FUND FOR RESEARCH INTO INDUSTRIAL DEVELOPMENT, GROWTH & EQUITY

ISO Type 1 Eco-Labels

Global Review of Eco-Labels: Implications for South Africa

PHASE TWO REPORT

January 2003

Trade Implications for South Africa of Foreign Eco-Labelling Schemes: A Socio-Economic Assessment

2. Eco-labelling and International Trade: A Brief Review of Issues

This chapter provides a brief review of some of the key issues relating to international trade and environmental labelling. The review includes a summary overview of some of the key issues relating to trade and eco-labelling.

2.1 Trade and Eco-labels - Overview of Key Issues

Until recently, the issue of eco-labelling was generally considered by international organisations predominantly in the context of changing consumption patterns, and not as a major trade issue. More recently, however, a number of deliberations have taken place in various fora - such as the World Trade Organisation (WTO), the United Nations Conference on Trade and Development (UNCTAD), the Organisation for Economic Co-operation and Development (OECD) and the United Nations Environment Programme (UNEP) - on the relationship between eco-labelling and international trade. Of particular interest is the fact that the Committee on Trade and Environment (CTE) of the WTO has recently been examining the trade effects of eco-labelling, especially as regards non-product-related process and production methods (PPM).

This growing appreciation of the interconnectedness between eco-labelling and international trade can be explained by a number factors:

• There has been a rapid proliferation in the number of (mainly OECD) countries that have introduced eco-labelling initiatives
• The coverage of eco-labelling programmes has similarly been growing, and currently includes a number of highly-traded products, including many products that are of export interest to developing countries
• Eco-labelling increasingly incorporates life cycle analysis requirements, which may lead to the use of criteria relating to non-product-related processes and production methods (PPMs)
• There have been a number of specific cases, such as a proposed eco-label for tropical timber and the EU eco-label for paper, that have fuelled concerns on the trade effects of eco-labels.

Although various recent UNCTAD and OECD studies have indicated that, in general, eco-labelling has not resulted in any significant trade effects, there are nevertheless some concerns that labelling will create difficulties for various product sectors from developing countries. Concerns have been expressed in particular, for example, as regards pulp and paper, footwear, and textiles products. Over the long term it is anticipated that as eco-labelling programs increase their product coverage to include more and more products of export importance to developing countries, then the trade impact of eco-labelling is likely to become more significant.

It is not within the scope of this study to undertake a detailed assessment of the current status of eco-labels under the rules of the WTO, an issue on which there are differing opinions. The following section, by way of general background, provides a brief review of some of the key issues relating to the interaction between eco-labels and international trade rules.

2.1.1 Non-Tariff Technical Barriers to Trade and the Position of the WTO

The relationship between eco-labels and the WTO rules is generally seen in the context of the potential that eco-labels may be used as a non-tariff technical barrier to trade (TBTs), and that they are thus potentially governed by the WTO's Agreement on Technical Barriers to Trade. A technical barrier to trade is barrier based on a technical or qualitative requirement, as opposed to being a formal (import or export) tariff levied on products and services. As outlined in Appendix 4, there are many different types of non-tariff barriers that countries may choose to use as a means of protecting domestic markets.

Many developing countries fear that stricter product standards relating to environmental criteria (for example through the use of eco-labels) are being used - or may potentially be used - as a means of protecting developed-country industries. Concerns have been raised by various international institutions, as well as by many developing countries, that eco-labelling, while professing to be environmentally beneficial, does in fact have a negative impact on global trade patterns. The concern relates to the fact that the demand for eco-labelled products in a particular host country or region may preclude those countries and industries where no eco-labels exist - or where the existence of labels is not widespread - from successfully penetrating such markets.

Although it is difficult to estimate the precise impact on international trade of the requirements of complying with different foreign technical regulations and standards, one can say with some certainty that it may involve significant costs for producers and exporters. These include costs associated for example with:

• Gathering the information on foreign labelling programmes
• In some instances having to hire experts to explain and translate the foreign regulations
• Adjusting production facilities and processes to comply with the labelling requirements
• Implementing appropriate verification measures to prove that the foreign regulations have been complied with - in many instances developing countries lack an appropriate infrastructure for effective testing, auditing and verification of compliance

These costs and administrative burdens may discourage manufacturers from trying to sell their products abroad, and may even dissuade importers from importing non-compliant products. In the absence of international disciplines, there is a risk that technical regulations and standards could be adopted and applied solely to protect domestic industries.

There are a number of important factors associated with eco-labelling that may have an impact on trade activities, particularly within developing countries:

• Eco-labelling is usually based on the domestic environmental priorities and technologies of the country where the eco-label was developed (the importing country), and thus may overlook the relevant and acceptable methods of production in the exporting country;
• Eco-labelling criteria may be tailored around an existing stock of technology that developing countries do not have easy access to; as a result, developing country producers may have to incur a disproportionately large cost burden to adjust to the eco-labelling requirements;
• Differentials in environmental infrastructure (including for example the availability of waste treatment plants) may place a de facto higher burden on developing countries in terms of achieving environmental standards and compliance;
• Suppliers of environmentally friendly (or less hazardous) input materials may be more difficult to source from within developing countries where the environmental concerns are different to those that are present within developed countries.

The WTO has a set of clearly defined regulations regarding trade barriers, as contained within its Agreement on Technical Barriers to Trade (TBT) signed in 1995. This agreement applies to all WTO members, and covers rules on standards, technical regulations and test and certification systems that need to be adhered to so as to avoid or minimise negative effects on trade. The TBT-Agreement states that its members must co-ordinate the introduction and application of national standards and of technical rules on an international level. Under the TBT Agreement, technical requirements are divided into two categories: technical regulations which are mandatory (known as "technical regulations") and those that are voluntary (known as "standards"). As most eco-labelling programmes are voluntary in nature, they are generally recognised as being standards in terms of the TBT Agreement.

A standard is defined in Annex I of the TBT as a

" Document approved by a recognised body that provides for common and repeated use, rules, guidelines or characteristics, for products or related processes and production methods, with which compliance is not mandatory. It may also include or deal exclusively with terminology, symbols, packaging, marking or labelling requirements as they apply to a product, process or production method."

Standards are dealt with, inter alia, through the Code of Good Practice, which is open to acceptance by governmental as well as non-governmental standardising bodies at the national and regional levels. The TBT Agreement subjects standards to a number of principles, including:

• They must be prepared, adopted and applied in a non-discriminatory fashion.
• They must not constitute unnecessary barriers to international trade.
• If international standards exist, standardising bodies must use them, unless they are deemed to be either ineffective or inappropriate.
• WTO members are encouraged to enter into mutual recognition agreements with respect to the conformity assessment procedures they apply to their standards.
• Transparency through the establishment of a procedure for the notification of standards when they are still at a draft stage, and through the creation of enquiry points to respond to questions posed in respect of them.

There are differing views on the implications of the TBT Agreement for eco-labelling initiatives. Some have questioned whether in fact eco-labels are covered by the TBT Agreement. Others maintain that eco-labels are covered by the TBT to the extent that they convey information about the characteristics of a product itself, but that they fall foul of the Agreement in those instances when they attempt to convey information about those processes and production methods that are not embodied in the final product. Another view is that labels may be used to differentiate between products on the basis not just of the final product's characteristics, but also in the way in which they are produced.

In light of the fact that the ecological criteria for many eco-labels are based on a Life Cycle Analysis (LCA) approach - including in particular the EU eco-label - it is suggested that there is a potential for technical barriers to trade to arise. LCA is based on an analysis of the entire life cycle of a product, from raw material extraction to the final disposal of a product. Standards for material use and for the content of the product are drawn up and are used as a basis for the LCA approach. A problem with this is that the standards are usually applicable to a certain country or region only, and thus may be of little relevance in other (often less developed) countries where environmental and resource pressures are of an entirely different magnitude and form.

In addition, LCA requires a large amount of information, which may cause practical problems, especially where some of a product's input materials are imported. In the absence of, or lack of adherence to, international and widely accepted methodologies or standards concerning LCA, developed with wide consultation among all stakeholders, there is a possibility that the LCA approach may create trade barriers. One of the reasons for this is that there may be significant adjustment costs for some countries whose industries supply products and services to external markets. There is thus concern that while the criteria for granting eco-labels do not discriminate directly between domestic and foreign producers, the reality of the situation is that eco-labelling may de facto discriminate against foreign producers, particularly from developing countries.

This is notwithstanding the fact that the International Organisation for Standardisation (ISO) has a technical subcommittee (TC 207) dealing with environmental issues, including standards for LCAs. It should be noted here that the term "trade barrier" is used largely to refer to situations whereby products fail to successfully compete in international markets due (mostly) to environmental reasons. These barriers can be consumer-driven or refer to the formal and institutionalised denial of market access. In most cases institutions and companies in developing countries have little recourse to international trade agreements and international trade bodies. As a result they are left with little choice but to accept eco-labelling as a potentially significant trade barrier, and to adapt accordingly to maintain and / or achieve greater export market penetration.

The WTO issued a draft ministerial declaration ahead of the Fourth Ministerial Conference that was held in Doha, Qatar, re-emphasising the fact that eco-labelling efforts should not become disguised trade restrictions and calling on the Committee on Technical Barriers to Trade to expedite its work on labelling.

The reality of the situation, however, is that "upward" pressure in the procurement chain (i.e. end-consumers, retailers and downstream manufacturers) in developed countries increasingly discriminate against non-complying manufacturers and their products. National authorities can develop complex schemes unsuited to foreign producers. Eco-labels can become barriers to trade, and may increasingly be used as a guise for protectionism. In this way, developed countries may effectively still restrict developing-country access to their markets.

Discussions in various international fora have generally concluded that eco-labelling is a valid environmental policy instrument and that it should be developed and implemented in a manner consistent with fundamental WTO disciplines of non-discrimination and national treatment. A number of possible solutions to promote the compatibility of trade and environmental interests have been proposed. These include for example:

• Increasing transparency in the process of developing and awarding eco-labels
• Establishing mutual recognition between eco-labelling schemes and promoting equivalencies between eco-criteria
• Dealing properly with PPM-related criteria and compliance with local environmental regulations
• Establishing international principles (such as the ISO eco-labelling principles)
• Dealing with special need of developing countries and technical assistance.

Whilst the potential impact of eco-labelling on trade and the discussions to address the position, in particular, of developing countries has not been finalised, it will be important for the DTI to keep abreast on the discussions and decisions with a view to assessing the implications for South African trade.