The road ahead for the environmental goods agreement talks

2 September 2014

The next round of talks towards clinching an Environmental Goods Agreement is scheduled for mid-September. This paper maps the landscape in which the negotiations are taking place and offers a preview of the road ahead. 

A group of 14 WTO members – counting the 28 member states of the EU as one – in July formally launched negotiations geared towards hammering out a new agreement aimed at liberalising trade in environmental goods. “The challenges we face, including environmental protection and climate change, require urgent action,” the participants said in a joint statement on the occasion.

The negotiations will be conducted as a plurilateral initiative outside the formal WTO Doha Development Agenda (DDA) mandate. Subsequent discussions during the first round of talks on 9-10 July largely focussed on the approach to be taken in terms of setting the stage for negotiations.

July’s news was much-anticipated following an announcement made by the group in January at an annual World Economic Forum event in Davos, Switzerland, which signalled plans to pursue “global free trade” in environmental goods. The Davos press release also suggested that the new initiative could be a “significant contribution” to participants’ efforts in other international negotiations with a specific reference to the ongoing UN climate talks.

The Davos announcement was itself preceded by signals from Washington last year that trade could be used to tackle climate change when US President Barack Obama unveiled his climate action plan outlining a series of measures including the possible liberalisation of environmental goods and services at the WTO.

Back in January the group said that the talks would build on a list of environmental goods developed to support a 2012 Asia Pacific Economic Cooperation (APEC) group commitment to reduce applied tariff rates to five percent or less by the end of 2015. More recently, delegates and experts gathered in Beijing, China in August as part a two-week APEC Senior Officials’ meet focused on building technical capacity among the 21-member alliance in order to implement the commitment on time. 

The APEC initiative being voluntary also means that only the prevailing applied tariffs would be reduced and not bound tariffs. Applied tariffs are the actual customs duty levied while bound tariffs signify the maximum duty ceiling levels that WTO members could potentially levy.

The Environmental Goods Agreement (EGA) talks, while using the APEC goods list as a starting point, seeks to go further given that participating countries have committed to global free trade in environmental goods. Commentators suggest this would likely envisage a reduction of all bound tariffs on any eventual list of environmental goods to zero. A number of APEC economies are also participants in the EGA while the non-APEC participants include the EU, Norway, Switzerland, and Costa Rica.

Any agreement will become operational once a critical mass of members – in terms of a certain percentage of trade in the agreed upon goods – has been reached. The benefits of the outcome would then be extended to all 160 WTO members on a most-favoured nation (MFN) basis. Following this arrangement, the eventual agreement would be classed as an open as opposed to a closed plurilateral agreement such as the WTO’s Government Procurement Agreement, where benefits are extended only to members that participate in negotiations. While no threshold has been set for what such a critical mass might constitute, some trade-watchers have speculated that it could be 90 percent, following the figure chosen in the WTO Information Technology Agreement (ITA) that was also negotiated on a plurilateral basis. 

Under the shadow of Doha?

The EGA group has sought to portray their effort as independent from the Doha Round. The DDA mandate under Paragraph 31 (iii) calls for “…the reduction or, as appropriate, elimination of tariff and non-tariff barriers to environmental goods and services.”   

Multilateral negotiations on this front have stalled over the last decade, hamstrung by contention among WTO members as to what constitutes an environmental good, how such goods should be liberalised, and the general lack of momentum in the Doha Round as a whole. In the face of multilateral stagnation, WTO members appear to be increasingly turning to plurilateral initiatives as a possible avenue for advancing trade liberalisation – and potentially contributing to breaking the Doha deadlock – in line with instructions given by trade ministers at the 2011 ministerial conference to pursue new, more flexible negotiating approaches.

However, although a smaller group of countries implies that progress on reaching a plurilateral agreement may be smoother, negotiators will still have their work cut out for them. Discussions during the course of the voluntary APEC effort led to many goods eventually being dropped before the final 54 “Harmonised System” (HS) sub-categories were arrived at from an original starting list of around 300.

The HS-codes refers to the World Customs Organization’s framework used for identifying goods at the border. The HS customs classification used means that environmental goods under these 54 HS-6 digit subheadings are lumped together with other industrial products which may not have an environmental relevance.  APEC economies can choose to liberalise tariffs on the entire HS 6-digit category or deploy an “ex-out” approach where only part of a subheading is deemed as an environmental good. Most of the goods in the APEC list, as well as the categories under which they have been classified, can be traced back to the various lists that WTO members submitted during the course of Doha Round talks on environmental goods.

Some observers have raised questions around how the process would be coordinated with the existing multilateral mandate on environmental goods – which sits under the special session of the Committee on Trade and Environment (CTE) where there has been no movement – and how any eventual outcome would be accommodated under the WTO. For instance, will the deal be administered by the CTE, or as a stand-alone agreement similar to the Information Technology Agreement (ITA)? The actual negotiations for the plurilateral agreement, however, will take place outside the WTO’s purview but largely  within its physical locale. The talks are in principle open to other WTO members to join.

Assessing the goods

The goods in the APEC list are broadly relevant to a number of environmental productcategories such as air-pollution control, waste-water treatment, solid and hazardous-wastemanagement,andrenewableenergy.This listalsocontainsa numberofproductsrelevanttoenvironmentalmonitoring,analysis,andassessmentandoneexampleofanenvironmentally-preferableproduct,multi-layeredbambooflooringpanels. [Ref 1]According to experts, however, only one subheading – HS 850231 for wind-poweredgenerating sets – exclusively covers environmental goods. One study argues that 46 ofthe 54 HS subheadings of the APEC list cover products that are not used primarily forenvironmental purposes. [Ref 2]Other researchers have made similar comments.  At the sametime it is important to take into account that the APEC list only includes part of today’sinternationally-traded environmental goods.

It may be desirable for EGA participants to consider adding products that could be clearly identifiable and relevant to attainment of major environmental goals, for example, climate change mitigation. Adopting a supply chain perspective would also be useful. Other considerations are goods deemed particularly important from a trade-perspective, including for developing countries, as well as products relevant for the delivery of environmental services.

Another potential hurdle to address will be how any future EGA will continue to be relevant to changes in technology.  While it will not be possible to raise tariffs once bound at zero, in a rapidly-changing world, products agreed-upon for tariff liberalisation might quickly become outdated. Some newly emerging technology may be eligible to be classified under a specific tariff line or broader HS subheading already benefitting from the EGA reduction in place. In other cases EGA participants may need to agree on a mechanism for continuous review of the list on a periodic basis so that newly emerging technologies that are not automatically captured can be added, in other words, there may be a need for a “living list” that is constantly updated.

Trade flows and tariff profiles

At the broad HS-6 digit level covering all 54 subheadings – and therefore inevitably including a number of non-environmental goods – the “G14,” as the current group has been dubbed by trade watchers, accounted for 86 percent of global trade in 2012 according to COMTRADE data.

The G14 group thus makes up a dominant share of trade in all of the 54 product subheadings. China, the EU, and the United States were, at the same time, the largest importers and exporters in 2011-12. Tariffs are already fairly low among current EGA participants. More than half of the HS subheadings and national or regional tariff lines of all the G14 combined are duty-free on an MFN basis. Similarly, more than half of the G14 group’s imports in value terms in the subheadings of the APEC list are duty-free. Again in value terms, 56 percent of all imports by G14 member of product groups in the APEC list are duty-free.

Imports into Hong Kong, Norway, and Singapore from the 54 subheadings are entirely duty-free while imports into Canada, Costa Rica, and Japan are almost entirely duty-free. In China and Korea, however, less than 30 percent of imports in value terms from the APEC-list are duty-free. The largest importers of dutiable goods are China, the European Union, the United States, and Korea. The average bound tariff for all 54 subheadings on the APEC list is 5.9 percent, excluding subheadings with unbound or only partially bound tariffs.  Such averages are highest in Costa Rica, New Zealand and Korea. [Ref 3]

Despite the overall low-level of applied tariffs, their removal as “nuisance tariffs” could lead to a lowering of implementation costs at the border. The reduction of MFN bound tariffs on products to zero would also lead to greater certainty and predictability for the private sector. In addition the inclusion of new environmental products beyond the APEC list with higher tariff barriers could raise average tariffs faced by EGA participants. Ultimately non-tariff measures (NTMs) such as standards and certification would eventually need to be addressed in order to truly smooth trade. These will not, however, be the immediate focus of negotiators. EGA officials explained at the launch in July that the negotiations will initially focus on tariff issues related to environmental goods.

What will September bring?

At the first round of talks in July, some EGA participants expressed willingness to nominate products in September based on categories, in order to ensure the agreement’s environmental credibility. According to a trade delegate, to start with, EGA participants would be free to put forward for discussion in mid-September products of interest falling under two categories namely, air-pollution control, and solid and hazardous waste management.

For this purpose participants who wish to put forward products might use a spreadsheet with column headings useful for facilitating discussions – such as the relevant HS-6 digit code under which the product and/or products would be nominated – a descriptive column, and additional columns providing for additional product specifications or ex-outs.The HS version used for the EGA would be HS 2012 whereas the one used for the APEC negotiations was a mixture of HS 2002, 2007, and some 2012. While all categories have not yet been decided, participants could draw on categories that were been put forward during earlier APEC negotiations, as well as at the WTO. These include, for example, waste-water treatment, heat and energy management, renewable energy products, and noise and vibration abatement.  

A trade delegate recently noted that while some participants may not yet be ready to nominate products for September there would be initial discussions on the categories and products that were nominated. According to another EGA-participant delegate the group will proceed with nominations on agreed categories in parallel with finalising a list of the latter. Another delegate suggested it might be useful to get a clearer picture of the categories to be discussed before entering into product nominations in order to safeguard the agreement’s environmental credibility. A rush to nominate products could jeopardise the talks in this respect, the delegate said, but also acknowledged that other participants might have differing views. The process would also be facilitated by inviting technical experts in the relevant categories to share their expertise and provide inputs during the week of discussions. The next round of discussions in November would go through a similar exercise on additional product categories.

According to one delegate, the objective at the end of these discussion rounds would be to consolidate sometime towards July/August 2015 the product compilations received after which actual negotiations would begin to retain, add, or drop products in the list, also taking into account various factors such as participants’ interests, concerns, and sensitivities, as well as seeking to strike a balance among the various categories. Another delegate was of the view, however, that it would be better not to set concrete timelines at such an early stage of the negotiations.

Most delegates contacted seemed to agree that while the objective was to reflect all the products agreed-upon in the APEC list, participants would be free to nominate additional products, and that these could be proposed at the HS-6 digit level or at the level of ex-outs indicating the relevant HS-6 digit code.

One trade source reflected on the possibility of the EGA participants agreeing on goods under the APEC list as part of a possible early harvest approach although it was not clear whether all participants would agree to such an approach. Criteria such as a systems-approach and relevance to supply-chains and environmental services could all be used by participants to nominate products. In that regard at least some degree of co-ordination by certain EGA participant negotiators with their TISA (Trade in Services Agreement) counterparts would be expected.

The EGA participants have stated that negotiations would remain open to any and all interested WTO members to join. Indeed it is anticipated that Israel would likely be the newest member to join the group for the third round of discussions slated for November. It should be noted that some of the current EGA participants might need to fulfil domestic consultation procedures every time a new participant intends to join. In particular, on the occasion of the EGA’s launch in July, China’s WTO Ambassador to the WTO Yu Jianhua said that the group would like to see more developing members join the process.

[Ref 1] Sugathan M., (2013), Lists of Environmental Goods: An Overview, ICTSD

[Ref 2] Reinvang, 2014, The APEC list of Environmental Goods:  An Analysis of Content and  Precision Level, Vista Analysis AS

[Ref 3] Vossenaar, R., (2014, forthcoming), Identifying products with Climate and Development Benefits for an Environmental Goods Agreement, ICTSD

 

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