Institute for Development Policy and Management
and Environmental Impact Assessment Centre

The University of Manchester

18 November 1999

This report was prepared with financial assistance from the Commission of the European Communities. The views expressed herein are those of the Consultants, and do not represent an official view of the Commission.

Introduction

The main objective of this study has been to develop a methodology for carrying out a sustainability impact assessment (SIA) and to use this methodology to make a broad assessment of the potential impacts (positive and negative effects) upon sustainability of the proposed New Round. In addition, the study findings have been used to provide ideas on how best to maximise the positive impacts of the expected liberalisation or rule-making.

The work has been completed in two phases: mid-July – mid-September (Phase One) and mid-September – mid-November (Phase Two). Phase One involved wide-ranging literature and case study reviews of the relevant documents and the development of a new SIA methodology for use in preliminary assessments in the pre-negotiation (i.e. pre-Seattle) stage of the New Round. This has been fully reported in Kirkpatrick, Lee and Morrissey, 1999.

Phase Two has involved an examination of the potential sustainability impact of each measure that may be covered within the negotiations. Impacts, positive and negative, have been assessed for four groups of countries – the European Union, developing countries, least developed countries, and the world as a whole. These findings have been summarised distinguishing those areas where negotiations are likely to have a relatively limited impact and those where the impact may be greater. Additionally, proposals have been formulated for mitigatory and enhancing measures.

This executive summary contains a resumé of the SIA methodology which has been used (chapter 2 of the main report), the findings from screening each of the measures that may be negotiated (chapter 3), and the results obtained from the scoping and preliminary assessment of each remaining measure and of the agreement as a whole (chapters 4 and 5). It also lists possible mitigatory and enhancing measures for those situations where the expected impacts are likely to be greater and indicates how these might be combined within a coherent strategy to enhance the impact of the agreement as a whole (chapter 6). The overall findings of the study are brought together in chapter 7. The Appendices contain statistical data and supporting information relevant to the assessment and the list of References contains the titles of documents cited in the text and of other documents used in the preparation of this report.

SIA Methodology

Sustainability impact assessment is a relatively new concept for which, previously, there was no established methodology and little practical experience, particularly relating to international trade policy. The development of a new SIA methodology has faced a number of challenges. The first is the geographic breadth and ill-defined scope and content of the proposed agreement in the pre-negotiation phase which creates considerable uncertainty. The second is the under-developed nature of the constituent appraisal methodologies – economic, social and environmental – for use at the strategic level, and the limited practical experience in their application. Third, there is no established method for integrating these specialised strategic appraisal methodologies, which are based on different discipline-based paradigms and research methods, within a common SIA framework.

Four kinds of information have played a key role in the assessment. These are:

• A list of 15 measures which may be negotiated during the New Round and which, therefore, are the main subject matter for this appraisal. These are listed in Box 2.

• Three different policy scenarios for the New Round: base scenario, intermediate scenario and a liberalisation scenario. The base scenario implies that no new agreement will be reached on the measure concerned. The intermediate scenario reflects the EU’s initial negotiating position. The liberalisation scenario assumes greater and faster liberalisation and very limited changes to existing mitigatory measures for adverse social and environmental impacts.

• Four different country groups for which appraisals have been undertaken: the European Union, developing countries, least developed countries and the world.

• A list of sustainability indicators – evenly balanced between economic development, social development and resource/environmental quality – and a set of significance criteria to be used in their interpretation. These are shown in Box 1. It should be noted that, in the case of long-term impacts, additional considerations may apply (see section on Appraisal of Long-term Impacts).

The assessment process has contained four main stages:

• screening: to determine which measures require SIA because they are likely to have significant impacts.
• scoping: to establish the appropriate coverage of each SIA.
• preliminary sustainability assessment: to identify potentially significant effects, positive and negative, on sustainable development.
• mitigation and enhancement analysis: to suggest types of improvements which may enhance the overall impact on sustainable development of New Round Agenda measures.

Screening

The purpose of screening has been to determine whether any of the measures initially listed for investigation in the SIA of the New Round (see Box 2) might be excluded from further examination on the grounds that they were unlikely to give rise to significant economic, social or environmental impacts. All of the measures listed in Box 2 have been investigated and, in each case, their likely impacts were considered according to the three scenarios (‘base’, ‘intermediate’ and ‘trade liberalisation’). Impacts were analysed in relation to the four target groups of countries: the European Union, developing countries, least developed countries and the world. The screening findings were initially derived using the study team’s own knowledge, the documentary sources listed in the Phase One Report and various consultations. Subsequently, these were tested in meetings with the European Commission and with representatives of Member States and civil society, during October, 1999. Since early October, the screening findings have also been available on the study website (see address above) both for information and comment.

The main conclusions which were drawn from the screening exercise are:

• All of the measures listed may give rise to some significant social and/or environmental impacts as well as economic impacts. For this reason, none of the listed measures could be safely screened out of subsequent stages in the preliminary SIA process.

• The nature and extent of the potential impacts vary between different measures, different scenarios and different target groups. Impacts may be both positive and negative, varying according to the particular measure, context and target group involved.

These findings were supported in the consultations that took place subsequently. No proposals to remove particular measures from the appraisal, or add new ones, were received. Consequently, each of the fifteen measures has been submitted to scoping and preliminary appraisal.

Scoping and Preliminary Impact Assessment

The main purpose of scoping is to determine the terms of reference for the appraisal of each measure by examining its components to identify those which may lead to significant impacts and those which are unlikely to do so and may be excluded from further analysis. Preliminary assessment is an extension to scoping in two senses: it assists in dealing with any remaining uncertainties concerning which impacts are to be recorded as potentially significant and non-significant, and it differentiates, so far as the available information allows, between impacts of lesser and greater significance.

Where impacts are found to be potentially significant, they are likely to be a material consideration in any subsequent trade negotiations relating to that measure and the subject of more detailed assessment and consideration in the post-Seattle negotiation period.

Scoping aims to identify the cause-effect routes through which significant impacts may result, taking account of possible indirect, feedback and cumulative impacts, as well as direct impacts. Both scoping and preliminary appraisal have been undertaken for each country group and for each scenario in order to record any differences in likely impacts between them. Similar sources and kinds of information, though in corresponding greater detail where needed, have been used for scoping and preliminary appraisal as for screening. Progressively more attention has been paid to the characteristics of the individual components of each measure, the different contexts in which they may be applied, the cause-effect routes involved, and whether the resulting economic, social and environmental impacts are likely to be significant or not.

Finally, the combined impacts are assessed for all of the measures that may be included on the New Round Agenda, taking into account any additional indirect, feedback and cumulative impacts which result from interactions between the measures and their individual impacts.

The results obtained from the preliminary SIA of the individual measures, according to the ‘intermediate’ and ‘liberalisation’ scenarios, are based upon comparisons with the situation in the base scenario. The main findings are summarised below.

1. In the case of the European Union:

• According to the intermediate scenario the economic impacts of most of the individual measures are positive and are significant or on the margin of significance. In a number of cases, however, there are both gainers and losers (e.g. consumers and producers or vice versa) and in two cases (agriculture and services) these were considered to be of sufficient importance to be separately identified. Social impacts and environmental impacts are identified as potentially significant or on the margin of significance for at least half of the measures. In many cases, social and environmental impacts are recorded as being both positive and negative either because different social groups or countries are impacted differently or because the impacts in question are likely to change over time. Both issues - of distribution and time - are relevant to the intra- and intergenerational concerns of sustainable development and are discussed further below. In summary, according to the intermediate policy scenario (which approximates to the EU’s initial negotiating objectives), the majority of the individual impacts are likely to be of lesser rather than greater significance; most are positive or contain positive components but these are frequently accompanied, particularly in the case of the social and environmental impacts, by negative impacts on some socio-economic groups and/or over certain intervals of time. A number of these individual measure impacts, both positive and negative, are expected to be of greater combined significance when the impacts of the Agreement as a whole are assessed.

• According to the liberalisation scenario, most of the economic impacts are expected to be significant and positive in the longer term (and certain of these could be higher, in the longer term, than in the intermediate scenario). However, some could be negative or of lesser significance in the short and medium term due to the costs of adjustment during the transitional process. In the case of the social and environmental impacts, there are both positive and negative consequences but overall performance is less satisfactory than in the intermediate scenario. The reasons for this are mainly two fold: the absence of the social and environmental safeguards which are built into the intermediate scenario and the likely higher social and environmental costs during the transitional period of adjustment. As in the intermediate scenario, the combined impacts (positive and negative) of the Agreement as a whole are likely to be of greater significance.

There is likely to be considerable diversity in the impacts of the individual measures both between and within the two country groups. However, for present purposes, the overall experiences of the two groups are likely to be sufficiently similar that they can be considered together.

• According to the intermediate scenario the economic impacts are mostly significant. In the great number of cases, these are positive for some countries or become so after an interval of time (the potential exceptions concern labour standards and the trade-MEA issue). However, probably to a greater degree than in the EU country group, there are some countries and socio-economic groups which may experience economic welfare losses, depending on their economic structure and adaptability to changing market and policy conditions. The extent of these potentially negative elements depends on the specific details of the individual measures, and the timing of their implementation (this is examined further, as a more general policy issue, later). The social impacts of the individual measures are also mostly significant, and of lesser rather than greater importance. A number are expected to be positive, or to become so after a period of time. However, in the case of a number of measures, impacts on individual countries, or socio-economic groups could be negative. This is more likely where there is no increase in economic welfare experienced, at least in the transitional period, and where there are significant changes in the distribution of income. The expected environmental impacts of individual measures are similar in pattern, although not identical, to that of the social impacts. There are significant gains and losses predicted, varying according to socio-economic group and country context. To some degree they will mirror the predicted changes in economic and social impacts but will also be influenced by the existing level of environmental stress in the country concerned and by its regulatory and institutional capacity to deal with such stress.

• According to the liberalisation scenario the economic impacts on these two country groups are more complex and diverse. A faster process of liberalisation, if not accompanied by considerably strengthened supporting measures, is likely to result in a much sharper division between countries and socio-economic groups into gainers and losers in economic welfare, particularly during the short and medium term adjustment period. In the longer term, assuming markets become more efficient, additional economic welfare gains should be made by these country groups as a whole. However, it is more problematic to establish the extent to which more countries and social groups will share in these welfare gains or, more fundamentally, how many of these countries will emerge from the transitional process on a closer trajectory to sustainability than previously. The majority of the social and environmental impacts are likely to be significant and, particularly during the transitional period, negative impacts (some at or near the greater significance level) are likely to be experienced. Their relatively greater importance is partly a reflection of the greater variations in economic welfare changes in this group and their social and environmental consequences, but also of the absence of the social development proposals and capacity strengthening in environmental protection which are a constituent element of the intermediate scenario. To the extent that developing countries re-emerge from the transitional process with higher economic efficiency and the capacity to make additional economic welfare gains, this could be reflected in some positive social and environmental impacts. This is provided it is accompanied by corresponding changes in the distribution of welfare and significantly strengthened environmental protection and resource conservation practices.

3. In the case of the world as a whole:

The combined impacts consist of those which have already been described, together with those on other developed countries, additional to the European Union.

The impacts on the rest of the developed world, under both the intermediate and liberalisation scenarios, are more likely to approximate to those of the European Union. However, there is great diversity within the developed world, as there is within the developing world, and there is likely to be a corresponding diversity in the economic, social and environmental impacts which they experience.

The impacts of each of the proposed measures on the world as a whole, under each of the scenarios, are summarised below. These reflect the findings already presented adjusted to include the remainder of the developed world. Overall, they indicate a significant expansion in world economic development, which is likely to be greater once the adjustment to the trade measures has been completed. However, the projections of likely social and environmental consequences are much more mixed. There are gainers and losers, both within individual countries and between countries, for reasons that have already been described. These exist in both scenarios, but the extent and significance of negative impacts is likely to be greater in the liberalisation scenario.

Finally, when assessing the impacts of the Agreement as a whole, the issue arises of its likely impact on long-term global sustainability. This raises additional questions of appraisal methodology and its application which are examined separately below. Before doing so, some observations are made on the compatibility of the findings so far with those reached in previous, more specialised studies of the likely economic and environmental consequences of trade liberalisation agreements.

Comparisons between different appraisal findings

The empirical studies relevant to the trade policy-sustainable development relationship are reviewed in Kirkpatrick, Lee and Morrisey 1999. The findings of these studies are divergent and incomplete. Some, using formal modelling (often general equilibrium models), conclude that there are significant economic welfare gains to be obtained from trade liberalisation. Recent studies of this kind include: Australian Department of Foreign Affairs and Trade, 1999; OECD, 1999a; European Commission, 1999. These are mainly trade-economy models which do not include social, environmental and regulatory sub-systems shown in the analytical framework in Figure 1. Where they do consider likely environmental consequences this is attempted in a less rigorous and detailed manner. (For example, by using a limited number of average emission factors which are used to predict changes in the aggregate quantity of certain emissions (OECD, 1997) or assuming a simple, general relationship between economic development and environmental improvement (e.g. based on the environmental Kuznets curve (OECD, 1999b). Social impacts are rarely considered other than by assuming a simple, usually positive, relationship with the average growth in incomes. There is also a growing case study literature on the trade – environmental - social relationship which often identifies negative environmental and social consequences resulting from trade liberalisation (Kirkpatrick, Lee and Morrissey, 1999).

The difference in these findings is a possible source of confusion both to trade agreement negotiators and to other interested parties, including civil society. For this reason, it is important to clarify the reasons for these disparities so that, in the future, negotiations might proceed on a more consensual basis.

The results obtained from using general equilibrium trade models (and other kinds of models) depend crucially upon the properties of these models as well as on the quantity and type of data used within them. Both are important and are interrelated. For example, where data are limited (as is commonly the case) additional simplifying assumptions are made in the model to reduce information requirements or to enable other less directly appropriate data to be used. To a greater or lesser extent, the model’s findings will then be different to what they might otherwise be. The properties of models are also influenced by other factors such as the purposes for which they are to be used and the need to stay within computational limitations. Hence, models that may be well-suited to analyse certain types of trade-economy relationships may not be suited, or easily extended, to analyse trade-economy - social - environmental - regulatory relationships.

This is not a criticism of trade-economy models. Modelling is more fully developed in this area than for any other element in the trade-sustainability relationship. However, there are certain characteristics of the existing models that may account for some of the limited differences between this study’s findings and those derived from the modelling studies described above. For example, these types of models often assume:

• efficient, highly competitive markets are in place or, where the presence of oligopoly is recognised, fairly simple types of rivalrous behaviour are assumed;
• equilibrium conditions apply and, therefore, adjustment processes and costs associated with disequilibrium conditions are ignored;
• aggregation in the analysis over a number of sectors, countries etc. and averaged supply and demand functions etc. in circumstances where the level of variability is likely to be high.

• these types of impacts are particularly associated with imperfect markets and disequilibrium conditions; and
• the variations in these impacts at the local level and between different socio-economic groups can be great and where impact measures are often multi-dimensional and semi-quantitative in nature.

Appraisal of long-term impacts

The analysis so far has mainly related to impacts resulting from trade measures over a short and medium term period (say, up to 15 years). This is important because negotiators may require a net benefit from the trade agreement over both of these time intervals, if an agreement is to be politically acceptable.

However, an additional requirement, assuming sustainable development is adopted as a long-term goal, is to appraise the trade agreement package from a long-term perspective. This, almost certainly, introduces a further dimension to appraisal. Certain factors which are implicit in the short and medium term appraisal, now need to be made explicit. These include:

• long-term economic and population growth rates, and the influence which trade-related policies have on these;
• changes in technology and, more specifically, how the trade-related policies influence the rate and direction of inventive and innovative activity (e.g. influencing trends towards de-materialisation and resource saving);
• the constraints imposed by carrying capacity and limited stocks of critical capital;
• changing life styles and the factors which influence whether or not these are culturally and environmentally enhancing.

However, when considering the long-term, the formulation of M and E measures is likely to change. They are more likely to be oriented towards:

Part of the purpose of this study has been to suggest measures, including flanking measures, which may enhance the impact on sustainable development of the New Round measures that have been subject to sustainability impact assessment. The objective at this stage is not to appraise these M and E measures; this is something to be considered post-Seattle. However, the suggestions which follow are based on certain guiding principles and selection criteria which are discussed below. A number of M and E measures are contained within the intermediate scenarios described in chapters 4 and 5 of the full report and, for the sake of completeness, these are also included here.

Guiding principles

A programme of M and E measures should possess an internal consistency and relevance to the objectives of the trade agreement it is expected to serve. With this in mind, there are a number of general principles which should guide the selection of M and E measures and their subsequent implementation. These include:

• Sustainable Development: The Preamble to the Agreement establishing the WTO commits the organisation to achieving trade liberalisation that is consistent with the objective of sustainable development. This implies that equal consideration should be given to economic, social and environmental impacts of trade liberalisation and rule changes and that SD considerations should be mainstreamed into all aspects of the WTO’s work. In turn, this suggests that subsidiary principles consistent with inter-and intra-generational equity and environmental and social policy principles of sustainable development (e.g. polluter pays principle, user pays principle, precautionary principle, distributive justice, etc) should be respected in trade policies.
• Regulatory Harmonisation: WTO multilateral regulations and rules need to achieve as much coherence and harmonisation as possible between domestic regulation and other international regulatory disciplines in the economic, social and environmental fields.
• Development Interests: The WTO Preamble also commits the organisation to achieving trade liberalisation that is consistent with development objectives. This need is particularly evident in the case of the least developed countries where existing conditions - as shown in the current level of their economic, social and environmental indicators (see appendix 1) - are already close to, or in some cases below, the minimum level for sustainable development.
• Policy Co-ordination: The effectiveness of M and E measures can be increased by co-operation between international organisations based on consideration of the interaction between trade-related areas and other policy areas, in a manner that is mutually supportive and complementary. There are already provisions for closer international co-operation between WTO, IMF, UNCTAD and the World Bank. The conclusion of similar agreements, with other international organisations involved in social development and environmental policy matters, could facilitate greater international co-ordination in the design and application of an overall international M and E strategy for advancing sustainable development.

The following more specific criteria have also been used in the initial identification of possible M and E measures. They could also be used in any more detailed post-Seattle appraisal.

• Relevant: suitable for addressing specific deficiencies identified in the appraisal findings.
• Workable: the measures proposed are practical in legal, organisational and technical terms.
• Cost-effective: they are likely to be a least cost way of achieving the desired improvement.
• WTO compatible but not necessarily WTO led: they should be consistent with existing or revised WTO rules but they do not necessarily need to be organised, financed or implemented by WTO.
• Coherent: the measures should be consistent with each other, with other trade measures already prepared, in the relevant scenario, and with the goals of sustainable development.
• Complementary to other sustainable development initiatives: the proposed measures should not duplicate other measures which may be more appropriately undertaken by others.

An initial list of possible mitigating and enhancing measures is contained in chapter 6 of the full report. It is illustrative of the wide range of instruments that may be developed to offset negative impacts or enhance positive impacts associated with each of the measures proposed for inclusion within the New Round Agreement. They include M and E measures to:

• Remove or modify trade-related practices which reduce economic welfare, increase income and other forms of inequality, intensify pressures on environmental quality and encourage over-use of natural resources.
• Encourage greater economic efficiency leading to increased economic welfare; align prices more closely to their full social costs of production; encourage technical change, appropriate to different country situations, which stimulates resource saving and more effective pollution control; strengthen the regulatory provisions for environmental and social protection where market systems are not yet able to perform these tasks effectively; and address problems of poverty and income inequality using methods which are de-coupled from mechanisms known to impede economic efficiency and environmental conservation.

Post-Seattle

The European Commission has already indicated its intention to continue the Sustainability Impact Study into the subsequent stages of the New Round negotiations after the Agenda has been determined at the Seattle meeting. NGOs and other interested parties have also expressed their strong desire to see such an assessment continue. The details relating to this remain to be decided. However the report’s conclusions (Chapter 7) contain some general suggestions relating to the post-Seattle stage.

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