Issue brief - Entwined

Issue brief
ENTWINED 2011/09/01
07
On the Role of MEAs in the WTO:
Legislators’ Silence Speaks Volumes
By Henrik Horn and Petros Mavroidis

ABOUT THE AUTHORS
Henrik Horn wrote his dissertation in economics
at the Institute for International Economic
Studies, Stockholm University, where he stayed
until his resignation in 2007, the last 13 years as
Professor of International Economics. He is since
2006 Senior Research Fellow at the Research Institute
of Industrial Economics (IFN) in Stockholm, Non-Resident
Senior Fellow at Bruegel, a Brussles-based think tank, and Chief
Reporter (jointly with Petros C. Mavroidis) for the American Law Institute
project Principles of World Trade Law: The World Trade Organization.
Horn is Research Fellow in the International Trade and
Industrial Organization Programmes of the Centre for Economic
Policy Research, London, Editorial Board member of the World
Trade Review, and Associate Editor of the Journal of World Trade.
He has taught at e.g. Stockholm University, Stockholm School of
Economics, the University of Michigan, Princeton University, the
World Trade Institute (Bern), and the Graduate Institute of International
Studies (Geneva), has served as a judge in the Swedish
Supreme Court for antitrust cases, and he has worked for four
years in the Economic Research and Analysis Division of the WTO.
Petros C. Mavroidis is Edwin B. Parker Professor
of law at Columbia Law School, New York and
Professor of Law at the Un. of Neuchâtel, Switzerland.
He is also Research Fellow at the Centre for
Economic Policy Research (CEPR) in London. Since
2000 he has been acting as chief co-reporter
(along with Henrik Horn) for the American Law Institute (ALI) project,
“International Trade Law: the WTO”. His latest publication is
“The Law of the WTO” (co-authord with George Bermann (Columbia)
and Mark Wu (Harvard), ThomsonReuters, 2010. He is currently
on leave from Columbia Law School and teaching at EUI, Florence.

ON THE ROLE OF MEAS IN THE WTO: LEGISLATORS’ SILENCE SPEAKS VOLUMES
On the Role of MEAs in the WTO:
Legislators’ Silence Speaks Volumes
By Henrik Horn and Petros Mavroidis
THIS BRIEF TARGETS
• Policy makers in the environment and trade area.
KEY MESSAGES
• The role of multilateral environmental agreements (MEAs)
in the World Trade Organization (WTO) legal order is highly
unclear, due to lack of legislation and case law on the issue.
• To determine the appropriate role of MEAs in the WTO, it
is necessary to understand the reasons for the separation of
agreements.
• One can identify two broad reasons for separation: strategic
benefits for certain countries, and contracting costs stemming
from large, complex agreements.
• Both of these reasons for separation suggest a very cautious
approach to MEAs by WTO adjudicating bodies.
• The main role of MEAs should be to provide factual information
concerning environmental issues.
purpose of issue brief: The purpose of this Brief is to point
to reasons why adjudicating bodies of the World Trade Organization
(WTO) should be cautious when drawing on multilateral
environmental agreements. The main purpose of such
agreements should be to provide factual information for adjudicating
such disputes.
International efforts to combat environmental problems are manifested
in a large number of multilateral environmental agreements
(MEAs). These agreements typically regulate economic activity,
and as such have consequences for international trade. They may
thus interfere with international trade agreements, and in particular
the World Trade Organization (WTO) Agreement, which provide
separate regulations of international economic activities. Despite
the overlaps of the two sets of regulations, the role of MEAs in the
WTO remains controversial. Legislators and WTO adjudicating
bodies have so far shown little enthusiasm for a narrowing of the
two, but there are frequent calls in the policy debate for recognition
of MEAs in the WTO legal order. This Issue Brief suggests reasons
why judges in disputes before the WTO should be cautious when
drawing on MEAs.
THE STATUS OF MEAS IN THE WTO
The basic problem for defining the role of MEAs in the WTO
is the fact that they are not among the covered agreements, that
is, among the multilateral and plurilateral agreements that form
the WTO Agreement. Hence, they are not included in the agreements
that WTO Members must respect to comply with the WTO
Agreement. The WTO Agreement is completely silent with regard
to MEAs. In principle, this lacuna could have been filled by the
WTO Committee on Trade and the Environment (CTE) and the
other competent WTO bodies. The Agreement Establishing the
WTO provides explicitly for this possibility to ‘complete’ the original
contract (Art. IX). However, no substantive progress has been
made there, despite many years of discussion. It has therefore been
left for WTO judges to determine the role of MEAs in the WTO,
but without any legislative guidance.
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ON THE ROLE OF MEAS IN THE WTO: LEGISLATORS’ SILENCE SPEAKS VOLUMES
WTO judges have only addressed the role of MEAs in a few disputes.
The first dispute was US – Shrimp, which concerned the possibility
for a WTO Member to regulate activities occurring outside
its own territory. In this dispute, the Appellate Body (AB) showed
a somewhat open attitude toward MEAs. 1 It referred to CITES,
an MEA, in order to cement its understanding of what constitutes
an exhaustible natural resource, one of the issues before it. It did
acknowledge CITES’ relevance, based on the fact that parties to
the dispute were signatories to CITES. But the AB did not take the
full step of explicitly recognizing what exactly the legal relevance of
MEAs is. The more appropriate interpretation of this report would
lead us to conclude that in the AB’s view, recourse of MEAs is left
totally to the discretion of the WTO judge. Hence, in theory, we
might never again experience recourse to MEAs by WTO judges.
The second decision addressing the role of MEAs was a panel decision
in EC – Approval and Marketing of Biotech Products – sometimes
called the “Biotech” dispute. In this case, the Panel dismissed
the relevance of an MEA – the Biosafety Protocol – on grounds that
not all parties to the dispute had ratified the MEA. The Panel did
not indicate what the role of the MEA would have been, had all
parties been members. Commentators by and large criticized this
decision, arguing that it rests on flimsy grounds.
The essence of the legal landscape is, hence:
• Neither the WTO nor most MEAs provide any explicit guidance
on how to view the relationship between the two bodies of
law;
• WTO Members have refrained from resolving the issue through
other means; and
• WTO case law has largely avoided the issue, or has been reluctant
to make general determinations.
It is thus fair to say that the role of MEAs in the WTO is, as a matter
of law, highly uncertain.
WHY FORM SEPARATE AGREEMENTS?
In our view, the appropriate relationship between MEAs and WTO
law must be addressed in light of reason(s) why the parties have chosen
to form separate agreements on trade and on the environment. It is
not a trivial issue to identify these reasons, since there are several
advantages for countries to form a single agreement rather than
separate ones.
First, a single agreement could enhance the possibility of enforcing
obligations, in particular in the environmental area. Second,
a single agreement would reduce duplication of certain efforts
required to negotiate and administer agreements. Third, a
single agreement could allow for linkages between trade and the
environmental concessions, thus allowing cooperation between
countries to go further than is possible with separate agreements.
So, why would countries forego these benefits of a single agreement?
We believe there are two broad reasons.
First, there may be “strategic” benefits to certain countries of
imposing separate negotiations and agreements. To see why, note
that negotiations can be organized in a variety of “bargaining formats”.
To give just a few examples: (i) one area (say tariffs) is
negotiated first, and only when an agreement on tariffs has been
reached is the other area (environment) negotiated; (ii) both areas
are negotiated simultaneously through separate negotiating processes,
and there is immediate implementation of an agreement
in one area even if negotiations are on-going in the other area; or
(iii) both areas are negotiated simultaneously but implementation
only occurs when there is agreement in both areas.
Such differences in bargaining format can have profound impact
on the outcome in terms of e.g. the distribution of the surplus
from the cooperation. For instance, in a negotiation between two
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ON THE ROLE OF MEAS IN THE WTO: LEGISLATORS’ SILENCE SPEAKS VOLUMES
countries A and B where country A stands to gain significantly
from a trade agreement, country A may be anxious to see the trade
agreement implemented as soon as possible to avoid delaying the
implementation of this agreement. But the bargaining position of
country A would be rather weak in the environmental negotiations
if implementation of the trade agreement is contingent on
an environment agreement. Country B would then benefit from
enforce a bargaining format where the two negotiations are linked
in this manner. Or, countries for which environmental commitments
are costly may prefer to keep environment outside the trade
agreement, in order to avoid having their environmental concessions
being enforced through potent trade countermeasures.
These are examples of “strategic” benefits of separation.
Second, the separation of trade and environmental agreements
may reduce “contracting costs”. International trade and environment
negotiations are not mere antagonistic haggling over how
to distribute the costs and benefits of trade liberalization and
environmental protection; it is rare that a “cake” of known size
and properties lies on the table when the negotiations begin. A
central role of negotiations is to identify packages of concessions
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ON THE ROLE OF MEAS IN THE WTO: LEGISLATORS’ SILENCE SPEAKS VOLUMES
that would provide benefits to all parties. That is, negotiators do
not only divide the cake, they also largely “bake” it. This can be
very costly, for two reasons. First, negotiations utilize administrative
resources, both at the negotiating table and in ministries and
governmental agencies of the parties, in particular in the form of
labour. Second, negotiating a large agreement takes time, implying
that the parties have to wait before they can enjoy the fruits of
their cooperation – in economic terms, there is a welfare loss due
to the discounting of the future benefits of the agreement.
Parties forming agreements take into consideration negotiation
and implementation costs alongside the benefits that the agreements
are expected to yield from reduced international externalities.
It may, therefore, be desirable to forego the gains of very elaborate
agreements if such agreements are very costly to bring about.
The parties will instead settle on cruder, but cheaper, agreements.
The literature suggests several ways of reducing such costs. For instance,
contractual bindings can be rigid rather than conditioned
on changes in the economic environment, an example being tariff
bindings that apply irrespective of changes in demand and supply
conditions. The agreement may also lack bindings, and instead
leave discretion over certain policies to the parties, such as the
GATT, which leaves discretion over domestic instruments to the
Members. In addition, contractual provisions may be expressed
vaguely in order to reduce negotiation efforts. These methods of
reducing negotiation costs imply that the resulting agreements are
incomplete in various ways.
In Horn and Mavroidis (2011) we propose an alternative
means of reducing negotiation costs: separating negotiations and
agreements. In particular, negotiations over a single, complete
agreement that comprises both trade and environment would obviously
be extremely costly. By negotiating separate agreements
in the two policy areas the parties can conclude the negotiations
more quickly. This approach is also likely to reduce administrative
resource requirements, since resources will not have to be spent
on coordination across issues. Of course, the cost savings come at
a price: the parties have to forego any benefits of a single agreement.
IMPLICATIONS FOR THE ROLE OF MEAS IN WTO DISPUTES
In seems plausible that the separation of trade and environmental
agreements is the result of both the strategic benefits that separation
yields for certain countries and the costs associated with
negotiating an agreement encompassing both trade and the environment.
What is the implication of this for the appropriate role
of MEAs in the WTO legal order?
First, while strategic reasons may explain separation of agreements,
they do not seem to explain why the separate agreements
would have gaps. Where separation is driven by strategic considerations
(i.e., parties have intentionally kept the MEA outside the
WTO), the case-law path must be trod with great caution. Judges
are in clear danger of undoing the balance of righs and obligations
between WTO Members if their decisions short-circuit the two
agreements.
Second, where negotiating costs explain separation of MEAs
and the WTO, WTO Members have abstained from sorting out
the relationship between obligations in the two sets of agreements.
It is therefore unclear to the parties how to best view the relationship
between them. Intuitively, it would then seem exceedingly
difficult for WTO judges to identify solutions that would be in
the long-term interest of all countries.
These two sets of reasons for the separation of WTO and MEAs
lead us to conclude that caution is recommended on the part of
WTO judges. However, we still believe that MEAs could provide
a useful role in adjudication, as sources of information. For instance,
an MEA may contain information regarding factual aspects
of dangerous substances, or about the extent to which environmental
measures are based on scientific evidence. As long as
WTO judges do not alter the balance of rights and obligations
between the WTO Members, it would be beneficial for the both
the trading system and the environment that WTO judges use
such knowledge embedded in MEAs.
In conclusion, the reluctance of WTO adjudicating bodies to
fully embrace MEAs is warranted. Legislators’ silence should speak
volumes to WTO judges.
WAY FORWARD
It seems highly unlikely that this issue will be settled through
legislative action at the WTO level. In today’s world, where the
entire Doha round is at stake, it is doubtful that negotiators
will add such a thorny issue to the current workload. One can
expect resolution of the issue at the adjudication level. The key
is to help participants in the process to understand that in the
long run it is in the common interest to encourage informed
rather than uninformed judgments.
POLICY IMPLICATIONS/
POLICY RECOMMENDATIONS
WTO adjudication is, by definition, a reaction to submitted
briefs. If WTO Members insist on invoking MEAs when lodging
their briefs, WTO adjudicating bodies will find it difficult
to ignore them. Civil society, through amicus curiae, could also
play a role here.
The ‘legislative arm’ of the WTO has not offered anything so
far, but has at least kept alive the possibility of working out
the role of MEAs in the WTO. The composition of the WTO
Committee on Trade and the Environment is likely to importantly
influence the possibility of progress on this issue. If those
participating in this committee came from departments dealing
with environmental protection (as opposed to pure trade departments),
bridges to MEAs may be built more naturally. The
WTO Committee on Technical Barriers to Trade is an excellent
illustration of how making room for technical expertise can
lead to informed judgments and help resolve trade concerns; a
number of potential disputes are being discussed therein and
only very few end up before WTO Panels.
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REFERENCES AND FOONOTES
Horn, Henrik and Petros C. Mavroidis. MEAs in the WTO: Silence Speaks Volumes.
Mimeo.
1 The WTO Agreement includes a two-tier dispute settlement system, with “panels” at
the lower level and the AB as the WTO “supreme court”.
Issue brief
Stockholm 2011/09/01
ENTWINED
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info@entwined.se
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Editor: Erika Svensson, Communication Manager
Financed by Mistra
Production: Capito AB
Photography: Istockphoto
Printed by: Tryckeri AB Orion, 2011

The reseach programme ENTWINED – Environment and Trade
in a World of Interdependence – examines the interplay between
the global trade regime and environmental policies
promulgated by governments and private entities with a
particular focus on the treatment of transboundary problems.
ENTWINED is actively engaged with policy makers and other
stakeholders to the Trade and Environment Debate. The team
includes researchers specializing in environmental and natural
resource economics, international economics and trade law.
The programme has its focus in Sweden, but engages leading
experts in other locations, including Geneva, New York,
Washington and Montreal. The ENTWINED programme is
funded by the Swedish Foundation for Strategic Environmental
Research, Mistra, see www.entwined.se