problems of determining the equivalency of national environmental policies, the reasons for differences in environmental costs, and the subsidy element inherent in foreign environmental standards are enormous. Finally, it would be almost impossible to devise tests to distinguish between legitimate environmental trade measures and protectionist trade actions.

In fact, the Guiding Principle on compensatory trade actions was drafted with the idea that implementation of the other OECD Guiding Principles would eliminate the need for compensatory trade actions.(26)

VI. Conclusion: Updating the OECD Guiding Principles

The introduction to the OECD Guiding Principles of 1972 states specifically that they do not cover questions of implementation of the principles, exceptions to the principles, transfrontier pollution, or possible problems related to developing countries.(26) The OECD Guiding Principles are currently under review in the OECD as part of its current trade and environment program.(27) A Joint Working Group of Trade and Environment Delegates has been convened to recommend ways of increasing the compatibility of trade and environmental policies and means for warding off potential conflicts before they arise.(28) This group is entrusted with developing OECD guidelines on trade and environment, which could include a revision or expansion of the original OECD Guiding Principles.

Currently, this Joint Working Group is discussing issues relating to the OECD Guiding Principles, such as the use of environmental subsidies, the harmonization of environmental policies, the possible exceptions to national treatment and nondiscrimination in trade for environmental purposes, and the use of countervailing duties in the environmental context. Debate is also directed to specific areas which were not considered when the OECD Guiding Principles were adopted, including the use of trade measures in international environmental agreements, the effects of trade policies on the environment, and the specific trade-environment concerns of the developing countries.

In developing new OECD trade and environment guidelines, the OECD Guiding Principles of 1972 will be reconsidered in the trade and environment context of 1992 and beyond. New and innovative policy approaches are essential, given the emergence of global and transboundary environmental concerns. Rules are needed to guide the effective and least trade-distorting use of trade measures for environmental purposes at the national and international levels. Recommendations are needed to increase the environmental sensitivity of trade policies and trade agreements and to ensure that their potential negative environmental effects are adequately taken into account and mitigated. Questions on how the OECD Guiding Principles or any new proposals might be adapted to developing countries (as well as to the European countries transition) must be considered. Even if the OECD gets it right in the 1990s, there is no doubt that any new OECD recommendations on trade and environment will need to be revisited twenty years hence, if not earlier.

(1.) See OECD, The Polluter-Pays Principle: Definition, Analysis, Implementation (1975). (2.) Id. at 13. (3.) Id. at 12-13. (4.) Id. at 18-20. (5.) Id. at 19. (6.) General Agreement on Tariffs and Trade, Basic Instruments and Selected Documents (GATT/BISD). (7.) GATT Doc. MTN.TNC/W/FA. (8.) Financial Assistance Systems for Pollution Prevention and Control I OECD Countries, OECD Environment Monographs, No. 33 (June 1990). (9.) Id. at 20. (10.) OECD, supra note 8. (11.) Id. (12.) Id. (13.) OECD, supra note 1, at 13. (14.) Id. (15.) Id. (16.) Id. (17.) See OECD, The OECD Chemicals Programme 11 (1988). (18.) GATT, Decision by Contracting Partieson the Application of Sanitary and Phytosanitary Measures, GATT DOC.MTN/TNC/W//FA. (19.) See Candice Stevens, Harmonization, Trade and the environment, Int'l. Envtl. Aff. (1992). (20.) OECD, supra note 1, at 13. (21.) Id. (22.) GATT. Agreement on Technical Barriers to Trade, GATT DOC.MTN/TNC/W/FA. (23.) Montreal Protocol on Substancs thatDeeplete the Ozone Layer, as adjusted and amended by the Second Meeting of the Parties on June 27-29, 1990, (24.) OECD, supra note, 1, at 14. (25.) Id. (26.) Id. at 12. (27.) For a description of the OECD trade and environment program, see Jacques de Miramon & Candice Stevens, The Trade/Environment Policy Balance, The OECD Observer, 25-27 (1992). (28.) OECD, Joint Report on Trade and Environment, June 1991, OECD/GD (92) 25 (1992); OECD, Trade and Environment: A Progress Report, May 1992, OECD/GD (92) 97 (1992).