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A Fresh Take on Defining Environmental Goods

We Need a Trade-Specific Definition of Environmental Goods

07/07/2021 | Maureen Hinman

The rapid pace of innovation in environmental technologies has given the U.S. a once-in-a-generation opportunity to spur domestic economic growth, advance climate and environmental goals, and bend the trajectory of the global economy toward a greener and more sustainable future. The widespread adoption of technologies like solar panels, wind turbines, and heat pumps will form the foundation of a greener 21st-century economy — if the United States can couple its domestic cleantech ambition with a pragmatic trade policy that effectively defines the role of trade in advancing environmental goals.

Trade policy can advance environmental objectives through the reduction or elimination of tariff barriers for environmental goods. But that goal, though obvious, has proved elusive over the 20 years since the World Trade Organization adopted it in the 2001 Doha Mandate. Since then, negotiators have made several strides toward defining the scope of environmental goods in the 2012 APEC List and during plurilateral negotiations at the World Trade Organization (WTO) that collapsed at the end of 2016. However, in addition to a mismatch in like-mindedness, environmental goods negotiations have also been plagued by a failure to effectively define the impact that trade in environmental goods will have on environmental outcomes.

In the past, negotiators in APEC and the WTO have combined typical analyses of the probable economic effects of trade liberalization with national assessments of products’ suitability to create a list of environmental goods. Driven by consistent participation and technical input from environmental ministries, these efforts to define the scope of environmental goods have focused on products’ suitability based on alleged: environmental function (like solar panels or water filters); preferability as a substitute product derived from its composition or other intrinsic factors (bamboo flooring, for example); lifecycle factors such as durability, energy-efficiency, and end-of-life costs (such as LED lighting); and green construction — that is, the environmental soundness of products’ manufacturing process.

Although using varied national definitions of environmental value based on function, composition, construction, and lifecycle attributes is a useful framework for defining the universe of what could be considered an environmental good, it has proved to be an ineffective method to define environmental goods worthy of liberalized tariffs — principally because it fails to account for the actual environmental effects of removing or reducing tariffs on specific environmental goods.

Consider, for instance, bicycles. A reasonable person would conclude that bicycles offer many environmental benefits: they are relatively easy and inexpensive to produce with environmentally-friendly materials, last decades, provide a carbon-free and pollution-free alternative to motor vehicles (and even public transportation), and as a bonus, provide users with health benefits like exercise and a healthy dose of fresh air.

So should bicycles be included on a list of environmental goods that qualify for tariff reduction? Not necessarily.

A trade-driven assessment of bicycles’ environmental suitability would instead ask: Will cheaper bikes, driven by tariff reduction, equate to more bicycle commuters (i.e. increased demand)? The answer, based on the available evidence, is no. If lower prices for bicycles do not lead to more cyclists on the road, the net environmental impact of lower tariffs on bicycles would be marginal at best. In fact, the only known substantive effect of tariff reduction on the global bicycle market has been a shift in production to lower-cost regions — including those with less stringent environmental standards. Global free trade in bicycles? Maybe not.

The example of bicycles illustrates a broader point: that in the trade policy arena, the scope and definition of “environmental goods and technologies” should be grounded in an empirical appraisal of trade’s value as an engine of technology acquisition. By focusing on only those products for which tariff reduction translates into more widespread adoption of that technology — and, as a function of trade liberalization itself, result in positive environmental outcomes — countries can arrive at a workable and effective list of environmental goods. The recent revival of environmental goods discussions within APEC and the WTO makes this an especially timely reconsideration.

In the absence of a new analytical approach to defining environmental goods, the history of past environmental goods negotiations is likely to repeat itself. An important first step toward implementing this new approach would be for the Biden administration to use its authorities pursuant to section 332(g) of the Tariff Act of 1930 to assess the trade and environmental impacts of tariff liberalization on a variety of previously proposed environmental goods. Such an inquiry would allow the United States and others to determine where tariff liberalization would substantially increase deployment (i.e. raise international demand and consumption), and where it would simply lead to origin switching or environmentally equivalent product-switching. From there, analysts could determine the environmental impact of the increased demand and/or technology capacity that would result from tariff liberalization (e.g. carbon reduced, M3 of water treated, tons of waste recycled, etc.) among major markets. For example, how much additional SOx/NOx could be prevented from entering the atmosphere in areas where trade analysis indicates that there is a potential increase in demand for stationary air pollution control devices?

Importantly, a Section 332 investigation would neither commit the United States to joining any new negotiations towards an environmental goods agreement nor wed it to any particular position. Instead, it would help the U.S. reframe the way that environmental goods lists are defined while simultaneously providing the United States and its trading partners with an accurate picture of where potential market access opportunities for U.S. technologies exist and which products may be the most sensitive if U.S. tariffs were reduced further.

The U.S. is a leader in the production and adoption of environmental technologies. As the U.S. works to transition to a 21st-century economy at home, it will need to work with key trading partners to expand U.S. market access on priority goods and remove burdensome tariff barriers that delay the adoption of these products. A transparent and trade-specific definition of environmental good can become a powerful tool for stimulating green growth both at home and abroad.

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