Standards, Developing Countries, and the Global Trade System...global trade negotiations.1 Its main...

PRODUCT STANDARDS, OR RULES GOVERN-ing the characteristics of goods, are crit-ical to the effective functioning of mar-

kets and provide important support to thetrade system. For example, government test-ing and certification of the bacteria content ofimported beef safeguards health and increasesconsumer acceptance of imported products.Product standards in the international tradesystem do, however, raise difficult issues fordeveloping countries. These countries’ limitedtechnical capability and financial resourcesmake it hard for them to participate effectivelyin negotiations governing standards or tobring disputes. In addition, pressures some-times exerted to use trade sanctions in supportof labor and environmental standards—legit-imate and desirable as these standards may be intrinsically—threaten to restrict develop-ing countries’ access to international marketswithout achieving their professed goals.

The rapid growth of international trade hasgreatly increased the importance of effectiveregulation of standards at the internationallevel. This chapter examines how standardsimposed by governments in importing coun-tries affect developing-country exporters anddiscusses the international regulation of someof the more prominent standards addressed inglobal trade negotiations.1 Its main messagesare as follows:• Insufficient technical and financial re-

sources limit developing countries’ abilities

to play an effective role in the design andimplementation of product standards andthus constrain their access to some mar-kets. Many developing countries, particu-larly the poorest ones, lack the technolog-ical capabilities and financial resources toparticipate effectively in the developmentof product standards, to meet industrialcountries’ import requirements, and tobring disputes when standards are used to discriminate against their exports. Forexample, the European Union (EU) is har-monizing standards for levels of aflatoxin,a substance that may cause liver cancer, infood products. The new standard, which ismore stringent than would be suggested byinternationally accepted standards, wouldlower risks by approximately 1.4 cancerdeaths per billion per year.2 The new stan-dard has the potential for substantially re-ducing exports of cereals from developingcountries into Europe (Otsuki, Wilson,and Sewadeh 2000). Few developing coun-tries have the technology to evaluate thedangers of aflatoxin, nor do they have the capabilities in scientific analysis to ad-dress the new EU standard. Furthermore,considerable legal and financial resourcesare needed to initiate a review under theWorld Trade Organization’s (WTO’s) dis-pute resolution mechanism. One achieve-ment of the Uruguay Round agreementwas to strengthen international rules gov-

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erning product standards in order to mini-mize their use for protectionist purposesand to create a level playing field. None-theless, the lack of capacity in developingcountries, particularly the poorest, limitsthe ability of these countries to benefitfrom the new rules (Wilson 2000b).

• The adoption and respect of core laborstandards—including freedom from dis-crimination, from exploitative child labor,forced labor, and the freedom to associ-ate and bargain collectively—are desirableand essential. However, the threat of tradesanctions or the imposition of trade bar-riers are likely to be excessively costlyinstruments for raising labor standards,and could even be counter-productive insome cases. Barriers to a country’s exportshurt workers by reducing demand for thecountry’s products. Even if sanctions forceimprovements in some sectors, they areunlikely to improve average working con-ditions in the economy. For example, theresult of foreign pressure to reduce the useof child labor in the production and exportof garments in Bangladesh was that manyof the laid-off children were employed inmore harmful occupations, such as prosti-tution or brick-breaking, and in factoriesthat did not produce for export (FinancialTimes, August 24, 1999). The impositionof trade barriers to improve labor stan-dards is vulnerable to capture by well-organized interests in domestic marketsthat would benefit from limiting imports.Similarly, trade sanctions are usually inef-fective in addressing environmental degra-dation. Empirical studies show that impos-ing trade sanctions on exporters can causeconsiderable losses in output while doinglittle to reduce pollution.

• Although labor and environmental stan-dards generally improve as countries de-velop, low labor and environmental stan-dards are not usually a significant sourceof competitive advantage. Labor and en-vironmental standards are positively cor-related with income, both because higherincomes stimulate demand for better stan-

dards and because better standards tendto encourage technological change toeconomize on inputs. Studies have foundonly limited evidence that low environ-mental standards increase competitive-ness or attract more direct foreign invest-ment. Experience in both industrial anddeveloping countries shows that the costof appropriately designed environmentalprotection is often low in terms of bothforgone growth and the capital cost ofabatement. Keeping labor standards lowis not an effective way of gaining a com-petitive advantage over trading partners.Indeed, low labor standards are likely toerode competitiveness over time becausethey reduce incentives for workers to im-prove skills and for firms to introducelabor-saving technology.

• The international community has moreeffective means than trade sanctions toencourage improved environmental andlabor standards in developing countries.Efforts to support development, such asincreasing assistance to countries withgood policies, will raise standards. Encour-aging greater openness to trade and to for-eign direct investment (FDI) will facilitatethe diffusion of cleaner technology thatcan reduce environmental degradationand improve worker productivity, therebypromoting better labor standards. Re-gional collaboration is appropriate foraddressing environmental issues that havea clear regional component, such as trans-boundary emissions and shared waterresources.

The regulation of standards:setting the stage

In the broadest sense, regulations are estab-lished because of perceived market failures,

when reliance on voluntary market transactionsis not efficient from the standpoint of society.3

For example, market prices may not reflect thefull cost of production because firms use publicwaterways to dispose of waste; consumers maylack information about product defects that can

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have serious consequences (unsafe automobiles,for example); and collusion and monopoly maymean increased costs for consumers. Establish-ment of regulatory standards is appropriatewhen the benefits of correcting these marketfailures exceed the costs. For example, currentauto safety standards have significantly reducedthe chances of injury and death but have noteliminated them, presumably because the costof doing so is too high. Costs include not onlythe direct costs facing the regulated firm butalso the costs of monitoring compliance and ofany potential spillovers in other areas. (Taxinggasoline at the pump to limit pollution imposesa direct cost on consumers, but it also imposesa cost on filling stations and refineries as a re-sult of lower demand.) The more detailed therules are in defining what goods are producedand consumed, and how, the greater the costs interms of stifling innovation, reducing choice,and monitoring compliance. Thus, regulatoryinstruments should use the market as much aspossible to encourage flexibility and choice ofproducts and of production techniques. For ex-ample, taxes and tradable permits have provedto be an effective and efficient means of con-trolling air and water emissions in certain cir-cumstances and to be less onerous than tradi-tional regulations that specify maximum levelsof pollution.

Because preferences and policy options dif-fer from country to country, regulatory re-gimes should be determined as much as possi-ble by the communities to which they apply,unless there are spillovers to other communi-ties. Given different preferences and differentaccess to information, regulation that is ac-countable to the community and meets locallydefined needs is likely to be more efficient andlegitimate than regulation imposed from afar.In an international context, it is important toensure that regulation (a) does not discrimi-nate between domestic and foreign producers,(b) relates to products or activities that imposecosts on domestic markets, (c) is restricted ge-ographically to the markets affected, and (d) isimplemented locally.

These simple principles have powerful im-plications for the appropriateness of different

kinds of standards. Briefly put, product stan-dards are necessary to support markets andmust be applied in a nondiscriminatory fash-ion. Environmental standards should be ad-dressed by the community affected by the rel-evant market failure. The impact of pollutionis normally limited to domestic or, sometimes,regional markets, although some issues, suchas those related to global warming and deep-sea fishing, require global action. Differencesin labor standards do not impose costs on for-eign markets and hence are not an appropriatearea for international trade negotiations.

Product standards and regulatorybarriers to trade

Ensuring that imported products meet ap-propriate standards for protecting health

and safety has become increasingly importantwith the rapid expansion of trade over thepast decade. Discriminatory regulations im-posed at the border can disadvantage foreignproducers and distort commercial markets.The reduction of tariffs and quotas throughmultilateral trade negotiations has highlightedthe use of product standards as trade barriers.Tariffs, quotas, and subsidies continue to re-strict trade in several sectors (see chapter 2),but other barriers—technical requirements,testing, certification, and labeling that affectimports—have emerged as important new is-sues for liberalization efforts (World Bank2000b). Two significant achievements of theUruguay Round, the Agreement on TechnicalBarriers to Trade (TBT) and the Agreement onSanitary and Phytosanitary Standards (SPS),were designed to address some of these issues.The TBT essentially relates to manufacturedgoods; the SPS applies to food (sanitary stan-dards) and animals and plants (phytosanitarystandards).

The role of product standards Product standards are critical to the effectivefunctioning of markets and play an importantrole in supporting international trade. Forconsumers, standards provide informationand help ensure quality. (For example, food la-

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beling requirements allow easier comparisonacross products, and regulations increase con-sumer confidence that electrical fixtures aresafe.)4 Standards are critical for “component”goods such as consumer electronics and com-puters, where the ability to mix and matchcomponents is important. They also helpachieve public objectives such as cleaner air;auto emissions standards and fuel economyregulations are examples. Because the exportof goods that are physically dangerous or ofagricultural products that are harmful tohuman health obviously damages the export-ing country’s (and the firm’s) credibility andthe acceptance of its products in the interna-tional trade system, there are important incen-tives for self-regulation.

For producers, standards can facilitate scaleeconomies and the efficient combination ofparts and components in production. Stan-dards can also be used to gain access to intel-lectual property and technology. For example,the European Union’s (EU) licensing of tech-nology based on European TelecommunicationStandards Institute (ETSI) standards facilitatedthe spread of wireless telephones in the Euro-pean market, highlighting the importance ofthe relationships between standards and tradein goods and services (Wilson 1997). Stan-dards can facilitate coordination of produc-tion that might not be achieved through mar-ket forces. For example, countries can improvetheir integration into global information andtelecommunication networks by adhering to in-ternational compatibility requirements for elec-trical products. Shared standards can reduceentry barriers by lowering inspection and test-ing costs that typically arise from imperfectinformation concerning the quality of tradedgoods (Moenius 2000).

Standards as barriers to tradeMandatory standards can also act as nontariffbarriers to trade, whether or not the intent isdiscriminatory; regulatory requirements mayraise foreign firms’ costs relative to those ofdomestic firms even if both are subject to thesame requirements in the domestic market.5

Health and safety standards typically requiretesting and conformity assessment for all pro-ducers, but costs will be greater for exportersthan for domestic producers if the exportersmust conform to standards different fromthose in their own market or if they are subjectto duplicative tests (Hoekman and Konan1998). For example, an EU regulation requiresthat dairy products be manufactured from milkproduced by cows kept on farms and milkedmechanically. This rule precludes imports frommany developing countries, particularly thosewith many small producers for whom mech-anization is not cost-effective (Henson andothers 2000). A country may have relativelystringent regulatory requirements owing to adifferent view of the tradeoff between risks andprice. Such requirements may pose a significantcompliance cost for exporters but would not beviewed as discriminatory, since they apply toboth domestic and foreign producers.

The need to comply with varying standardscan raise entry barriers in the form of in-creased one-time costs of product redesignand creation of an administrative system. Forexample, manufacturers may need to keep re-designing automobile seat belts to meet chang-ing standards for multiple export markets.Standards may also diminish the ability tocompete, owing to the recurrent costs of main-taining quality control, testing, and certifica-tion. Often, firms must decide whether to es-tablish a costly platform design that can easilyaccommodate small modifications—for exam-ple, a car chassis that can serve multiple mar-kets—or to design a product solely for thehome market, even though costly modifica-tions are required for export. A classic exam-ple of the latter is the right-hand or left-handplacement of car steering wheels.

Costs also may be incurred in meeting pre-cise technical regulations and carrying out con-formity assessment—that is, in evaluatingwhether a product “conforms” to a regulatoryrequirement. These requirements present thelargest potential technical barrier to futuretrade. Governments in importing countries mayrefuse to recognize tests performed in foreign



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laboratories or by foreign public authoritiesand may not accept declarations of conformityby a foreign manufacturer. For example, Mex-ico used to allow only Mexican organizationsand laboratories to test products subject toMexican regulations. (Under the North Ameri-can Free Trade Agreement, or NAFTA, Mexicoagreed to allow U.S. and Canadian firms toperform testing and certification.) Such re-quirements may represent legitimate concernsregarding the quality of administration in theexporting countries, or they may result fromadministrative shortcomings in the importingcountry (delays, arbitrary inspections, redun-dant tests, and the like) that affect both foreignand domestic firms.

The use of product standards for protec-tionist purposes is a clear threat to an opentrade regime. In principle, it is possible to dis-tinguish between the “normal” costs of trade(the kinds of frictional costs described above)and barriers that are designed to limit compe-tition from imports. The SPS agreement pro-vides that trade restrictions can be imposedonly to the extent necessary to protect life orhealth, that they must be based on scientificprinciples, and that they cannot be maintainedif scientific evidence is lacking. Where theweight of scientific evidence is clear and well-accepted, this approach has helped to resolvedisputes. For example, the United States suc-cessfully challenged Japanese technical regula-tions on the ground that there was no evidencethat costly fumigation tests were necessary foreach new variety of fruit imported into Japan.At times, the scientific community is unable toassess risks because the damages are only evi-dent ex post (as was the case with asbestos),or the relative newness of the technology maycall for caution in accepting existing evidence,as is happening with genetically modified or-ganisms (Messerlin and Zarrouk 2000).

Given differences in historical experiences,levels of development, and risk preferences,differences in product standards among coun-tries will remain an important feature of thetrade system. Over time, the accumulation ofcase law through the WTO dispute settlement

mechanism should help establish precedentsfor determining what is acceptable underWTO disciplines. This should help resolvedisputes earlier and restrain discriminatorygovernment initiatives that clearly conflictwith principles of nondiscrimination. In addi-tion, greater reliance on private initiatives, asopposed to government fiat, in designingproduct standards is desirable. For example,whereas voluntary agreements account for alarge proportion of the standards (except forthose related to health or the environment) inindustrial countries, in developing and tran-sition countries such as China, Russia, andUkraine, standards in important areas of eco-nomic activity continue to be developed andpromulgated by governments. Reliance on pri-vate norms in developing countries wouldreduce the use of standards as trade barriers(industry-based standards may have protec-tionist intent but can be difficult to enforceunless backed up by government regulations),and they can help ensure appropriate expertisein designing standards.

Empirical evidence on standards as tradebarriersA large proportion of internationally tradedgoods is subject to standards, including about60 percent of U.S. exports and 75 percent ofintra-EU trade (European Commission 1996;Wilson 1997). The coverage of standards hasincreased significantly in the past few years(Hoekman and Konan 1998). Few attemptshave been made to measure the general impactof product standards on traded goods.6 TheOrganisation for Economic Co-operation andDevelopment (1996) found that differing stan-dards and technical regulations, along withcosts of testing and certification, can representbetween 2 and 10 percent of overall productcosts, and the European Commission (1996)found that the average frictional costs of dif-fering standards among EU countries prior tothe single-market initiative ranged between 2and 3 percent of the value of trade. The U.S.-EU mutual recognition agreement on tele-communications and information technology



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products, if fully implemented, could reducecosts by 5 percent of the value of goods traded(Wilson 1997). These costs are greater thanthe average tariff on intra-OECD manufactur-ing trade (less than 1 percent in 1995) and ondeveloping countries’ manufactured exports toindustrial countries, which was 3.4 percent(Hertel, Hoekman, and Martin 2000).

There is some evidence that the adoption of common standards tends to reduce importsfrom other sources. Sectors of EU economiesfor which common trade regulations wereadopted as part of the move to the single mar-ket represent one-third of EU value added andone-third of intra-EU trade, but only one-fourth of EU imports from the rest of theworld. Conversely, sectors in which the estab-lishment of common trade regulations was lesssuccessful represent one-third of both intra-EUtrade and EU imports from the rest of theworld (Messerlin 1998). Surveys and simula-tion exercises confirm the role of standards inincreasing costs. An OECD (1999) survey of55 firms in Germany, Japan, the United King-dom, and the United States found that tech-nical standards and conformity assessmentprocedures imposed significant costs on dairyproducts, auto parts, and telecommunications.Typical problems included requirements fortesting of each product consignment both be-fore shipping and at the port of entry and forfrequent tests following design changes. Simu-lations with a computable general equilibrium(CGE) model found that a 2.5 percentage pointdecrease in border costs within the EU (the es-timated result of adoption of uniform stan-dards) would generate a short-term welfaregain of up to 0.5 percent of the gross domesticproduct (GDP) of EU countries (Harrison,Rutherford, and Tarr 1996), in part because ofscale economies and increasing competition.7

The benefit could reach 2.4 percent of GDPover the long term as investment increases as aresult of a rise in the real return to capital.

Trade disputes on product standardsOne indication of the importance of standardsin restricting trade is the marked increase in the

number of trade disputes over standards andtechnical barriers during the past five years.(The increase is evident in the U.S. annual re-ports in the National Trade Estimates seriesand the EU’s annual reports on trade barriers.)In addition, most countries’ submissions forthe 1999 ministerial conference of the WTO in Seattle stressed the need to address techni-cal barriers in the context of new trade talks(Wilson 1999). The most prominent standardscases in recent years have been in agriculture,such as the dispute between the EU and UnitedStates over hormone-treated beef.8 The use ofgenetically modified organisms (GMOs) in ag-riculture is also generating trade tensions. Bythe end of January 1999, the WTO DisputeSettlement Body had considered 25 disputesthat referenced either the SPS or the TBT (Wil-son 1999). Nine of the disputes centered onfood safety regulations, five involved technicalregulations tied to customs requirements, andthe remainder were in areas such as quotas,import bans, and disputes over environmentallaws. Most of the complaints brought to theWTO are from industrial countries; of the 25complaints considered by the WTO throughJanuary 1999, 16 were brought by industrialcountries against other industrial countries, 3were brought by industrial countries againstdeveloping countries, and 6 were brought bydeveloping countries against industrial coun-tries. No low-income country other than Indiahas brought cases to the WTO under the TBTor the SPS or has been challenged under theseagreements.9 Pursuing a case through WTOprocedures is expensive and resource-intensive,which may explain in part why many develop-ing countries have not done so.

One indication of the increased focus onWTO dispute settlement—including cases re-lated to standards—by members is the invest-ment by the United States in new staff in the Office of the U.S. Trade Representative(USTR). The budget request for fiscal 2001 in-cludes an increase of 14 percent for additionalstaff, all of whom would focus on dispute set-tlement case work at the WTO (Hufbauer,Kotschwar, and Wilson 2000).10 The least-



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developed countries (a UN-designated groupof 48 developing countries) are likely to find itdifficult to match this type of investment inWTO dispute settlement processes.

Disputes over standards as barriers to tradewill undoubtedly become more important as(a) the share of trade in world output increasesand developing countries’ weight in worldtrade rises, (b) exports of finished goods bydeveloping countries grow, and (c) large de-veloping and transition countries, such asChina, Russia, and Ukraine, whose domesticregulatory systems and import rules requiredeep reform, join the WTO. A recent review of Ukraine’s standards and regulatory systemcommissioned by the World Bank, for exam-ple, reveals serious economic distortions in thedesign of the government’s standards, testing,and certification systems (World Bank 2000a).

Capacity in developing countriesProduct standards may work to the disadvan-tage of developing countries, where capacityto engage in standards development and tocomply with standards in export markets islimited. Because of lack of resources, manydeveloping countries find it difficult to diffusebest-practice information on quality standardssuch as those in the International Organiza-tion for Standardization (ISO) 9000 series andto adopt appropriate process and productionmethods (World Bank 2000b). Certificationcosts can be particularly significant for smallfirms. ISO 9000 certification for a single plantcan cost up to $250,000, with additional au-diting costs after initial approval. Limits oncapacity are particularly important for theleast developed countries.

Developing countries lag behind industrialcountries in their capacity for effective certifi-cation and accreditation of testing facilities(Stephenson 1997), and authorities in indus-trial countries may not trust developing coun-tries’ inspection procedures (Baldwin 2000).Developing countries thus find it difficult todevelop standards based on internationalnorms and to reach mutual recognition agree-ments (MRAs) with other nations. Their pro-

ducers may thus confront higher costs of entryin markets than do producers from countriesthat can certify compliance through an MRA(see box 3.1). Furthermore, governments andfirms in more advanced countries can establishstrategic standards that shut out developing-country firms or that alter the terms of compe-tition or the terms of trade in favor of domes-tic firms (Fischer and Serra 2000; Gandal andShy 1999; Matutes and Regibeau 1996).

Full implementation of the commitmentsmade in the SPS and TBT agreements will ben-efit both developing and industrial countriesand will strengthen the multilateral system.There have, however, been reservations aboutdeveloping countries’ abilities to meet specificprovisions of these agreements. The SPS agree-ment, for example, encourages the use of rele-vant international standards; although a coun-try may apply other standards at the border, it has the burden of demonstrating their scien-tific merit. Since most standards were designedby industrial countries, they may not be appro-priate for the technology mix or preferences indeveloping countries. “Thus for a country toeffectively use the WTO agreement to defendits export rights or justify its import restric-tions, it will have to upgrade its SPS system tointernational standards” (Finger and Schuler2000). Upgrading standards and providing riskassessments for proposed standards can becostly. There are similar questions regarding re-quirements in the TBT agreement which em-body the concept that trade is best facilitatedby harmonizing international standards.

Effective compliance with requirements forWTO enquiry points (offices that provide in-formation regarding national technical regula-tions) can involve substantial costs, includingthe costs of establishing governmentwide in-formation systems to report regulatory changesand respond to requests.11 Formal compliancewith enquiry point requirements has improvedin developing countries, but it remains lessthan 60 percent for the SPS agreement and 75percent for the TBT agreement (figure 3.1). Itis not clear whether these enquiry points meetall the provisions of the agreements. The num-



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ber of notifications by developing countries ofnew technical regulations and certificationrules, as required by TBT and SPS agreements,has grown (figures 3.2 and 3.3), although theincrease may not reflect greater ability to meetproduct standards for export goods.

All in all, the costs involved in complyingwith TBT and SPS requirements are substantialand are likely to be equal to an entire year’sdevelopment budget in some least developedcountries. (This calculation includes the costsof meeting Trade-Related Aspects of Intellec-tual Property requirements, or TRIPs, require-ments; see (Finger and Schuler 2000).)12 Suchexpenditures can improve a country’s capacityto participate in international trade, but theymust be evaluated in light of other develop-ment priorities.13

Many developing countries have recom-mended a targeted review of TBT and SPS

requirements in light of development needs, in-cluding extension of the time frame for com-plying with some provisions and modificationof the rules governing notification of new tech-nical regulations. (Providing 60 days to com-ment on new regulations is of questionablevalue to developing countries that lack thecapacity to analyze and formulate positions on technical requirements quickly.)14 A seriousand thorough use of the results of the SecondTriennial Review of the TBT agreement, sched-uled to conclude in November 2000, wouldhelp address developing countries’ concerns.

Labor standards and tradesanctions

Adoption and compliance with core laborstandards is desirable on moral grounds,

and necessary for promoting broad-based and



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Mutual recognition agreements (MRAs) arespecifically encouraged as part of the Technical

Barriers to Trade (TBT) agreement. Discussions ofMRAs have dominated trade policy discourse sincethe early 1990s, in part because of internal marketharmonization in the European Union (National Re-search Council 1995; Wilson 1995). Several bilateralMRAs have been completed among industrial coun-tries, including four between the EU and its tradingpartners. The EU is pursuing negotiations with othercountries. Regional talks on MRAs are also under-way among, for example, members of the Asia-Pacific Economic Cooperation (APEC). APEC hasconcluded model MRAs on food, electrical products,and exchange of information on toy safety. There islittle quantitative evidence on the economic or tradefacilitation benefits of MRAs, although in areas ofdeep regulatory intervention market expansion maybe achieved through convergence in standards overtime, if MRAs are fully implemented.

Developing countries find it difficult to partici-pate in MRAs, in particular because more developedtrading partners often are less than confident in their

Box 3.1 Mutual recognition agreementstesting and certification procedures. NegotiatingMRAs is time- and resource-intensive (as came out indiscussions at the WTO Symposium on ConformityAssessment Procedures, June 8–9, 1999). Moreover,the lack of modern technical infrastructure to sup-port an MRA in developing countries poses clear ob-stacles to implementation. Thus, developing-countryfirms are likely to be at a competitive disadvantagein exporting to markets covered by MRAs. HowMRAs relate to WTO obligations on the most fa-vored nation (MFN) commitment—that is, nondis-crimination—remains unclear. It is unlikely that ac-cess to the benefits of an MRA could be offered on anondiscriminatory basis to developing countries.

Other tools exist to facilitate trade in goods sub-ject to mandatory regulation. For example, manufac-turers’ declarations of conformity avoid duplicativegovernment or third-party product testing and havebeen employed for products that pose limited health,safety, or environmental risk. Innovative regional useof declarations of conformity, with countries poolingtheir resources, could be explored as a way of facili-tating developing countries’ trade.

inclusive economic development (World Bank1995 and Aidt and others 2000). However,imposing trade sanctions to bring about im-proved labor standards is unlikely to enhanceeither global welfare or the welfare of devel-oping countries. In terms of the criteria forregulatory decision making outlined in the be-ginning of the chapter, labor standards shouldnot be the subject of trade negotiations be-cause the level of standards in one countrydoes not affect the welfare of its trading part-ners, and the workers whom trade sanctionsare designed to protect have no role in decid-ing whether sanctions are imposed. Althoughhigher labor standards are associated with im-proved living conditions and development, theimposition of trade sanctions is a remarkablycostly mechanism. Furthermore, trade sanc-tions are vulnerable to capture by domestic in-terests, and are likely to hurt the workers thesanctions are designed to assist. Lower laborstandards abroad are not a serious threat tothe livelihoods of workers in industrial coun-tries; neither theory nor evidence suggests that

lower labor standards generally provide acompetitive advantage.

Core labor standards and theirrelationship to developmentCore labor standards are commonly definedto include freedom of association and collec-tive bargaining; nondiscrimination in employ-ment; no exploitative child labor; and no forcedlabor (for example, slavery).15 Each of thesecore standards is covered by at least one In-ternational Labour Organisation (ILO) con-vention. By the mid-1990s, only 27 countriesworldwide and only 10 OECD countries hadratified all core ILO conventions, althoughratifications increased in the second half of the1990s (OECD 2000). Several countries thathave not ratified some of these standards areregarded as being in compliance with them inpractice. Their reasons for nonratification ap-pear not to relate to objections on principle,but rather to specific details of the conven-tions or their interpretations by ILO bodies(OECD 1996).16 Of course, ratification does



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Figure 3.1 WTO enquiry point notification, by country group, 1995 and 1999Percent

Note: Percentage of countries with WTO enquiry points under the rules of the Technical Barriers to Trade (TBT) andSanitary and Phytosanitary Standards (SPS) agreements.Source: G/TBT/ENQ,WTO <www.wto.org>.

0

TBT SPS TBT SPS

Developing countries Industrial countries

10

20

30

40

50

60

70

80

90

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1995 1999

not necessarily imply that core labor standardswill be observed, which requires legislative andregulatory changes, as well as monitoring andenforcement to stop abuses.

Adherence to core labor standards, as mea-sured by freedom of association, is weaklycorrelated with both higher levels, and highergrowth rates, of GDP per capita.17 (Freedom

of association is used because it is easier tomeasure than some of the other standards.)On average, more-developed countries havebetter-than-average compliance, while compli-ance in many of the poorest countries is inad-equate. Higher income levels stimulate demandfor better standards, and higher standards con-tribute to growth by increasing work effort



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Figure 3.3 Number of notifications under the SPS agreement, 1995–2000

1999 2000

Note: SPS, Sanitary and Phytosanitary Standards. Data are for 2000 through October 3, 2000.Source: G/SPS/N, WTO <www.wto.org>.

1995 1996 1997 1998 1999 2000

0

50

100

150

200

250

Low- and middle-income countries High-income countries

Figure 3.2 Number of notifications under the TBT agreement, 1995–2000

Note: TBT, Technical Barriers to Trade. Data are for 2000 through October 4, 2000.Source: G/TBT/N, WTO <www.wto.org>.

0

1995 1996 1997 1998 1999 2000

100

200

300

400

500

600

700

Low- and middle-income countries High-income countries

and stimulating innovation, in order to econo-mize on labor.

There is less evidence that adherence tolabor standards is correlated with other mea-sures of economic development, such as realwages. In the newly industrializing countries ofEast Asia, rising real wages have been associ-ated with improved bargaining rights (Maskus1997). In a larger sample of countries, how-ever, there is no clear correlation between free-dom of association and changes in real wagesor changes in manufacturing output per workerfor the period 1973–92. In a sample of 17countries that had recorded discrete improve-ments in legislation and practice regardingfreedom of association, there was no uniformtendency for growth to accelerate after thechanges (OECD 1996).

Labor standards and economic welfareAdherence to core labor standards can makeimportant contributions to improving welfare.The welfare impact depends on the structureof domestic institutions and policies. For ex-ample, if monopsonist firms hire workers be-low their marginal revenue product, allowingworker association and collective bargainingcould raise both worker wages and efficiencyby boosting employment.18 Moreover, orga-nized labor can contribute to raising efficiencyand welfare in ways that go beyond the adju-dication of wages. For example, unions cancontribute to firm-specific knowledge and or-ganizational capital, thus raising productivity,and can help improve domestic labor stan-dards by overcoming a “prisoner’s dilemma”low-standards equilibrium (Stiglitz 2000).19

But if the economy starts from a competitiveequilibrium, collective bargaining that raiseswages above their marginal revenue productmay lower efficiency. If collective bargaining issupported by measures to restrict entry (and incompetitive conditions, collective bargaining isnot likely to have a long-term impact on wagelevels otherwise), the excluded workers areclear losers. Thus, evaluating policies for in-ducing higher labor standards requires detailed

knowledge of the competitive conditions in theaffected labor markets.

In some cases, improvements in labor stan-dards may have unintended consequences andnot necessarily improve the welfare of work-ers. In several countries, labor standards arelower in export-processing zones (EPZs) thanin the rest of the country, mainly because ofbans on unions or restrictions on strikes(OECD 1996).20 Workers in most EPZs, how-ever, earn higher wages and enjoy better work-ing conditions than their counterparts else-where in the country (ILO 1993; Maskus1997).21 It is not clear what effect better laborstandards would have on investors the EPZsare designed to attract. Advocates of improv-ing labor standards in EPZs must understandnot only the domestic labor market but alsothe negotiating position of the developing coun-try relative to investors.

Labor standards and competitivenessIt is often argued that low labor standards im-pose low wages and thus enhance domesticcompetitiveness at the expense of trading part-ners’ workers. In some cases, employer collu-sion, in the absence of collective bargainingrights for workers, may reduce wages belowwhat they would be with effective labor stan-dards, thus potentially raising production.22

Such an outcome would require nation-widecollusion since if a firm pays below the pre-vailing wage, it will eventually lose its employ-ees to other sectors.23 The key point in this dis-cussion is that standards need to be ratchetedup in a coordinated and economy-wide fash-ion, i.e. a sectoral or partial approach will havespillover effects which could in many cases bedetrimental to a broad group of workers.

Over time, artificially imposed low laborstandards are likely to erode competitivenessbecause they reduce incentives for workers toimprove their skills; the earnings gain that canbe achieved by upgrading skills is limited bylabor market conditions. Similarly, low laborstandards reduce incentives for firms to intro-duce labor-saving technology, as the savingsare worth less if wages are low.



Unpublished Proofs

The data do not indicate that core laborstandards play a significant role in shapingtrade performance (OECD 1996). Countrieswith higher labor standards had higher growthrates in their share of world manufacturingexports from 1980 to 1990, but it is not pos-sible to infer the direction of causality fromthese results. Of six countries that achievedsignificant improvements in labor standards,half saw a decrease in the growth of their sharein world manufactures, while half saw an in-crease. Differences in endowments and tech-nology are much more important than laborstandards in determining patterns of compara-tive advantage.

The OECD study (1996) also examined therelationship between labor standards and FDI.Most world FDI flows from OECD countriesinto other OECD countries, which generallyhave high labor standards. As for the inflowsof FDI to non-OECD countries, it is not clearthat countries with low standards are the pri-mary destinations.24

Effectiveness of trade sanctions inimproving labor standardsEven where low labor standards reduce eco-nomic efficiency and welfare, sanctions areunlikely to improve workers’ welfare. It is afamiliar principle of economics that the mostefficient way to remove a distortion is to ad-dress it directly. For example, setting a tariff isan inefficient way to encourage domestic pro-duction of a good. Imposing trade sanctions isa vastly inefficient way to encourage betterlabor standards.

Take a favorable (to those advocating tradesanctions) case, in which government-supportedbarriers to entry enable monopsonist employ-ers to pay workers below their marginal rev-enue product. Both employment and wagerates are lower than if the market were com-petitive. Assume that the rest of the world im-poses a tariff on exports of the product, thusreducing the export price. The monopsonist’sresponse to any reduction in demand underthis market structure would be to reduce fur-

ther employment and wages in the sector. Ifthe monopsonist were large, that would leadto pressures to reduce wages in the economyas a whole (Maskus 1997).

Trade sanctions on particular export goodsare unlikely to improve labor standards forthe economy as a whole, even if the sanctionschange the behavior of particular firms. Forexample, barring child labor in one firm orsector without addressing the fundamentalcauses of child labor is likely to shift childrento less-remunerative and perhaps more dan-gerous occupations in other sectors. In Ban-gladesh in 1993, the threat of U.S. sanctionsled owners of garment factories in Dhaka todismiss all children under age 16. Anecdotalevidence suggests that many of these childrenfound employment in workshops and facto-ries not producing for export, or as prosti-tutes, brick-breakers, or street vendors (Pana-gariya 1999a). There are effective measuresfor combating abusive child employment, in-cluding income-support programs and subsi-dies for education, but trade sanctions are notamong them.

The political-economy arguments againstimposing trade sanctions on countries withlow labor standards are even more compel-ling. As discussed above, determining whetherparticular improvements in labor standardswould raise welfare requires considerable in-formation on labor and product market con-ditions. Determining whether labor arrange-ments in exporting countries will affect wagerates in importing countries is even more com-plicated, requiring estimates of various param-eters such as demand and supply elasticities in different markets and factor intensities ofgoods (Maskus 1997). The complexity of theseissues, and the decentralized nature of the costs of protection to consumers, increase thepotential for decisions to be captured by well-organized domestic interests that would ben-efit from trade barriers. The fact that laborunions and producers in some protected indus-tries in industrial countries favor using theWTO system to improve labor standards un-derlines this concern.



Unpublished Proofs

While adherence to core labor standardsimproves welfare, integrating labor standardsinto the WTO is contentious. Under tradi-tional criteria, which focus on product stan-dards, not process standards, labor standardswould not be considered for trade discussions.The TRIPs agreement has, however, widenedthe scope for broadening the traditional crite-ria (see box 3.2).

Inadequate labor standards and poor work-ing conditions are first and foremost, a devel-opment challenge that affects sizable popula-tions, whether or not they are involved intrading activities.25 It may be easy to identifysome blatant abuses linked with goods thatenter industrial markets, but the large majorityof workers in developing countries may sufferfrom even worse conditions than workers em-ployed in export activities. The keys to improv-ing workers conditions—beyond developmentitself—lie in assisting countries with the devel-opment of domestic institutions to supportworkers’ rights and improve working condi-tions, and coordinating policies across develop-ing countries to ratchet up standards and escapea low-standard equilibrium.

The ILO has been actively pursuing theseactivities since its creation in 1919. The ILOregularly monitors working conditions in itsmember countries, and traditionally providesincentives (such as technical assistance) to encourage improved compliance with ILOconventions. However, it is able to invoke eco-nomic sanctions (Article 33 of the ILO Con-stitution) and did so for the first time in 2000(against Myanmar), although implementationof the sanctions was postponed to allow thecountry time to comply.26 Strengthening theILO and enhancing its cooperation with otherinternational organizations would be an effec-tive step toward ameliorating working condi-tions around the world. The private sector,particularly multinational firms, should alsoplay a more active role by promoting uniformcorporate codes of conduct and using best-practice production methods in all countrieswhere they or their affiliates operate.

Environmental standards and trade

The past decade has seen increasing debateover the contribution of trade to environ-

mental degradation. In part, this debate hasreflected concern about the role of growth indepleting crossborder public goods; specificissues include the dangers of global warmingand the unsustainable pace of fishing and wateruse in some regions (Nordström and Vaughan1999). Workers and firms in industrial coun-tries fear that their competitive position isbeing undermined by environmental regula-tions that force pollution-intensive industriesto move to developing economies. Greater tradeintegration and access to information, whileboosting global welfare, are increasing the in-tensity of disputes and the potential for do-mestic interests to be injured by the actions offoreigners.

Although environmental concerns areclearly legitimate, the trade system is rarely theappropriate instrument for addressing them,given the principles outlined at the beginningof this chapter. Only a limited set of environ-mental issues affect more than one country. Tothe extent that environmental damage is lim-ited to a single country, decisions on whetherto restrict production for environmental rea-sons should not be imposed through trade ne-gotiations. Imposing trade sanctions to achieveenvironmental goals is likely to be inefficientand perhaps counterproductive. Countries havedifferent priorities, which are in large part areflection of different levels of development.Poorer countries are likely to make differentchoices in facing tradeoffs between growth andenvironmental goals than do industrial coun-tries—today’s industrial countries did the samewhen they were developing. It is important thatdeveloping countries retain access to the inter-national trade system, even if their domesticenvironmental policies are not those preferredby richer countries. Several international in-stitutions—such as the Joint United NationsEnvironment Programme (UNEP)—and the international environmental summits, have anenvironmental mandate and should be the



Unpublished Proofs



Unpublished Proofs

TRIPs requires all WTO members to set minimumstandards for protecting intellectual property

rights (including patents, copyright, and trademarks)and to establish obligations regarding the enforce-ment of rights. Disputes under TRIPs are subject tothe WTO’s integrated dispute settlement system.27 In-dustrial countries were strong advocates of TRIPs,and developing countries may have acceded to it toachieve progress in sectors of importance to themsuch as agriculture and textiles.

TRIPs makes significant demand for changes inintellectual property regimes, particularly in manydeveloping countries in which protection of intellec-tual property does not meet minimum TRIPs stan-dards. Changes in legal systems are under way inmany countries. However, there is a concern that thetendency to copy intellectual property regimes fromindustrial countries in order to comply with TRIPsrequirements may be inappropriate for many develop-ing countries. For example, these regimes may notadequately protect traditional knowledge, particularlygiven that the appropriate form of such protection isunknown and will require experience to develop (Finger and Schuler 1999).

Implementation of the TRIPs agreement couldhave a significant financial impact on developingcountries. TRIPs will transfer rents from developingto industrial countries, which hold the overwhelmingbulk of patents and copyrights. It is impossible topredict the size of these transfers. Some insight intothe orders of magnitude involved can be found in astudy by Maskus (2000b). He estimates that had theTRIPs agreement been in place in 1988, transferscould have amounted to $8.3 billion (in 1995 dol-lars) to the top six industrial countries, with slightlyless than half this amount coming from the develop-ing countries in his sample.28 A second area of con-cern regarding the financial impact of the TRIPsagreement is the considerable cost of administeringintellectual property rights, particularly for thepoorer developing countries. In addition, developingcountries may not benefit from the most advancedtechnologies, due to the costs involved. Beyond pureeconomic costs, there is concern that TRIPs may

Box 3.2 The Trade-Related Intellectual PropertyAgreement (TRIPs) and developing countries

constrain countries’ access to critical drugs such asthose for treating AIDS or malaria. Some of the rela-tively advanced developing countries may be able toproduce these drugs domestically. To do so, theycould invoke an exception in the TRIPs agreement togrant compulsory licenses for the domestic produc-tion of drugs. (The agreement allows for compulsorylicensing under certain conditions, one being bonafide negotiations between the local government andthe foreign manufacturer regarding the terms onwhich the manufacturer would be willing to supplythe domestic market. In either case, compensation isdue the foreign patent holder.) Less-advanced coun-tries may have difficulties in producing or importingcheaper drugs because, although TRIPs does notentirely foreclose the possibility of exporting drugsproduced under compulsory licenses, it does limit it(Subramanian 1999).

The negative impacts of TRIPs for developingcountries were intended to be mitigated by severalfactors. First, they had longer transition periods forimplementation, though these have largely expiredexcept for least developed countries (which haveuntil January 2005). Second the TRIPs obligationsdo not apply to products and processes that were al-ready on the market before TRIPs took effect. Thenet impact will eventually depend on the existence ordevelopment of substitutes, which could reduce themarket power of patent or copyright holders, andthe price elasticity of consumer demand.

In the long run, stronger protection of intellectualproperty in developing countries may contribute togrowth by removing a disincentive for owners oftechnology to export and license, encouraging for-eign investment, and by stimulating both domesticand foreign research and development. Such benefitsare likely to be greatest for the larger and richerdeveloping countries, which can enforce patent pro-tection and imitate technology (Maskus 2000b). Inaddition, to counter some of the perceived imbalancein the initial agreement, developing countries havemade various proposals to ensure that indigenousculture, knowledge and genetic resources are pro-tected and remunerated.

forums for discussing environmental goals. Inaddition, donor countries and internationalagencies can and do condition their assistanceon achievement of environmental goals, in-cluding those that affect important aspects ofthe global commons.

The impact of trade integration on theenvironmentTrade integration influences growth, the tech-nology mix, and the composition of output. In-creased openness will raise economic growthand living standards, which, other things beingequal, will increase environmental degrada-tion. This scale effect is empirically important,especially for countries that are specialized inenvironment-intensive activities, such as min-ing, fisheries, and forestry, as in Chile, andwood and wood products, industrial chemi-cals, and petroleum, as in Indonesia (Lee andRoland-Holst 1997).

Although the scale effect is always positive(as long as trade integration induces growth), itcan be counterbalanced by two other effects:the technique effect and the composition ef-fect.29 Trade integration changes access to tech-nology (through, for example, capital goodsimports), and this technique effect may have apositive or negative impact on environmentaldegradation. New technology may result insavings on energy and other inputs, reducingthe pollution intensity of growth. The compo-sition effect may also have a positive or nega-tive impact on environmental degradation.Trade integration and growth affect the com-position of output, owing to changes in therelative endowments of factors, the increas-ing consumption of (relatively cleaner) servicesthat accompanies higher incomes, and the in-creased affordability and desirability of pollu-tion reduction, which indirectly lead to betterenvironmental protection.30

The impact of trade integration on the en-vironment has varied considerably, dependingon the nature and strength of these three ef-fects, but outward orientation has reduced the pollution intensity of output in severalcountries (Birdsall and Wheeler 1992), and

outward-oriented economies have lower pollu-tion intensity of aggregate output than inward-oriented ones. During the 1980s outward-oriented growth was associated with decliningpollution intensity because the industrial ac-tivities of outward-oriented economies becamemore diversified, shifting away from heavymanufacturing (Lucas, Wheeler, and Hettige1992).31 FDI and the use of technology-ladenimported inputs have helped transmit cleanertechnologies from the regulated industrial-country market to developing countries—forexample, in the paper and pulp industry(Wheeler and Martin) and the steel industry(Reppelin-Hill 1999).

Conversely, in many countries import-substitution strategies have been pollution-and resource-intensive because of price distor-tions and lack of competitive discipline. Thereis strong evidence that under an import-substitution strategy, countries have special-ized in pollution-intensive manufacturing ac-tivities in which they are not truly competitive.The resource content of goods in such coun-tries is much higher than that of comparablegoods in open economies (Jha, Markandya,and Vossenaar 1999; Vukina, Beghin, and So-lakoglu 1999). Some distortions have strongerenvironmental consequences than others. Forexample, subsidized energy usually implies amore energy-intensive economy and thereforemore emissions.

Trade liberalization and other reforms havehelped correct policy distortions that subsidizeenvironmental degradation. For example, en-ergy use per unit of aggregate product in 12former centrally planned economies declineddrastically with market reform, in part be-cause of the rise in domestic oil prices and thecleaner composition of manufacturing outputfollowing trade and price liberalization. En-ergy intensity in China fell by 30 percent be-tween 1985 and 1997 as market-oriented re-forms were introduced (Vukina, Beghin, andSolakoglu 1999; World Bank 1997). Similarfindings emerge for use of natural resources.For example, in Sri Lanka, trade liberalizationincreased the demand for land to be planted in



Unpublished Proofs

tea, which is less erosive than other crops, thusgenerating both environmental and economicbenefits (Bandara and Coxhead 1999).

Some countries do show increased pollu-tion following trade liberalization, owing toboth scale and composition effects. Beghinand Potier (1997) suggest that some countriesfaced more domestic pollution following tradeliberalization because their aggregate activitiesexpanded, not necessarily because they spe-cialized in “dirty” activities. Several countries,however, did see increased specialization indirty activities following trade liberalizationbecause they happened to be competitive inthese activities. In this category are Indonesia(Lee and Roland-Holst 1997; Strutt and An-derson 1999); China (Dean 1999; Dessus,Roland-Holst, and van der Mensbrugghe1999; Jha, Markandya, and Vossenaar 1999);Costa Rica (Abler, Rodriguez, and Shortle1999; Dessus and Bussolo 1998); and Turkey(Jha, Markandya, and Vossenaar 1999). Fer-rantino and Linkins (1999), using simulationswith a CGE model to estimate the effects oftrade liberalization on output of toxic emis-sions, suggest that specialization is more im-portant than scale in determining the impactof trade liberalization on pollution. Table 3.1summarizes the evidence from economywidestudies on the relationship between trade lib-eralization and pollution. Panel studies founda mixed effect of outward orientation. Rock(1996) found that the composition effect ofoutward orientation was positive or ambigu-ous. Lucas, Wheeler, and Hettige (1992) founda negative composition effect. Negative resultsin a study by Vukina, Beghin, and Solakoglu(1999) were robust.

One concern about trade and financial in-tegration is that countries with relatively weakenvironmental regulations will attract dirty in-dustries away from countries with strongerregulations, and that because of competitive-ness concerns integration will inhibit the im-position of strong environmental regulations(“regulatory chill”). A related conjecture isthat states could strategically decrease envi-ronmental protection to attract new indus-

tries, setting off a “race to the bottom.” Theemergence of such a race is theoretically pos-sible (Klevorick 1997; Wilson 1997), particu-larly in political and regulatory environmentsthat are not transparent and are vulnerable to capture by dirty-industry interests. (Cap-ture by “green” interests is also possible—en-vironmental protection would exceed publicpreferences.) The several methodological ap-proaches used to study this question generallyfind mixed evidence as to whether environ-mental regulation is eroding competitivenessin relatively “clean” countries (see table 3.2and box 3.3).

The cost of environmental protectionOne reason for the paucity of evidence thatenvironmental regulations impair competitive-ness is that the cost of environmental protectionis often low, as measured by forgone growth orthe capital cost of abatement. Despite the inef-ficiency of the command-and-control approachthat most OECD countries have used in ad-dressing pollution, the cost of compliance to in-dustries has been surprisingly small, and abate-ment has been significant (Jaffe and others1995). Simulations using applied general equi-librium models of developing economies havefound that the cost of abatement for most typesof emissions is modest in terms of forgone GDPgrowth. This finding was robust, having beengenerated from models of 7 developing eco-nomies with different assumptions on abate-ment possibilities and for 13 types of pollution.The only type of pollution that was found to beexpensive to abate was bioaccumulative toxicreleases in water (Beghin, Roland-Holst, andvan der Mensbrugghe forthcoming). Detailedqualitative case studies of individual industriesundertaken by the United Nations Conferenceon Trade and Development (UNCTAD) con-firm these findings (Jha, Markandya, and Vos-senaar 1999).

Malaysia provides an interesting case ofspecialization in resource-intensive activitiesaccompanied by environmental protection(Jha, Markandya, and Vossenaar 1999). Thepalm oil industry adapted to a rapidly imple-



Unpublished Proofs

mented set of environmental regulations andtaxes. Compliance is high, and exports are sta-ble, even though opportunities to pass the cost-increase on to consumers were limited by thehighly competitive nature of the industry. State-funded research helped develop commercialby-products from palm meal, reducing thecost of compliance by generating revenuesfrom the by-products instead of treating themor dumping them and paying fines and fees(Jha, Markandya, and Vossenaar 1999; Khalidand Braden 1993). The Malaysian electronicsindustry also continued to grow despite tighterenvironmental regulations, in part because thestrong FDI presence facilitated the introduc-

tion of the latest technology (Jha, Markandya,and Vossenaar 1999).

Trade policy and environmentalprotectionTariffs are usually ineffectual instruments fortackling pollution and environmental degra-dation. Only when the externality originatesin trade are trade taxes effective in addressingthe problem (Subramanian 1992). A rankingof instruments for addressing pollution emis-sions follows the targeting principle (Bhagwatiand Srinivasan 1997), which, broadly, says“the closer, the better.” Hence, emissions taxesare the best instrument for dealing with pollu-



Unpublished Proofs

Table 3.1 Summary of economywide studies assessing the impacts of trade liberalizationon pollution

Policy change Scale Composition Technique Total pollution

Mexicoa Trade liberalization + – n.a. Small decreaseUnited Statesa with NAFTA + + n.a. IncreaseCanadaa + + n.a. Increase

Mexicoa Trade liberalization + + n.a. IncreaseUnited Statesa with NAFTA plus + + n.a. IncreaseCanadaa investment + + n.a. Increase

liberalization

Mexicob Trade liberalization, +2.8 to 3.7% –4.3 to 2.6% –0.7 to 3.5% –0.2 to 6.4%better terms of tradewith United Statesand Canada

Costa Ricac Trade liberalization 9.4% 5.6 to 10.6% + but small 15 to 20%

Vietnamd Trade liberalization 5 to 8.8% –6.3 to 8% 1.1 to 7.5% 0.8 to 23.1%

Indonesiae Trade liberalization 0.87% –.36 to 2.86% n.a. 0.51 to 3.73%with Japan

Japane Trade liberalization 0% –0.09 to –0.02% n.a. –0.09 to –0.02%with Indonesia

Globalf Multilateral n.a. n.a. –0.02 to 0% –4.32 to 0%liberalization

n.a. Not available.Note: NAFTA, North American Free Trade Agreement. The data cited in notes a–f are reproduced from Beghin and Potier 1997.a. Grossman and Krueger 1992; percentages not available.b. Beghin, Roland-Holst and van der Mensbrugghe 1995. The scale effect range refers to production and absorption. The rangesfor composition and technique effects refer to 13 measures of pollution emissions.c. Dessus and Bussolo 1998. The scale effect is the increase in output. The composition effect is the difference between total andscale effects.d. Dessus and van der Mensbrugghe.e. Lee and Roland-Holst 1997. The range of composition effects refers to 10 pollutant types. The authors also report a humantoxicity index.f. Ferrantino and Linkins 1999, tables 7 and 9. Scale and composition figures are not disaggregated.

tion emissions and minimizing distortionaryeffects elsewhere in the economy. If emissionstaxes are not feasible, input taxes are prefer-able to production taxes, which in turn arepreferable to tariffs (Beghin, Roland-Holst,and van der Mensbrugghe 1997; Lloyd 1992;Ulph 1999). This point has been documentedempirically in the case of forestry products(Barbier and Rauscher 1994), as well as forthe Indonesian economy (Lee and Roland-Holst 1997). With increasing economic in-tegration, Indonesia is tending to specialize in resource- and pollution-intensive activities.Pollution emissions at the national level (asdistinguished from the sector level), however,cannot be decreased even modestly by usingtariffs. By contrast, production taxes propor-tional to the pollution content of output makethe targeted pollution abatement feasible at areasonable cost in forgone growth.

There have been few trade disputes overtechnical requirements related to the environ-ment. Whalley and Hamilton (1996) reportonly a limited number of environment-relatedtrade disputes for the period 1982–96, and veryfew such disputes have been brought to theWTO since 1995 (WTO website). Only two ofthe 43 requests from developing countries—concerning reformulated U.S. gasoline and theU.S. ban on certain seafood products—involveenvironmental objectives. Of 300 cases of tradeimpediments to U.S. agricultural exports, onlyone was based on environmental goals; most in-volved food safety and protection of crops andlivestock from pests and disease. It is not clearwhether the paucity of environment-related dis-putes reflects the limited impact of environmen-tal regulations on traded goods, the high costsof litigation, or the scope of disputes providedfor under WTO rules.



Unpublished Proofs

Table 3.2 Evidence on international competitiveness and environmental regulation

Approach Study Conclusion

Cross-sectionalHeckscher-Ohlin (H-O) model

Investigations of FDI flows

Plant location: firm surveys

Plant location: econometricapproach

Kalt 1988

Tobey 1990

Han 1996

Valluru and Peterson 1997

Diakosauvas 1994

Xu 1999

Albrecht 1998

Eskeland and Harrison 1997

Xing and Kolstad 1995

UNCTAD 1993

Levinson 1997a, summary

Levinson 1997a

Bartik 1989

Mani, Pargal, and Huq 1997

Metcalfe 2000

U.S. manufacturing exports negatively affected byenvironmental regulation

World trade in dirty commodities not affected byenvironmental regulation

Small negative impact of regulation, decreasing overtime

Grain trade not affected by environmental regulation

Exports of the five most polluting crops negativelyaffected by regulation

Environmentally sensitive exports of 34 countries notinfluenced by regulation

United States found to import pollution-intensiveindustries more than it exports them

No pollution-intensive bias in French and U.S. FDI indeveloping economies

U.S. FDI influenced by weak regulation only inchemical industries

Negative effects of environmental policy on location

Marginal impact of compliance cost except for self-declared U.S. dirty industries

No effect

Small and negative effect

Positive effect of one measure of environmentalstringency on plant location

Negative effect of regulatory stringency on small U.S.livestock operators



Unpublished Proofs

Empirical studies of the pattern of trade, the allo-cation of FDI, plant location, and profitability

have found limited or no evidence that environmentalregulations have reduced investment or lowered com-petitiveness. As might be expected, evidence for arace to the bottom is somewhat stronger for the dirti-est industries, although even here there are conflict-ing results. There is no evidence that intracountrydifferences in environmental regulations affectinvestment. Large firms appear better-able to accom-modate environmental regulations than smaller firms.

Studies of the patterns of trade have used thecross-sectional Heckscher-Ohlin (H-O) model, whichexplains specialization on the basis of environmentalabundance, to examine indirectly the effects of envi-ronmental regulation on international competitive-ness. The results are mixed. Using 1977 data, Kalt(1988) found that U.S. environmental regulation had a significantly negative effect on competitive-ness, as measured by net exports of manufacturinggoods. Tobey (1990), using 1975 data, found no evi-dence that increased regulation affected output inpollution-intensive industries. Han (1996) tested theenvironmental H-O model using panel data (acrossindustries and over time) and actual expendituredata on pollution abatement as a measure of theenvironmental input. He found that increased envi-ronmental regulation has had a significantly negativeeffect on competitiveness, but that this effect has de-creased over time as many countries tightened theirregulations and as abatement costs fell with new cap-ital vintages, learning by doing, and new technolo-gies. Valluru and Peterson (1997) and Diakosauvas(1994) found little evidence that environmental regu-lations have had a significant negative economiceffect on agricultural trade except for the most-polluting commodities such as cotton and tobacco.Xu (1999) found that the export performance of en-vironmentally sensitive industries in 34 countries wasunchanged between the 1960s and the 1990s despitethe emergence of environmental standards in mostindustrial countries since 1970.

The evidence on the allocation of FDI provideslittle support for the existence of pollution havens.The United States is importing more pollution-intensive industries than it is exporting, and dirtyindustries are no more likely to invest abroad thanother industries (Albrecht 1998, cited in Nordströmand Vaughan 1999; Eskeland and Harrison 1997).Eskeland and Harrison (1997) find no evidence of

Box 3.3 Evidence on the “race to the bottom”pollution-intensive bias in the allocation of French andU.S. FDI flows going into manufacturing industries inCôte d’Ivoire, Mexico, Morocco, and the RepublicaBolivariana de Venezuela. Xing and Kolstad (1995)find that U.S. FDI in chemical industries seems to beinfluenced by weak environmental regulation, as prox-ied by sulfur dioxide emissions, but they also find thatFDI in cleaner industries was not influenced by envi-ronmental stringency.

Studies have found only limited evidence thatenvironmental regulation has a significant effect onplant location. Surveys of the relocation of transna-tional corporations provide some support for the no-tion of a race to the bottom (Runge 1994; UNCTAD1993). Surveys, however, tend to be less reliable thanactual data because they report what is said ratherthan what is done (Levinson 1997a). Levinson finds,for many industries and measures of stringency, thatinterstate differences in environmental regulations donot systematically affect the location choices of mostmanufacturing plants in the United States. Mani,Pargal, and Huq (1997) find, surprisingly, that aproxy for different levels of enforcement of federalenvironmental policy in Indian states is positivelyrelated to decisions on the location of new manufac-turing plants for a wide range of manufacturingindustries and for the smaller subset of pollution-intensive industries. It is possible that the proxy forstringency (the share of the state budget spent onenvironmental programs) measures the efficiency ofstate administration, which induces firms to locate instates with higher environmental expenditures.

Several other studies have looked at the impactof environmental regulation in agriculture, but mostlyin OECD countries. Metcalfe (2000) finds that strin-gency had little impact on the location of U.S. hogproduction across states and over time. Stringencydid have a negative impact on small operators butnot on large, modern, confinement livestock produc-ers. Hettige and others (1996) found evidence ofeconomies of scale in environmental compliance formany other industries in several countries.

Finally, studies have found a positive relation-ship between environmental performance and theprofitability of U.S. firms (Cohen and Fenn 1997;Repetto 1995). Although environmental complianceis not free, it creates new market opportunities andmay induce further efficiency gains that may offset its(small) cost. Environmental performance appears tobe systematically associated with higher profitability.

Several global environmental treaties havebeen concluded over the last 25 years, notablythe Convention on International Trade in En-dangered Species of Wild Fauna and Flora(CITES)32 protecting trade in endangeredspecies, and the Montreal Protocol33 banningthe use of ozone-depleting chemicals (for exam-ple CFCs, widely used as a coolant in refrigera-tors and air conditioners.) These agreementstypically provide incentives for compliancethrough both technical and financial assistance.In addition, many also provide for trade sanc-tions to enforce compliance. The compatibilitywith WTO rules of trade sanctions potentiallyallowed by such treaties has not been tested.

Alternative policies for environmentalprotectionAlthough trade sanctions are not effectivemeans of inducing environmental protection,foreigners can affect environmental choices inother ways. In some cases, foreign countriescould provide subsidies to encourage betterenvironmental practices. For example, in theU.S.-Mexican dispute over protecting dolphins,an alternative policy would have been for theUnited States to equip Mexican fishermen withimproved nets.34 The cost of this option wouldhave to be compared with the overall lossesresulting from trade restrictions. This is tosome extent an empirical issue, but the optionwould at least reduce dolphin kill, which nei-ther trade sanctions nor a consumer boycott islikely to do.

Ecolabeling schemes enable foreign con-sumers to choose goods produced in an envi-ronmentally benign way. These schemes canbe a source of trade friction, even though themarkets they cover are still relatively small,because of the increased production costs in-volved in the certification process. For exam-ple, ecolabeling schemes in textiles requiremultiple production standards for dyes, fibers,and bleaching chemicals (OECD 1997a). Inaddition, most schemes impose fees. Canada’sEnvironmental Choice Program imposes a 0.5percent charge, based on the price of the good,on sales up to Canadian $1,000,000. Certifi-

cation under industrial-country labeling schemesmay be difficult for developing countries toobtain (Jha, Markandya, and Vossenaar 1999;Jha and Zarrilli 1994; OECD 1997a; Zarsky1994). For example, none of the 48 licensesgranted under the EU Commission’s ecolabelwent to a developing-economy firm, althoughit is not clear whether any of these firms ap-plied (Nimon and Beghin 1999). Ecolabelingschemes can be used in a discriminatory way,especially in markets dominated by develop-ing economies, such as textiles. Domesticindustries have more say in defining ecostan-dards than do foreign competitors. The stan-dards are likely to favor technologies that arefeasible in industrial countries rather than theinput mix and technology set of developingcountries.

Local ecolabels are emerging in developingcountries, especially in timber-based products,but also in textiles, to promote better practiceand preempt discriminatory labeling in indus-trial countries. For example, Malaysia sup-ports ecolabels and standards that apply to alltypes of timber and are based on internation-ally agreed standards, not merely on standardsdeveloped by one or a few countries (Jha,Markandya, and Vossenaar 1999).

Another approach is to help trading part-ners implement market-based environmentalpolicies that have proved effective in tacklingenvironmental problems in developing coun-tries. Reducing subsidies on pollution-intensiveactivities or raising taxes on polluting activi-ties, through discharge, input, or output taxes,has reduced pollution and increased tax rev-enues in Bangladesh, Brazil, Indonesia, andother countries (World Bank 1997). Market-based instruments also provide incentives tosave on the taxed resource and become moreresource-efficient. The more targeted the in-strument, the better. Some countries, such asChina and Malaysia, have used emissionscharges with some success. When the cost ofmonitoring is not prohibitive, the market in-strument can be very targeted; for example,many countries use stumpage fees to fostersustainable forest management (World Bank



Unpublished Proofs

1997). China has been successfully abatingpollution for the past 20 years by using levies(Wang and Wheeler 2000).

Privatization and competition, or incre-mental reform in this direction, can promotebetter resource management. Several studiesidentify state firms as worse polluters thanfirms in the private sector (Pargal and Wheeler1996) or centrally planned economies as worsethan market economies (Vukina, Beghin, andSolakoglu 1999). Incentives to economize,combined with increased resources for bettermanagement, have improved the performanceof public entities in many countries. For ex-ample, in several countries, water-user associ-ations have been substituting for the govern-ment in allocating irrigation water.

Engagement of the public is essential to suc-cessful environmental protection. This processcan foster partnership among the public, firms,and authorities. The government can be a fa-cilitator for private industry by disseminatinginformation on new technology and environ-mental regulations. Alternatively, the processcan be coercive, relying on disclosure of vio-lation of environmental regulations, such asillegal discharges. The coercive approach hasbeen effective in developing economies such asChina (Dasgupta and Wheeler 1997), althoughcomplaints tend to be positively associated withhigher income and greater human capital.

Regional approaches to environmental stan-dards may prove more effective than global ap-proaches, particularly on issues with a clearregional component such as transboundaryemissions and shared water resources. A re-gional approach does not imply uniform stan-dards for domestic environmental problems;the case against harmonization of policies isoverwhelming in most settings because of dif-ferent valuations of the marginal benefits of en-vironmental protection.

Notes1. The regulation of standards in a local or national

economy, particularly with respect to appropriatenessand efficiency impacts, is another important topic for

many developing countries, but it is not the main sub-ject of this chapter. The effects of voluntary productstandards are touched on summarily.

2. Many international food standards are set by theCodex Alimentarius Commission, which is based inRome and is a joint commission of the Food and Agri-culture Organization of the United Nations (FAO) andthe World Health Organization (WHO).

3. This framework is taken, in part, from Rollo andWinters 2000.

4. For a primer on standards and trade, see Na-tional Research Council 1995.

5. This section draws on Maskus and Wilson,forthcoming.

6. The Development Economics Research Group of the World Bank is carrying out a major project ontrade and standards that includes construction of anew global database on standards barriers to supportfuture empirical and policy research in this area.

7. The estimate of the decrease in costs attributableto the adoption of uniform standards is taken fromGasiorek, Smith, and Venables 1992.

8. An overview of all WTO dispute settlement casesmay be accessed through the WTO website at<www.wto.org/wto/dispute/bulletin.htm> and the WTODocument Distribution Facility at <www.wto. org/ddf>.The U.S.-EU case on hormone-treated beef is catalogedunder WT/DS26 and WT/DS48.

9. WTO cases involving only industrial countriesmay have implications for developing-country ex-porters’ market access. For example, the EU’s restric-tions on U.S. exports of genetically modified grainscould have major implications for the exports of simi-lar products from countries, such as Argentina andBrazil, where GMO varieties have been widely planted.

10. The budget of the Office of the USTR in fiscal2000 was $25.5 million, and the office had 178 (full-time equivalent) staff members; see <http://www.ustr.gov/reports/spy.pdf>.

11. For additional background, see Wilson 2000aand 2000b.

12. The (unweighted) average development assis-tance budget as a share of GDP for low-income coun-tries was 11.2 percent in 1998.

13. The World Bank has an active program to assistdeveloping countries in improving their standards in-frastructure. Further information is available at <http://www1.worldbank.org/wbiep/trade/Standards.html>.

14. This discussion is taken from formal posi-tions submitted to WTO General Council, January–November 1999.

15. These core labor standards were enunciated inthe June 1998 ILO Declaration on Fundamental Prin-ciples and Rights at Work.



Unpublished Proofs

16. The 1996 OECD study was updated in a morerecent report (OECD 2000), reaching broadly the sameconclusions as the earlier study.

17. This analysis should be viewed with some cau-tion, for several reasons: simple correlations provideno information on the direction of causality; the lack of a theoretical model of the determinants of growthmeans that the measured correlations between stan-dards and growth may be misleading; and it is difficultto construct adequate quantitative measures of the ex-tent of adherence to core labor standards.

18. Alternatively, the worker association could re-strict entry of workers and enable them to bargain fora higher wage, improving the welfare of workers in theassociation at the expense of excluded workers. Theoutcome would depend on the goals of the associationand the relative bargaining power of workers and cap-ital (Maskus 1997).

19. The “prisoner’s dilemma” in this context refersto the fact that if a country attempts to improve stan-dards it will lose a competitive edge if it acts alone. Asa result, in the absence of coordination, no country willattempt to improve standards.

20. Maskus (1997) points out, however, that laborturnover in EPZs is rapid, in part because assembly em-ployment is dominated by women, who leave to marry.In any event, high labor turnover results in low union-ization rates, even in EPZs in which union organizationand the right to strike are protected.

21. Firms in EPZs may pay higher wages than otherdomestic firms for several reasons: they benefit fromless burdensome regulations and can operate more flex-ibly; they tend to be larger and thus enjoy scaleeconomies; they are governed by the policies of foreign-owned firms that are bound by their headquarters’ bestpractices in labor standards; they need to attract laborto move to the area; or pressures to maintain quality tosatisfy export requirements may encourage them to payhigher wages to induce greater effort (Maskus 1997).

22. Even here, the impact of higher exports onwages in importing countries is likely to be small, par-ticularly in the familiar case of highly labor intensivegoods such as apparel, footwear, and electronics(Maskus 1997).

23. This analysis depends on the structure of labormarket conditions. For example, employers who col-lude to reduce labor standards can benefit if there areeffective barriers to labor mobility.

24. In the 1990s China, whose labor standardshave been criticized, was the largest beneficiary of FDIflows among developing countries. Significant anecdo-tal evidence indicates, however, that U.S. FDI in Chinais establishing above-market-wage, high-standards op-erations. Clearly, firms are investing in China for many

reasons, but the attraction of a large and rapidly grow-ing market is the most significant motive.

25. Labor markets in developing countries havebeen a subject of increasing involvement by the WorldBank—including the seminal 1995 World Develop-ment Report on “Workers in an Integrating World”—in large part because of the recognition that they playa key role in poverty reduction and economic develop-ment. Bank projects with a labor market componenthave increased dramatically since the early 1990s. Ef-forts are also underway to enhance dialogue withNGOs and other external partners, including regularconsultations with representatives from the Interna-tional Confederation of Free Trade Unions (ICFTU) todiscuss areas of mutual concern.

26. For more information, see http://www.ilo.org/public/english/bureau/inf/pr/2000/27.htm.

27. To date, six cases against developing countrieshave been initiated, all by the EU and the United States.Four cases deal with pharmaceuticals and agriculturalchemicals and two concern compatibility of domesticregulations with TRIPs obligations. The countries in-volved are Argentina, Brazil, India, and Pakistan; seehttp://www.wto.org/english/tratop_e/dispu_e/stplay_e.doc.

28. The transfers refer to the net present value ofpayments from 1988 on, based on the 1988 structureof patents.

29. The scale effect, almost by definition, has anelasticity of 1 with respect to growth. Thus, if an econ-omy grows by x percent, all else being equal, emissionswill also increase by x percent.

30. A significant body of literature on the “envi-ronmental Kuznets curve” (EKC) posits that pollutionintensity follows an inverse-U-shaped curve with re-spect to income. At low levels of development, pollu-tion tends to increase with economic growth; above acertain income level, it declines. There is evidence, atleast for some types of pollutants, that the turningpoint in some developing countries is occurring atlower levels of income than was witnessed in industrialcountries earlier. If this tentative evidence is borne out,it suggests that several factors are working in favor ofa more rapid transformation to a cleaner environmentin developing countries. These factors include techno-logical diffusion of both cleaner production processesand abatement technologies and greater awareness ofthe costs of environmental damage on the part of bothofficials and the general public. This literature is sum-marized succinctly in Nordström and Vaughan 1999.

31. See Rock 1996, however, for a critique of themeasurement of openness and market integration.

32. For more information see http://www.wcmc.org.uk/CITES/index.shtml.



Unpublished Proofs

33. For more information on the Montreal Proto-col, see http://www.unep.org/ozone/montreal.htm.

34. The United States placed trade restrictions onthe import of Mexican tuna because Mexican tunafishing techniques led to the indiscriminate killing ofdolphins.

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