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The Consequence Of Environmental Regulations On World Trade

Globally, the synergy between trade and the environment is becoming increasingly prominent, but it is significant. International law first addressed the environment through non-binding conventions and treaties that solely had implications for the signing countries. Currently, there is debate over whether environmental concerns will likewise develop into a global norm that is universally acknowledged. Environmental criteria may be used as an exemption to trade regulations under World Trade Organization (WTO) standards, provided that they do not include arbitrary or discriminatory measures.

These exclusions, meanwhile, are not always obvious and could mask protectionist policies. This raises concerns, particularly considering the numerous trade measures that the European Union is currently debating. Some of these initiatives include the recent prohibitions on goods derived from deforestation, carbon levies on imports, and anti-green washing exercises.

Environment faces problem from international trade. Most of the developing nations possess abundant natural resources. Large MNCs frequently abuse these resources, which has a devastating effect on the environment. This year, climate change has been a concerning topic since its effects are being felt in so many different countries. In India, the summer of 2020 saw a temperature of fifty degrees, exceeding previous records. Meanwhile, states like Assam, Kerala, and Maharashtra were constantly in danger of flooding, and Gujarat was experiencing an increase in earthquakes. Globally speaking, there have been quakes in Russia and the Philippines, floods in Indonesia, and bushfires in Australia. Most of these calamities have been connected to climate change.

Environmental Laws: An International Need
Nations all throughout the world are adopting environmental stewardship as an essential component of good governance. Governments have been compelled to establish strict restrictions aimed at limiting environmental degradation due to the rise in environmental consciousness and growing concerns over climate change and resource depletion. These regulations include a range of aspects related to industrial operations, such as the manufacture and transportation of goods, and range from carbon emissions to waste management.

International trade issues

International trade of goods has had and continues to have a significant negative impact on the environment. These effects include a rise in both short- and long-term greenhouse gas (GHG) emissions globally, the regional introduction of invasive species into waterways, and localized particulate pollution that is harmful to human health. The management of trash and production has been negatively impacting the environment in several ways. Governments everywhere have been addressing these environmental issues, but in comparison to how quickly the problem is expanding, the speed at which solutions are being found is incredibly slow. Economically sound countries like the US, China, Japan, and others have ignored environmental issues.

For instance, Trump pulled the United States out of the Paris Agreement. China's industrialization is accelerating to the point that the environment is suffering permanent harm. When economically developed nations break these accords, small countries are frequently placed in a precarious position. Even if smaller or third-world countries make up over two-thirds of the UN and WTO membership (more voting power), the threat of economic marginalization forces these nations to abide by the decisions made by the powerful economic blocs. Deforestation is another global issue.

New environment laws on global trade

Laws pertaining to international trade are mostly found in agreements that nations have ratified, as we can see. These agreements are crucial to international organizations like the UN and WTO, and all parties to them are required to abide by the decisions made. The United Nations General Assembly established a set of 17 global goals to promote sustainability in 2015 after realizing that environmental concerns and climate change were issues of global concern. This was acknowledged in the well-known Paris Agreement, wherein all signatory nations committed to reducing trade practices that might be environmentally harmful.

One glaring example is the recently enacted European Union (EU) Deforestation Regulation. The EU passed in 2023, which established the Deforestation Regulation (EUDR), which forbids the import, export, and sale of goods derived from deforestation. To protect forests, biodiversity, and the environment from climate change, this law forbids the sale and import of agricultural goods made from cattle, coffee, palm oil, wood, rubber, soy, and cocoa that are the result of deforestation in Europe, unless a risk analysis has been completed. It is important to consider Brazil as an example to put this trade measure into context. Brazil sent the EU almost $50 billion (about $150 per person in the US) (about $150 per person in the US) worth of goods in 2022.

Only commodities that satisfy all three of the following requirements can be sold in Europe: they must be produced in compliance with national laws of the countries of origin; they must not have been subject to deforestation after December 31, 2020, and they must be submitted to a due diligence mechanism.

Considering this due diligence, the resolution mandates that importers and dealers with headquarters in the EU provide the relevant public body with the following documents: risk analysis, product information and mitigation measures. The EU authorities are racing against time as this resolution is set to go into effect on December 30, 2024, and they still need to design all procedures and processes that operationalize these requirements and how they will be verified, particularly about reign public and private documents.

In addition to this problem, the EUDR poses doubts about its "deforestation free" requirement. According to the EUDR, any territory put to agricultural use after December 31, 2020, qualifies as deforestation. This means that regardless of the legality of these conversions or the laws of the country of origin, the European Union will forbid the sale of items derived from cattle, coffee, palm oil, timber, rubber, soy, and cocoa that were produced in sections of forests converted after December 31st, 2020. This might become problematic based on the applicable national law. Some legal systems allow for the legalization of deforestation.

To implement its own Deforestation legislation, the United Kingdom likewise recently modified Schedule 17 of the Environment Act 2021 legislation. Like the EUDR, the amended UK Environment Act (Forest Risk Free Commodities) forbids companies from using illicit products derived from forest risk commodities (such as soy, palm oil, cocoa, and cattle products other than diary), creates a system of due diligence, and calls for an annual report.

Role of WTO

When it comes to controlling global trade and business, the WTO is essential. The WTO recognizes the significance of striking a balance between a nation's economic and environmental progress when it comes to environmental rules. Fundamental objectives of the WTO include allowing for the best possible use of global resources to achieve sustainable development and attempting to safeguard and preserve the environment. These objectives are reflected in the Preamble of the Marrakesh Agreement, which established the World Trade Organization, and they are consistent with the organization's mission to remove trade obstacles and discriminatory practices in international commercial interactions between nations.

European Union (EU) Initiatives:

  • The EU is actively debating several trade measures related to the environment.
  • Recent EU initiatives include:
    • Prohibitions on Goods Derived from Deforestation:
      • The EU's Deforestation Regulation (EUDR) prohibits the import, export, and sale of goods derived from deforestation. This regulation aims to protect forests, biodiversity, and the environment from climate change.
    • Carbon Levies on Imports:
      • The EU is considering carbon levies on imported goods.
    • Anti-Greenwashing Practices:
      • Measures to prevent deceptive environmental claims by businesses.

Points of conflict

  • Trade impact on economies of developing countries reliant on deforestation-based industries.
  • Potential backlash from trading partners due to carbon levies on imports.
  • Challenges in enforcing and verifying anti-greenwashing measures.

Unilateral imposition of EU on deforestation

The EU's unilateral imposition of global deforestation mitigation strategies´┐Żthat is, disregarding national laws governing both legal and illegal deforestation´┐Żwould be another source of contention. The EUDR's extraterritorial applicability is motivated by geopolitics, or the desire of a nation to enforce its interests, no matter how varied. Nonetheless, this transgresses other countries' fundamental rights under international law on the management and use of their land and natural resources, or sovereignty.

Barriers on free trade by EUDR

It is evident that while environmental protection regulations are an exception to the rule in trade and the WTO, the EUDR may eventually give rise to disputes because of claims that it is arbitrary and discriminatory, going against the most favored nation clause and/or differential national treatment, among other free trade principles. A government is not allowed to impose trade barriers that favor domestic products or that benefit one country's products at the expense of another according to GATT provisions.

New environmental laws can act as a powerful force for positive change. By establishing stricter pollution standards, restricting the trade of environmentally harmful products, and mandating resource efficiency, these laws push industries and nations towards more sustainable practices. This not only reduces the environmental footprint of global trade but also fosters innovation in clean technologies, potentially creating new markets and economic opportunities.

However, the implementation of new environmental laws often leads to disruptions in established trade patterns. Industries accustomed to lax environmental regulations may face higher production costs due to compliance measures. This can lead to temporary price increases for consumers and potential job losses in certain sectors. Additionally, uncertainty surrounding the interpretation and enforcement of new laws can create friction between trading partners, hindering smooth trade flows.

New environmental laws can also have a significant leveling effect on the global trading landscape. Previously, countries with weak environmental regulations could gain an unfair competitive advantage, attracting industries seeking to avoid stricter controls. The introduction of new, more uniform standards reduces this advantage, fostering a fairer environment for responsible businesses. This may initially disadvantage developing nations, but with proper support and capacity building, these countries can adapt and become more competitive overall.

One of the key challenges posed by new environmental laws lies in the inherent tension between trade liberalization and environmental protection. Trade agreements often prioritize the free flow of goods, which can be seen as conflicting with a nation's right to implement stricter environmental regulations. This can lead to disputes, with countries challenging environmental measures as disguised trade barriers. International bodies like the World Trade Organization (WTO) play a crucial role in mediating these disputes, but finding a way to reconcile these competing interests remains a complex and ongoing process.

As the world grapples with climate change and other environmental crises, new environmental laws are likely to become increasingly stringent. To ensure a smooth transition, several key considerations are essential: International cooperation is vital.

Developed nations can support developing countries in adopting sustainable practices through technology transfer, financial aid, and capacity building initiatives. Balancing stringent environmental standards with flexibility for developing economies is crucial. Phased implementation plans and targeted support can facilitate the transition without hindering their economic growth. New environmental laws are a complex force reshaping the world of global trade. While they present challenges for established systems, they also offer significant opportunities for a more sustainable future.

By fostering international cooperation, promoting innovation, and prioritizing environmental considerations within trade agreements, we can navigate this transition and ensure that global trade flourishes in harmony with a healthy planet.

Written By: Karun Singh Bhamra

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