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p. 42 of 57 BACK | NEXT I. The Changing Environment II. Driving Forces of Change III. Options and Opportunities IV. Toward Policy Integration Mounting Pressure for Policy Responses Policy Integration Entry Points for Policy Integration Managing Economic Fundamentals Intrasectoral Policy Integration Intersectoral Policy Integration International Trade and Investment Governance A Framework for Policy Integration Toward an Action Agenda V. Call to Action

Asian Environment Outlook 2001 : IV. Toward Policy Integration

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International Trade and Investment

In much of the Asia and Pacific region, economic growth has occurred in parallel with increasing economic integration into the global economy through foreign trade and international investment. In East Asia, export-led industrialization was the leading edge of the region's development strategy, and this is now the development model of most DMCs. Private investment sourced internationally is the dominant basis of capital for such development. International initiatives on trade and investment within the context of the General Agreement on Tariffs and Trade (GATT) and the WTO focus on further liberalization of trade and investment regimes. A parallel set of initiatives for trade liberalization is also slowly taking root under the auspices of ASEAN and other regional organizations.

In this context of economic globalization, policy integration for trade and investment implies an open trade and investment regime, not necessarily an unregulated regime (see Box 4-5). Policies that encourage open trade and investment do not contradict policies that require all investors (foreign and domestic) to meet national environmental performance standards. Typically, this will involve developing in accordance with a “master” plan supported by EIA of all new investments. An approach of combining national environmental performance standards with support of open trade and investment will (in most cases) provide the best route to securing improvements in economic and environmental performance.

Approaches that use national environmental policy to regulate international trade and investment are often criticized for two reasons. First, in a competitive economic environment, developing countries may become pollution havens that seek to attract new investment by sacrificing environmental protection as a way of reducing costs for foreign investors. But most research suggests that such pollution haven effects, if present at all, are very weak and secondary to other investment concerns (such as adequacy of infrastructure) (Zarsky 1999). Of greater concern is the transfer of outdated, polluting technologies and equipment to DMCs. Such concerns are more effectively addressed through national environmental regulations rather than by efforts to directly regulate the import and export of particular kinds of technology. This regulatory approach is often both impractical and highly inefficient as a strategy for co-optimizing environmental and economic performance.

Second, some argue that environment, health, and safety regulation is a "shadow" form of protectionism. Countries could use a laborious and time-consuming regulatory process that is unevenly applied to international investors as a means of controlling access to domestic markets. This charge has been made on a number of occasions with respect to trade in food products, for example, from North America to Asia. There is a counter-demanding concern that national environmental regulatory concerns will be overridden in the name of open trade. The solution to such concerns is transparency in the operation of regulatory regimes, including opportunities to submit suspected use tactics for international review and arbitration by the WTO and other international bodies.

If such reviews are to take place, however, it is critical that the decisions of international organizations and their operational criteria be developed within an open and participatory environment. The recent WTO finding that regulations requiring turtle excluders on fishing nets are an unjustifiable restraint on trade created a storm of protest from environmental groups and others, making clear that there is currently little consensus on how such rulings are to be made. There is also a need for greater capacity building around environmental concerns within international organizations. Trade and investment organizations must also practice policy integration. These are serious concerns both for the environment and for economic welfare. Without successful initiatives to secure broader consensus over the operation of WTO and other international organizations, it is likely that the current backlash against the effects of economic globalization will only intensify.

Environmental regulation is also pursued on a bilateral basis in the form of environmental riders on free-trade initiatives (such as the North American Free Trade Agreement). More generally, the Kyoto Protocol of the Framework Convention on Climate Change seeks to create an international regime that will impact investment and trade on a global scale through international commitments to reductions in the rate of growth of GHG emissions. Balancing economic and environmental concerns has been one of the largest stumbling blocks to the successful implementation of the Kyoto Protocol. The challenge of achieving policy integration by treaty has proven extraordinarily difficult as countries disagree over accounting systems for cost and benefits, ranging from credits for carbon sequestration to mechanisms for technology transfer. These difficulties notwithstanding, some level of international regulation is likely to be required to address global environmental problems such as climate change.

In principle, open international trade and foreign investment regimes improve access to capital and technology on a global scale. Rather than being limited to domestically available capital and technology options, economic actors can draw on a global stock of opportunities. Manufacturers in Bangladesh can contract with suppliers in Germany for low-pollution industrial technology. Households in Indonesia have access to energy-efficient appliances from around the world. In practice, such capital and technology transfer is often subject to market failure because of limited access to information, credit, and other necessary enabling factors. For the full economic and environmental benefits of open trade and investment to be achieved, these sources of market failure need to be addressed. One particular source of concern in this regard is how to ensure equitable transfer of energy- and materials-efficient technologies, without the extraction of monopoly economic rents.

In agriculture and other sectors, the definition of intellectual property rights is also a source of concern (see Box 4-6), especially as a result of increased use of biotechnology in food production and the increased "prospecting" for genetic varieties in developing economies. New policies of access and reciprocal benefits are needed, but policymakers in the region are likely to act only after the damage is done. Only after terms are agreed and conditions strictly controlled should DMCs invite foreign firms to form joint ventures with local groups to explore the chemical and genetic cornucopia of a region's biodiversity.

Increasing international trade and investment also results in tighter connection between suppliers, manufacturers, customers, and producers around the world. This provides further opportunities for policy integration. Among the tools available are supply chain management, various forms of product and firm certification (such as ISO 14000), and socially responsible investment. Ethical investment funds would direct foreign investment funding into firms or sectors that are certified as environmentally sound and sustainable.

Regional and global economic and social integration will almost certainly continue apace, bringing with it access to new and environmentally sensitive markets but also pressure to convert natural areas into export-oriented businesses. As global and regional trade liberalization move forward, enterprises will increasingly be held accountable by international consumers and shareholders for their environmental behavior. Asian and Pacific companies partnering with foreign firms will have access to new and clean technologies, although they also will find themselves bound by stricter international environmental standards. The challenge will be to shape environmental institutions to take advantage of the positive influences of globalization and to reduce or offset the negative consequences. Some of these institutions will be formed at the national level. Others will necessarily be developed at the regional or global levels to deal with the rules of trade, investment, and knowledge exchange.

Finally, it is important to reiterate the significant role of the donor community in influencing international investment. Although typically small as a share of total investment, donor investment is a critical point of leverage and can be a major source of funding for infrastructure projects. Donor agencies need to hold their lending practices to the highest level of environmental review within the policy integration framework of co-optimization of environmental and economic performance.

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