Is the Future of Preferential Trade in Sustainable Production Only?



Charlotte Sieber-Gasser | Trade Experettes

Dr. Charlotte Sieber-Gasser is Senior Researcher and Lecturer at the Department of Public Law, University of Lucerne.

A new, untested regulatory mechanism for the promotion of (more) sustainable trade through trade preferences is about to be introduced for the first time worldwide. By a relatively narrow margin, Switzerland ratified the Comprehensive Economic Partnership Agreement (CEPA) between EFTA states (Switzerland, Liechtenstein, Norway and Iceland) and Indonesia on 7 March 2021, in a popular referendum. While it is limited to trade in palm oil and its derivatives, the new regulatory mechanism has the potential for overcoming most of the shortfalls in existing “Trade and Sustainable Development” (TSD) chapters, for instance, in EU trade agreements: it is binding, enforceable, and thereby creates a tangible economic incentive to switch from conventional to sustainable production. It may, however, also create new legal pitfalls: 1) dependency on private standards or labels, 2) reliance on private certification processes, and 3) uncertainty with regard to the long-term impact of a given standard or label.

Legal basics of trade preferences for sustainable production

To date, WTO law considers differential treatment between products or services based on non-product-related process and production methods (npr-PPMs; process and production methods which do not result in a different product, e.g. organic versus conventionally produced cotton) discriminatory. As a result, unilateral policy measures with extra-territorial application and differentiation between “sustainable” and “conventional” production are in principle in violation of WTO obligations.

While npr-PPMs can still be implemented on a national basis – for instance through minimum wages, the enforcement of labour standards, or national emission ‘cap and trade’ systems – such trade-related interests normally cannot be applied to imports. Hence, unless a substantial number of WTO Members participates in similar policies, applying such policies nationally may put the domestic industry at a disadvantage compared with their foreign competitors. WTO members are thereby disincentivised in raising their national minimum standards in environmental, climate and labour protection.

In very rare circumstances, unilateral extra-territorial application of a specific npr-PPM might actually qualify as “necessary to protect public morals” or “relating to the conservation of exhaustible natural resources” within the general exceptions in the main WTO treaties (e.g. Article XX GATTArticle XIV GATS). Safer and more direct, however, are trade preferences for sustainable production in bilateral or regional trade agreements as long as the minimum requirements for trade agreements are fulfilled (Article XXIV GATTArticle V GATS). In theory, WTO Members may agree on any kind of sustainability preferences they wish. As Bronckers & Gruni and many others show, however, WTO members have to date done so rarely, if at all: up until today, TSD chapters are for the most part limited to the adoption and/or implementation of international core environment, climate and labour treaties, and non-compliance remains non-sanctionable. 

A new regulatory mechanism: accelerating the transition from conventional to sustainable production through preferential trade liberalization

This is where CEPA might turn out to be a game-changer. CEPA is the first trade agreement which encompasses a regulatory distinction between conventional and sustainable production. The TSD chapter requires “all vegetable oils and their derivatives traded between the parties” to be traded in accordance with the “laws, policies and practices aiming at protecting primary forests, peatlands, and related ecosystems, halting deforestation, peat drainage and fire clearing in land preparation, reducing air and water pollution, and respecting rights of local and indigenous communities and workers” (Articles 8.10(2):a and 8.10(2):e). 

While this provision is excluded from the scope of CEPA dispute settlement, along with the rest of the TSD chapter, it is nevertheless likely to be rigorously enforced. Instead of burdening Indonesia with the enforcement of CEPA Article 8.10, importing CEPA parties (i.e. the EFTA-states) will establish domestic control-systems to ensure that only palm oil and its derivatives produced in line with Article 8.10 benefits from CEPA preferential treatment. In Switzerland, this means that importers of Indonesian palm oil and palm oil derivatives have to prove RSPO-certification (international sustainability standard established by the “Roundtable on Sustainable Palm Oil”), if they want to benefit from CEPA tariff-reductions. The domestic processes of import control and governance in Switzerland are established in a separate ordinance, de facto moving responsibility for enforcement to Swiss authorities. Therewith, CEPA creates an enforceable, tangible economic incentive to switch from conventional to sustainable production, while avoiding bilateral trade conflicts by limiting enforcement to import control and governance of domestic importers.

While preferential treatment of sustainable production is limited to palm oil in CEPA, its regulatory mechanism could in principle be applied also to other products and commodities in future trade agreements. The mechanism hinges upon a suitable international standard or label. If such a standard or label is available and both sides agree, the same type of domestic import control and governance could be extended to any kind of trade preference (e.g. organic beef, fair trade bananas, climate neutral clothes, etc.).

The curious case of Indonesian palm oil in CEPA

In the case of Indonesian palm oil, circumstances are quite unique. According to the Swiss State Secretariat for Economic Affairs, almost all palm oil and palm oil derivatives imported to Switzerland are: 1) already certified (due to consumer preferences), and 2) originate in Malaysia. Preferential treatment of RSPO-certified Indonesian palm oil is therefore unlikely to change the overall share of certified palm oil imported to Switzerland, but may perhaps lead to a shift from Malaysian to Indonesian origin. This may be the reason why Indonesia was prepared to agree to the CEPA regulatory mechanism for certified palm oil in the first place – Indonesia gains a competitive advantage vis-à-vis their main Malaysian competitor.

Finally, since only a small share of Indonesian palm oil is currently RSPO-certified, it is possible that – contrary to what is intended – deforestation will increase at first as a consequence of the CEPA regulatory mechanism: evidence suggests that prior to RSPO-certification existing palm oil plantations will expand. In addition, RSPO-certification is known to reduce deforestation in primary forests and high tree cover areas, but has no impact on deforestation in lower tree cover areas. Ultimately, an increase in trade in palm oil and its derivatives is bound to have a negative impact on the environment even with RSPO-certification.

Will the CEPA approach catch on?

Social and environmental drawbacks of trade liberalisation are well-documented and widely acknowledged today: as it turns out, global trade and competition alone do not suffice to lessen inequality between and within states and to promote sustainable economic development. Already back in 2011, Dani Rodrik famously identified the drawbacks of economic globalization as the “Globalization Paradox” where he argued: “The reality is that we lack the domestic and global strategies needed to manage globalisation’s disruptions. As a result, we run the risk that the social [and environmental] costs of trade will outweigh the narrow economic gains and spark an even worse globalisation backlash”(at 88). Is the approach taken in CEPA one way to address this?

CEPA is the first trade agreement elevating a private sustainability standard to a binding requirement for preferential treatment. Furthermore, an otherwise non-sanctionable provision in the TSD chapter becomes enforceable through domestic legislation (and domestic courts). CEPA thus creates a template for binding, enforceable sustainability preferences in trade agreements – a regulatory precedent with the potential to become a new sustainability standard for TSD chapters in trade agreements.

Given that trade agreements will continue to be subject to the optional referendum and remain disputed in Switzerland, it is to be expected that from this point on at least every EFTA or Swiss trade agreement will need to encompass a similar provision in order to meet the threshold of securing the support of a majority of Swiss voters. The implications for on-going and future trade negotiations involving Switzerland are therefore considerable. Spill-over effects to other trade negotiations – notably involving the EU – are quite possible.

But there are also good reasons why other countries have to date been reluctant to introduce a comparable regulatory mechanism in their FTAs. First, it establishes heavy dependence on a particular (private) standard or “label” and on certification processes which are oftentimes not entirely transparent and fair. Unintended consequences cannot be excluded. Second, it is both patronising domestic consumers and foreign producers and thus also revives outdated and failed trade and development policies. Ultimately, it is not entirely certain that preferential treatment limited to certified products and commodities will necessarily benefit the environment, the people and the climate the way it is intended to. 

Nevertheless, if we want to address negative side-effects of international trade – such as pollution and environmental degradation, the exhaustion of natural resources, dangerous working conditions, along with a rise in inequality – we need to look beyond existing WTO law and TSD chapters in trade agreements. The CEPA provides a fresh way of thinking about the role of trade preferences in the protection of the environment, the climate and labour. 

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