A Latin American Case for a Trade and Environment Link in the FTAA 

Eduardo Gitli and Carlos Murillo

Washington, April 2000

 

At present, environmental issues do not constitute a negotiating subject, per se, in the FTAA process.  Most Latin American governments object outright to any discussion of the combination of trade and environment issues. Opposition is mainly through their trade negotiators, who wield a disproportional influence in relation to other sources of government authority.  Moreover, as a general rule, most developing countries have not developed their own agenda for international environmental arena.  Any participation in the international arena is merely reactive; developing countries are consistently defendants rather than plaintiffs in the international environmental arena.[1] Likewise, most developing countries have failed to develop substantive, proactive positions on the trade and environment issue. In the environmental arena we know that the failure to develop proactive stances undermines the capacity of developing countries to take advantage of the many opportunities to leverage resources or concessions for environmental protection or to challenge developed country environmental performance. In the trade and environment arena, the result is that Latin American countries are giving their Northern partners the upper hand in negotiations and implicitly allowing them to define the “real” issues and agenda.

The purpose of this paper is present a Latin American viewpoint on the NAFTA trade and environment model and to provide some recommendations to Latin American governments for the FTAA negotiations. Our overarching objective is to make the case that governments can, and should, develop an agenda for a trade and environment link in the FTAA that simultaneously advances their environmental, economic and political agendas.  In Section I, we provide some background on the politics and reality of trade and environment considerations in the Americas.  We emphasize the importance of understanding the broader objectives of Latin American countries in the FTAA negotiations. Section II offers a critical perspective on the highpoints, tensions, opportunities and shortcomings of the NAFTA trade and environmental model and its close sister, the Canada-Chile Agreement on Environmental Cooperation.  We assess the plausibility of these models to the whole American continent.  In Section III, we recommend a series of principles for the integration of environmental considerations into the FTAA negotiations.  We propose a NAFTA-style environmental Side Agreement for the Americas, but also highlight the environment issues that could be considered by each of the FTAA's nine negotiating groups.
   

I.  General Objectives for A Regional Trade Agreement 

Those interested in promoting a “trade and environment” dimension in the FTAA context need to recognize that from a Latin American perspective the primary objective of trade diplomacy and ensuing institutional arrangements in Latin American is to promote open trade and investment.  Similarly, the underlying assumptions of this paper is that open markets—especially greater market access for developing country goods and services and open markets for investment[2]—are beneficial for economic development.  For developing countries, an institutional framework that supports open markets is particularly important.  Key objectives of Latin American countries in regional trade arrangements should be to:

• Ensure market access for Latin American goods.  This will require not only duty free access to the relevant markets, but also predictable and transparent export-import systems in all countries to ensure that exports are not encumbered by "export harassment measures";
    

• Promote investment in their countries;
    

• Ensure that expanding trade and investment contributes to a better quality of life for Latin American people;[3] and
    

• Provide a flexible dispute resolution mechanism that is as inexpensive as possible for participating countries.

  
In pursuit of these objectives, regional agreements must also guarantee respect national sovereignty, constitutions and laws.  They should also facilitate cooperation among countries to reduce transportation costs (through public and private investment in infrastructure), expand trade, solve migration problems and reduce general transaction costs associated with trade.

The challenge for countries in the Americas to promote trade, while ensuring the responsible and sustainable use of natural resources.  However, several challenges confront efforts to integrate environmental considerations into this trade agenda. First, in considering trade and environment questions in the Americas, we must first acknowledge the following:

• Economic development in Latin America is currently based on the use of natural resources and the function and services of ecosystems throughout the hemisphere
     

• Environmental problems in Latin America transcend political boundaries. Long-term solutions demand shared efforts among countries and regions (See Schaper, 2000). 
    

• Few environmental problems arise from trade per se.  Rather, they emerge from the production methods and consumption patterns of economies that involve not only domestic production and consumption but also exports and imports. 

Second, countries in Latin America and the Caribbean have little experience in the field of trade and environment.  Beyond the NAFTA Environmental Side Agreement and the Canada-Chile Agreement on Environmental Cooperation, Latin American efforts in the trade and environment area are largely restricted to general statements with little focus on implementation. The Central America region´s ALIDES (Alliance for Sustainable Development) and Mercosur´s Environmental Commission are two recent, promising, trade and environment innovations.   Third, the trade and environment issue is complicated by the fact that the FTAA region comprises 34 countries of distinct economic, social, ecological and geographic diversity. 

In this context, the primary focus of any effort to integrate environmental considerations into the FTAA must be cooperation and providing for a long-term process of implementation.
  

II.  Plausibility of the application of the NAFTA model to the Americas and Options for Moving Forward 

Countries of the Western Hemisphere have at least three options when it comes to the issue of environment and the FTAA.  Plan A is to avoid all discussions and negotiations on this issue.  Plan B could be to adopt the NAFTA model of parallel environment negotiations and a Side Agreement for the environment.  Plan B would be for countries to work to insert the environmental negotiations directly into the FTAA through an environmental chapter in the FTAA.

In our view, Plan A—the NAFTA model of addressing environmental issues through a parallel track of negotiation along with incorporation of some key environmental principles in the main trade text—is the most compelling for the Americas on several counts. Here we have two possibilities. The first is the "pure NAFTA model—whereby an environmental agreement is negotiated in parallel to the trade agreement, but does not belong formally to it. The second is the "Canadian-Chilean interpretation" as in the Canada-Chile Agreement on Environmental Cooperation (CCAEC). The most crucial differences between the North American and Chilean models are that the Chilean Agreement provides for fines rather than sanctions as the last resort in dispute settlement proceedings and a significant portion of the NAFTA environmental model is focused specifically on U.S.-Mexico border issues [4](both issues are discussed in further detail below).

This section reviews the key benefits of the NAFTA model and presents those aspects of the Canadian model that we consider improvements on the NAFTA model. We also highlight aspects of both agreements which future Side Agreements should improve upon.

They key benefits of the Side Agreement model include: a) respect for national sovereignty; b) obligations on Parties to establish and maintain open and transparent environmental management systems; c) the establishment of institutions to foster cooperation; and d) provisions to enhancing the participation of civil society in decision-making.  The NAFTA model illustrates that countries can address important environmental issues that arise in the context of trade and provides examples of several important provisions that could feasibly and usefully be applied to the Latin American context.  First, the most important benefit of the Side Agreement approach is that it moves countries beyond discrete “trade and environment” issues to provide for a broad range of environmental cooperation initiatives and solutions.  The NAFTA model obliges Parties to establish and maintain comprehensive, accountable, open and transparent systems for environmental management.  It has had considerable success in promoting, for example, greater environmental performance in each of the countries (Schott & Esty, 2001).

Second, the NAFTA allocates responsibility for environmental cooperation to appropriate agencies by creating an institutional and organizational framework for environmental cooperation that relies primarily on environmental expertise. In so doing, it entrenches the principle that environmental issues require expertise that is often beyond the scope of trade negotiators.  It allows those environmental issues with trade repercussions to be discussed by environmental, and not trade, authorities.

Third, NAFTA creates important and useful avenues for the participation of the civil society in the environmental aspects of economic integration.  Articles 14 and 15 of the NAFTA Environmental Side Agreement provide that any citizen or non-governmental organization from the parties may send to the Secretariat a submission asserting that a party is failing to effectively enforce its environmental law in order to promote exports or investment.[5] In response, the Commission for Environmental Cooperation (CEC) Secretariat may be obliged to prepare a factual record (note that this procedure differs from the dispute resolution process which can be initiated by a Party).  The factual record does not have legal value and can not trigger the imposition of trade sanctions.

Despite these positive features, three crucial components of NAFTA's environmental Side Agreement would need to be improved upon or adjusted in the broader context of the FTAA: a) cooperation; b) enforcement of the environmental laws in each country; and c) and trade sanctions.

First, in the case of NAFTA, the key issues for environmental cooperation stem from the unique geographical, political and economic ties between Mexico and the United States.  The main problems that NAFTA's environmental cooperation efforts address are questions of territorial jurisdiction, waste management, and the exploitation and quality of the waters of the international rivers and other bodies of water.  The framework for cooperation among Latin American countries would need to be completely different and far broader.  Central challenges for cooperation in Latin America are likely to be transfer of cleaner technologies, building local capacity for environmental management, exchange of information and experience as well as training.

Second, by obliging each country to implement its own environmental laws, the NAFTA model addresses the important task of ensuring that countries do not weaken their attention to environmental issues in order to attract investment or promote trade.  At the same time, this provision averts the possibility of imposition of the foreign environmental standards of one of the parties.  In order to properly understand the implications of such a provision in the FTAA context,  further research is needed to assess the internal coherence of the environmental legislation of each Latin American country as well as its record of, and capacity for, enforcement (Gitli y Murillo, 1999).  Chances are that each Latin American country will find that it does not have the capacity to properly enforce even its existing environmental legislation, Research will also help countries identify their needs for technical and financial assistance to achieve effective environmental enforcement.   Also on the issue of environmental enforcement, Latin American countries have the opportunity to improve upon NAFTA´s provisions related to citizen submissions regarding domestic non-compliance with environmental legislation (Articles 14 and 15).  While important, NAFTA´s provisions for citizen submissions have proven difficult to implement effectively. Between 1995 and March 2001, NAFTA´s Commission for Environmental Cooperation received 26 citizen submissions.  Sixteen cases are under review and ten files have been closed. (Seven of the ten closed submissions were terminated because they did not meet the criteria and one of them has been withdrawn.) The only factual record that has been called for and prepared concerns the 'Cozumel Case' regarding a pier built off the island of Cozumel in Mexico which had allegedly involved destruction of an ecologically critical and delicate coral reef. The Cozumel case generated strong criticism of the CEC´s weak enforcement power.  The environmental community was unified in its dissatisfaction with the CEC's report.  The CEC´s report concurred that Mexico had failed to enforce its environmental laws in order to attract the investment in Cozumel, but failed to either make a single recommendation for action or censure the Mexican government.  In any similar future provisions, greater efforts will need to be made to guarantee that they investigating body attracts the necessary political support so that it can properly respond to environmental concerns that arise.

Finally, NAFTA's provisions for the use of trade sanctions to promote compliance with its environmental provisions are inappropriate for the Americas.   Part Five of the North American Agreement on Environmental Cooperation (NAAEC) "Consultation and Resolution of Disputes" details the procedures in cases of an alleged persistent pattern of failure by one Party to the NAFTA to effectively enforce its environmental law (in order to promote exports or investment) and includes provisions for trade sanctions.   To date, no sanctions have been imposed under the auspices of NAFTA and the process leading up to the imposition of sanctions could take more than a year and a half.[6]  Nonetheless, opposition to, and fear of, the potential use of trade sanctions is the issue that most provokes Latin American opposition to the inclusion of environmental considerations in the FTAA negotiations.  Whereas the environmental community in North American tends to favor the identification and punishment of environmental offenders, the approach favored by many within Latin America´s environmental community is cooperation to avoid and repair environmental damage.

Even if the real likelihood of trade sanctions is remote, provisions for sanctions should be rejected by developing countries in both any hemispheric investment or trade agreements on three counts.   First, history of international relations teaches developing countries not to underestimate the potential for international rules to be exercised and twisted by stronger economic or political forces.  Second, the history of the “sanctions” issue provides developing countries a perfect opportunity to stand up to the tendency for developed countries to 'over-reach' on different purportedly 'trade-related' issues (such as intellectual property rights).  No developing country should be forced to suffer a loss of national sovereignty, dignity or welfare through external efforts that force them to change policies or practices.  Developing countries must defend the principle that every country should be in control of its own destiny and the enforcement of any regulation should only take place nationally (this does not, however, preclude the commitment to minimum rules established in multilateral fora, such as multilateral environmental agreements).  Finally, there are other more effective means for providing developing countries economic incentives for “good environmental behavior”. The threat of loss of prestige has, for example, proven effective for many international environmental issues in several instances (e.g., whaling).  And, economic fines and compensation measures (a la the Canada-Chile Agreement on Environmental Cooperation—See Box 1) could be used in cases of persistent patterns of violations of domestic laws to encourage better performance. Provisions for financial and technical assistance to developing countries could be one of the most effective ways to improve environmental performance, particularly in countries that simply can not afford to dedicate more of their limited national budget to environmental concerns. 

  
The Canada-Chile Environmental Side Agreement incorporates several improvements on the NAFTA model, particularly in the area of dispute resolution.  Most importantly, the Canada-Chile Environmental Side Agreement has no provisions for the suspension of trading benefits through trade sanctions.  Instead, after efforts to resolve disputes through consultations and dialogue, a monetary fine can be imposed on the country that continues to persistently fail to effective enforce its environmental law.    The fine can be no greater in size than U.S. $10 million or its equivalent in the currency of the defendant. To determine the amount of the assessment, the dispute panel is required to take into account, among other considerations, the pervasiveness and duration of the Party`s persistent pattern of failure to effectively enforce its environmental law, and/or the level of enforcement that could reasonably be expected of a Party given its resource constraints (Durbin, 2000).  The Canada-Chile Agreement also reproduces NAFTA´s important provisions for the preparation of factual reports on environmental concerns at the request of the public.

Despite the Canada-Chile model´s improvements on the NAFTA model, both models encounter important challenges.  On the NAFTA front, a key complaint is that the institutions created by NAFTA´s Environmental Side Agreements have failed to ameliorate the infamous environmental degradation along the U.S.-Mexico border.[7]  Even though NAFTA has, as predicted, encouraged the dispersion of new maquiladora investment away from the border area to other parts of Mexico, the number and scale of maquilas on the border continues to grow despite inadequate investment in infrastructure, thus increasing rather than decreasing environmental impacts on the border).[8]   U.S. and Mexican NGOs working in the border region argue that not only has NAFTA exacerbated negative environmental and social problems on the border, NAFTA´s environmental have been relatively impotent in face of mounting problems (Public Citizen, 1995 & 1999).  They argue that the growth of the maquila industry at the Border and the intensification of industrial activities had lead to: i) increase in the amount of hazardous waste and of illegal imports of hazardous waste into the United States); ii) deficient sewage treatment infrastructure; and iii) border air pollution.

Second, the work of each of NAFTA´s environmental institutions has been challenged by design flaws.  NAFTA´s Commission for Environmental Cooperation, for example, is troubled by a lack of independence, a limited scope for work and weak enforcement power.  Problems encountered by NAFTA´s institutions specifically charged with border issues—the Border Environmental Cooperation Commission (BECC) and NADBank—illustrate the problems of inadequate funding and political will.  Both institutions suffer inadequate funding due to Mexican economic depression and U.S. government budget cuts.  In terms of design flaws, the NADBank´s funding is limited to BECC-certified projects, which, in turn, are mainly focused on water issues,  excluding air, natural resources and species conservation from its scope of operations.  In addition, the NADBank can only provide loans (not grants) which shrinks the pool of successful applicants to the limited number that can demonstrate a capacity to repay NADBank loans.

Third, both the NAFTA and Canada-Chile Agreements on Environmental Cooperation face the charge that each Agreements fails to address the intensification of environmental problems due to export expansion. Several Chilean NGOs, argue that increased Canadian investment in the mining sector, for example, coupled with inadequate domestic environmental laws for this sector and almost non-existent supervision of the laws, will generate tremendous environmental problems.  They also complain that the agreement by increasing the pressure to favor foreign investment, the agreement will contribute to parallel weakening of environmental institutions charged with protecting the environment. Even though environmental cooperation is a legitimate central focus for Environmental Side Agreements, governments should be careful not to sideline the crucial trade-related issues that can arise and must be addressed.
   

III.  Recommendations for Trade and Environment in the FTAA 

Important environmental issues will arise as trade expands in the Americas. The deterioration of the environment will result in significant short and long-term burdens for developing countries. The advance of environmental concerns in the FTAA negotiations is unavoidable. And, this is good news for developing countries in Latin America.  Each country in the Latin American region stands to benefit from taking advantage of opportunities to promote both trade and environmental protection simultaneously.  It is time for Latin American countries to develop their own positive agenda for incorporating environmental considerations into the FTAA negotiations in ways that will benefit their own environments and economies.  As governments and negotiators pursue this task, we offer the following recommendations:2  

Environmental Principles in the FTAA Trade Agreement

• A commitment to maintaining environmental standards.  Environmental standards should not be relaxed in order to attract investment or promote free trade.  Rather, special incentives should be offered for trade and investment that improves the achievement of such standards.
    

• Regulations should be developed and enforced at the national level.  This would not exclude commitments to minimum standards or provisions in multilateral environmental agreements.
    

• The FTAA should consider the trade-related measures included in MEAS  as 'lex specialis'.   This way, these measures would prevail over trade provisions.  The dispute settlement mechanisms of MEAs, rather than that of the FTAA, would be the primary forum for resolutions of any conflicts that arise.  Every FTAA member should also ratify, at minimum, the following Multilateral Environmental Agreements (MEAs): the Montreal Protocol, the Basel Convention, CITES, the Kyoto Protocol and the Convention on Biological Diversity (CBD) and its Biosafety Protocol.

  
Environmental Side Agreement 

The key reasons that FTAA negotiators should pursue an Environmental Side Agreement is that it can provide an opportunity for: a) cooperation and the promotion of solutions rather than disputes; b) the discussion of environmental issues with trade repercussions and linkages by environmental experts; c) the participation of civil society in environment and trade-related decision making.  Governments have two choices: they cannot negotiate the environmental cooperation efforts outside or within the context of the FTAA negotiations.  In our view, negotiations for an Environmental Side Agreement should be an integral part of the FTAA negotiates.  This approach will guarantee the use of the expertise of trade negotiators and will ensure the credibility of the agreement and its consistency with international trade commitments.   Furthermore, the experience of weak follow up to the 1996 Santa Cruz Summit for Sustainable Development in the Americas highlights the importance of real credibility and political will to ensure proper implementation and enforcement.  Isolated trade and environment discussions in separate environmental fora outside the context of the FTAA are unlikely to be perceived to be credible by the public.  Nor are they likely to attract the political support necessary for real responses to the concrete trade and environment related issues that might arise.

• Governments should integrate environmental considerations through the negotiation of a Side Agreement—learning from the existing hemispheric experiences (North American Agreement on Environmental Cooperation) and the Canada-Chile Agreement on Environmental Cooperation). 
     

• The FTAA´s environmental cooperation agenda must include activities to: assist developing countries and their private sectors to meet the costs of “green certification”; address the trade in products that are forbidden in countries of origin (e.g., hazardous waste); clarify the relationship of trade rules with international environmental initiatives, such as the Climate Change Convention´s Clean Development Mechanism; promote transfer of clean technologies; promote efficient and renewable energy; and promote common environmental principles for all bilateral and regional trade agreements.
    

• The exclusion of any provisions for trade sanctions.  Rather than punishing culprits, the FTAA should rely on cooperative measures to improve environmental performance and to find ways to avoid and repair environmental damage. In the case of persistent patterns of domestic environmental legislation violations, provisions for fines could be included.  The fines could then be dedicated to efforts to resolve the problem that caused the controversy.   Public exposure, “shaming” and technical and financial assistance will also be valuable tools for promoting environmental enforcement.

Negotiating Process 

• Increased access to information, such as official and provisional negotiating agendas, officials reports, provisional and final agreements, working documents from the Negotiating groups, formal and informal contributions from members during the negotiating process.
     

• The preparation of non-technical summaries, workshops and seminars to strengthen the understanding and participation of civil society representatives and enhance the possibility of acceptable agreements.
    

• Environmental considerations should be incorporated into each of the FTAA´s nine negotiating groups (see Box 2).
    

• The creation of a regional advisory committee under the Ministers' Council for economic cooperation.  It would be comprised of experts and one representative from each of the regions existing free trade groupings: the Andean Group (CAN), NAFTA, MERCOSUR, CARICOM, and the Central America Common Market.

  
At the National Level

• Study the internal coherence of environmental legislation and enforcement capacity.
    

• Design programs that provide for negative social and environmental costs of growing specialization of international trade.
    

• Develop a proactive “International Environment Agenda” to articulate a stance on each of the key environmental issues.

  

  

Bibliography 

CONAMA (1998) Comercio Internacional y Medio Ambiente. Contexto Normativo e Institucional. Documento de Trabajo No.5. Serie Economía Ambiental. 

Gitli, Eduardo & Carlos Murillo (1999) Factors Hindering the Inclusion of environmental Issues into Trade Negotiations:  FTAA and a Positive Agenda, INCA Project, CINPE-UNA, Costa Rica. 

Gitli, Carlos & Gunilla Ryd (1992) “Latin American Integration and the Enterprise for the Americas Initiative”, Journal of World Trade, 26:4.  

Murillo, Carlos (2000) “Environmental Opportunities in the FTAA Negotiating Groups”, in Robin Rosenberg (ed) (2000) Environmentally Sound Trade Expansion in the Americas, North-South Centre: Miami. 

Public Citizen and Red Mexicana de Acción contra el Libre Comercio (RMALC) (1996). NAFTA's Broken Promises. The Border Betrayed. En: _ HYPERLINK http://www.tradewathc.org/nafta/reports/enviro96.htm