Environment and Trade: A HandbookUNEP/IISD   
5    Legal and policy linkages
   5.1  Environmental standards and process and production methods
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"PPM" has become one of the most debated sets of letters in trade law history. For many people, this debate lies at the heart of the trade and environment relationship.

A process and production method is the way in which a product is made. Many products go through a number of stages, and therefore a number of PPMs, before they are ready for market. For example, making paper requires trees to be grown and harvested, the wood to be processed, the pulp often to be bleached, and so on. The various processes will have different sorts of environmental impacts—on biodiversity, on forest-based streams and wildlife, on human health from chemical pollution of waterways, or in terms of air pollution and energy use. Other paper may be made from post-consumer waste, a different process involving a different set of environmental impacts.

An important technical distinction is the difference between a product-related PPM and a non-product related PPM (see Box 5-1). Throughout this book the term PPMs will refer to non-product-related PPMs, more or less the accepted shorthand in general discourse.

Box 5-1: Product- and non-product-related PPMs

The distinction between product-related PPMs and non-product-related PPMs may seem like nitpicking, but it is important to understand, since the two are treated entirely differently under trade law.

The distinction rests on how the PPM affects the final product. Consider two products—say two rolls of newsprint. One is produced using 50 per cent recycled content, and the other is produced from 100 per cent virgin fibre. These are two very different PPMs. But the key question is whether the final product has different qualities that would cause it to be treated differently in its use, handling or disposal. If the recycled newsprint performs in every sense the same as the virgin-content product, then the recycled-content process is a non-product related PPM, since it has a negligible impact on the final product.

Take, for another example, two apples—one produced organically and one produced with the use of pesticides, some of which are still left on the product as a residue. Again we have two very different PPMs. But in this case, the difference will cause us to have to handle and use (but probably not dispose of) the products differently. Some people might want to peel the chemically treated apple, and border authorities will inspect the levels of pesticide residue to see that they meet health regulations. The organic apple may be subject to tighter border checks aimed at preventing the spread of invasive pests. The different PPMs in this case make a difference to the final product, and they would thus treated as product-related PPMs.

Trade law does not question the right of countries to discriminate based on product-related PPMs. There are rules about the process of discrimination, of course—the SPS Agreement, for example, has a preference for international standards when setting restrictions on pesticide residue levels—but the principle of discrimination is accepted. Non-product-related PPMs, on the other hand, make no difference to the commercial or practical substitutability of the products—a criterion that we noted in chapter 3 is increasingly being used in the WTO to determine which products are like. And, we noted, WTO law does not allow countries to discriminate among like products, whatever their different environmental impacts.

This prohibition makes little environmental sense. The way a product is produced is one of the three central questions for an environmental manager: how is it made, how is it used and how is it disposed of. Domestic environmental regulations on PPMs abound—factories are told how much pollution they may emit, forest products companies are told how and where they may harvest trees, mining companies are told how they must treat their waste, and how they must restore their sites after mine closure. So from an environmental perspective, it makes sense to also be able to discriminate at the border between otherwise like goods that were produced in clean and dirty ways.

In practice, however, allowing discrimination based on PPMs would present some difficulties for the trading system. It would give governments greater opportunity in their struggle to protect their industries unfairly against foreign competition. Motivated not by environmental but by economic considerations, a government might conduct an inventory of the environmentally preferable PPMs used by its domestic industries, and make new regulations penalizing those producers (that is, foreigners) not using them.

At least this might result in environmental improvement, if only in certain selected industries, and only if the inefficiencies thus created did not overwhelm the environmental benefits. (See the discussion in chapter 2 of efficiency and the environment.) But there are two other fears. The first is that the standards thus imposed might be environmentally inappropriate for some foreign competitors. For example, a country where water scarcity is a major issue might enact laws discriminating against products produced in ways that waste water. But this would force exporters in water-rich countries to follow standards that are not relevant to their local environmental conditions.

The second is a related argument from some developing countries that argue that their social priorities differ from those of developed countries. They may, for example, be more concerned about clean water as an environmental issue than with global warming. Or they may be more concerned about infrastructure, education and health care than about any environmental issue. If so, the argument goes, it is unfair for developed countries to discriminate against their exports based on environmental issues that are not high on their agendas, forcing them to either adopt rich country environmental priorities or suffer a loss of wealth-creating exports. Many developing countries worry that if the WTO allows PPM-based discrimination on environmental grounds, it will also be forced to allow it on social grounds, such as human rights, labour standards and so on, increasing the scope of the threat to their exports.

Another part of this argument is that the now-rich countries became wealthy by burning a lot of fossil fuels, cutting down most of their forests, destroying the ozone layer and otherwise cashing in on national and global environmental resources. Now that the wealth they have gained allows them to maintain high environmental standards, it is hypocritical to forbid developing countries to follow the same path. At a minimum such demands should be accompanied by technical and financial assistance to help bring about environmental improvements, and other forms of capacity building.

Finally, there is a sovereignty argument. If the environmental damage in question is purely local, then it is really the purview of the exporting, not the importing, government. This argument weakens, however, if the environmental damage in question is not purely local—if it involves polluting shared waters or airstreams, depleting populations of species that migrate across borders, or damaging the atmosphere. Here, the need for international co-operation is obvious.

MEAs are one such form of co-operation, and are the most commonly recommended way to prevent PPM—based environment and trade conflicts. That is, countries should collectively agree to either harmonize standards or to live with a negotiated menu of different national standards. As we have seen, many such agreements are in force today. Such agreements, however, take many years to negotiate and even more to take full affect—a problem, if the environmental issue in question is urgent. As well, some subject areas may not be ripe for agreement; countries often disagree on the need to regulate or the mechanisms for doing so. These factors may make the international option unattractive for addressing issues of great importance to some countries.

 © 2000 United Nations Environment Programme,
International Institute for Sustainable Development