Sustainability: International Trade

Ben Stansfield: Good morning everybody, welcome to the second webinar in our green or sustainability themed series of webinars.  We have a few people still logging on but we will make a start because we have committed to keeping you no more than 45 minutes from your day.  My name is Ben Stansfield I am a partner in the Built and Environmental Law Group and I am delighted to see that already some of this morning's delegates were with us for our post COVID-19 sustainable growth webinar but I am also grateful to see some new names amongst delegates so thank you very much for joining us.

Today we are going to be talking about environmental and sustainability issues in the context of international trade issues.  We were going to be covering some state aid issues but unfortunately our speaker Bernadine Adkins has been called into a client crisis and is unable to make today's event so Bernadine sends her apologies, but we still have two excellent speakers and I will proudly introduce them in a moment.

First a little bit of housekeeping.  The webinar will be 45 minutes give or take, we will speak for about half an hour then invite questions from you online.  Please use the Q&A function at the bottom of your screen, please ask questions throughout and we will cover as many as we can at the end.  We are recording today's webinar and will send a link round to you later and you can either watch back or share that link with your colleagues.  Finally, at the end of the webinar we will send you a survey link, please do give us the feedback as that helps us shape up content in the future.

So today I am really privileged to share a virtual platform with two of my colleagues.  We have Ursula Johnston who is a director in our EU trade and competition practice. Ursula is a global trade specialist and assists many of our clients overcome their compliance challenges in the fields of customs, exercise duties and cross border regulatory matters including export control. 

We are also joined by Savannah Would one of our trainee solicitors.  Savannah is a trainee in the trading competition group and she works very closely with Ursula assisting clients with their free trade issues, in particular on Brexit.  Savannah will be talking to us about free trade agreements and how they deal with the environmental issues, and Ursula will talk to us about the advent of free ports but we have a Bernadine sized hole in our programme so Ursula has very kindly agreed to step in and give us an update on the international trade landscape so thank you very much for doing that at short notice Ursula.

Before I hand over to Ursula and Savannah I thought I would take my chair's privilege and set the scene from an environmental law perspective rather than a trade law perspective.  We said in our first webinar climate change issues have never had such a high profile as they currently do and although COVID-19 has pushed the green agenda perhaps off the front page and onto page two, it is still pretty significant and there is a lot of talk about green growth.  Whilst the green agenda has not really been spoken about as loudly in the UK as an environmentalist like me would really like, and I am talking about the last 12 months since we legislated to net zero and not just the start of the current crisis.  There have been a few positive noises recently, Alok Sharma our business secretary has assembled the green recovery working group, and our foreign secretary Dominic Raab gave a speech recently and he said there is not choice between cutting greenhouse gas emissions and growing economy, you have to do both at the same time.  In contrast to the UK the EU has been really busy, they published the green deal in December 19 which is effectively a road map as to how the EU will get to net zero.  It is adopted in European industrial strategy this year and it is also published by a diversity strategy.  Now those documents are not just a vegan environmentalist's, environmental nerd's dream like me, there is plenty in there about increasing land and water under special environmental protection and reduction in pesticides that is going to increase pollination that gets me very excited.

There is a lot in there, lots that the EU are proposing to do to improve sustainability and environmental protection that will really impact how international trade works and I want to share very briefly some of those issues. 

There is talk about the European Emissions trading scheme being enlarged to include other sectors, for example commercial property and transport.  Now that is going to really help to ensure effective and sustainable carbon pricing across the EU.  More businesses will be subject to it, more businesses will be have to purchase and surrender allowance equivalent to their carbon emissions.  Now that has the potential for carbon leakage and that is what happens when production is transferred from the EU where carbon pricing regulation makes production expensive.  Jurisdictions where carbon prices are less strictly regulated but if those countries do not share the EU's ambition with respect and sustainability of environmental issue we could expect a carbon border adjustment mechanism for certain sectors so the price inputs will effectively and accurately reflect their true carbon content. 

The circular economy is going to be developed and measures will be introduced in the European Union that will encourage business to offer products that are more durable, more re-suable and capable of being repaired.  Insurers will have a right to repair, so how is that going to affect import goods from outside the EU? And in transport terms the EU ETS will likely welcome a shipping centre, and aviation will receive fewer allowances in the future and the EU is talking about regulating access with European ports for the most polluting ship so that is down to impact how we can get through this into the single market.

Some of you might be thinking that is just the EU Ben, there are plenty of other countries with whom we can trade but the EU is really ambitious and this is a stated ambition in the green deal, it talks a lot about green deal diplomacy.  It wants to set a credible example and it wants to really impact trade policy and it said look we are going to talk to the UN about this, there is a charm offensive to produce the G7, the G20, the WGO and if you remember the G20 is responsible for 80%25 of global greenhouse gas emissions there is a great deal that the EU thinks it can achieve.  The EU has identified the EU China summits in Leipzig at the end of 2020 as an opportunity to reinforce it's climate messages. China is the largest emitter of CO2 in the world and the EU sees that as a real opportunity to make some environmental progress. It is the same issue with the EU Africa summit in October.  A green transition is actually at the top of the agenda for those talks. 

So why is the EU on this mission? Well it recognises climate change is the biggest threat to humanity and I am sure it has sound environmental and moral motivations in doing this, but the EU also recognises that very positively climate change represents instability.  You know climate change affects ecological transition it is going to reshape geo politics, trade security, economic interest, it is going to impact societies, we are going to have conflicts, population displacement and what have you so climate has to be at the centre of every decision the EU makes including in relation to trade. 

So that is enough from me with my environmental law hat on but I hope that has helped set the scene a little and made the link between environmental policy aspirations and its effect on trade and I would now like to hand over to Ursula and Savannah.

Ursula Johnston:  To go one step further with Ben's very kind introduction to Savannah and myself and the team that we work in, traditionally and historically we have been advising clients on their trading activities, how to move goods from A to B, what are the costs, what are the risk associated with that.  However as the UK has now committed to withdrawing from the EU, we are getting increasingly more queries from clients asking how will UK international trade policy effect my business? And therefore I think right now as we look at the UK and the EU have completed their fourth round negotiations it is really timely to think about environment and sustainability and how that can be interwoven with trade policy decision making. 

I also think as we hopefully or at least the UK and the EU, as we start to move out of the immediate COVID-19 crisis I think as well businesses will be again addressing that battle of globalisation versus regionalisation or nationalisation of their supply chains and of course that has a significant impact not only from a trade and trade policy and trade agreements perspective, but also again from environmentalist sustainability side as well.  I think it is a great day today to talk about this, and in particular as I understand in the coming days they are going to announce air bridges so we will be able to go on holiday to Spain after all.

This was not going to a platform to mention Brexit but since we are at the very pivotal stage in the negotiations I thought I would just give you a short summary of where I believe the UK is.  So I think it is broadly, the broad consensus as far as political will on both sides to reach a deal by the end of the year.  I think it is accepted, and this again comes into our discussions around sustainability and environment, that there will be regulatory divergence.  The EU has moved away from trying to get the UK to commit to dynamic alignment so that would mean that the UK would have to peg itself to changes in EU regulations, so my expectation is the UK will broadly copy and paste many of the EU existing regulations around environment and sustainability.  It will not be held to those on a go forward basis as the EU develops new regulations.

Where do I think the sticking points are right now, I think are tariffs and agricultural and obviously access to EU fishing water.  It think what we can expect, particularly in the more sensitive areas, we can expect phasing in periods, grace periods of standstill but giving businesses and farmers more time to prepare for the potential tariff and non-tariff barrier changes.  I think what is very clear is we are going to move away from the current single market regime.  I attended a conference a couple of days ago where we discussed when we will have sight of that trade deal when will businesses be able to say, well look these are the duty rates I have paid, these are the provisions around labour, employment, environment, data share etc.  I think it is going to come down to the wire, I think October still feels quite ambitious because typically in trade negotiations, the big decisions, the big sticking points that only get resolved at the very last minute and it's about who blinks first.  I think that is probably enough around Brexit so I want to take a step back from Brexit now and think about what governs international trade so that we can scene set the comments and in the commentary that Savannah is going to give later on. 

So I am sure that in the last couple of years everyone has been talking around this idea of a WTO style trading relationship with the EU and MFN trade terms. But it is true our global trading landscape is already governed by framework principles that have been established by the World Trade Organisation and under the trade organisation they are responsible for implementing and developing two informal agreements which are a general agreement on tariffs and trade and the general agreement on trade and services.  Now neither of those agreements really have any mention of environment and sustainability and one of the reasons for that is they have not really changed very much in the last 20 or 30 years.  If you think you have 195 plus members of the WTO trying to reach consensus on changing the text of any of those agreements is incredibly difficult, and we set that further in the context current trade wars between China and US there is very little appetite right now for the major trading nations to go into that text because broadly they do not think it holds very much value for them.  So what we have now with the WTO lacking really any teeth, is we see increasingly individual countries or individual groups of countries looking to negotiation by-lateral or multi-lateral trade agreements, and that is where we now see the inter-play between environment and sustainability policy and trade because those trade agreements will typically include a chapter whereby each party to the agreement commit to uphold or implement particular standards but will mostly broadly reflect their existing domestic policy in this area.  

A trade agreement covers on the one hand it covers tariffs, so it will say well if you allow me to import potatoes with no duty on the other hand I will allow you to import microchips with no duty into my territory. So it looks to see what are the potential gains for the members and how can they increase domestic living standards.  So I think what we see with environmental provisions in these trade agreements is they tend to be a gear not an engine.  They are not driving the FTA negotiating processes however, as Savannah will touch upon later, it can be used as potentially a lever to push one of the negotiating parties into a particular direction.  I think the other thing to remember and this is less so the case for the UK and the EU right now, but trade negotiations can last for 10 plus years so if you can imagine you can come into a platform for trade negotiations thinking well national governments have their own agenda on this area but when it comes to signing off and implementing those agreements 10 years later national policies may well have changed.

I think the last points raised around trade agreements and those policies is that there is a lack of enforcement around them.  So in the course of doing this research, because I have to say this was not something that Savannah and I had spent a lot of time doing historically, was we found very few, I do not think we have had any incidences where a commitment to adopting a particular environmental or sustainable provision in the FTA chapter had been enforced by another party, typically disputes tend to raise around state aid and non-tariff barriers to trade.

I think one example I just wanted to go through before I hand over to Savannah was China-Australia trade agreement and this is where you can see what were the interests of those parties when they were negotiating that trade agreement.  Well basically Australia wanted to sell the result of mining, so iron ore to make steel, minerals, precious minerals etc. and therefore to try to have a chapter in that trade agreement that held either Australia or China to a high level of environmental or sustainability policy would have been very difficult.  That would clearly then have had a conflict of interest. 

I think that is what I wanted to say generally around scene setting and trade and now I am going to hand over to Savannah who is going to discuss some more specific examples.

Savannah Would:  Thank you Ursula.  So I am going to talk now about the interaction between sustainability and trade agreements. The relationship between trade and the environment is complex and there is quite a clear conflict from the outset.  Naturally, if you increase the level of trade particularly over a long distance between continents or where you have got a global supply chain,  you are looking at the use of aircraft and shipping which has an impact on the environment and the exporter and importers carbon footprint and also contributions to greenhouse gas emissions.  However increasing trade through the conclusion of trade agreements can have many positive effects both economically and socially, particularly in increasing efficiencies in the supply chain. So trade agreements provide a great opportunity for issues around climate change and sustainability to be addressed, and also a means of facilitating co-operation between countries to work together to improve environmental standards globally and as Ursula mentioned earlier they can be used as leverage for improving environmental standards.

So if we take the recent example of discussions between the UK and the ASEAN region.  If you look at Malaysia where the government has declared a moratorium on palm oil expansion to protect forest cover at 50%25, and also to enforce sustainability standards in palm oil production in Malaysia. So this really shows how trade negotiation could be used to better environmental standards and that would be a really positive effect.  If we consider some of the free trade agreements recently concluded which are currently under negotiation between the EU and third counties, it provides a useful insight into how sustainability and the environment are being considered.  So what have we seen in modern EU trade agreements?  As Ursula mentioned these do contain a chapter typically on trade and sustainable development and some of the rules imposed on the EU and its trade partners relate to following international labour and environmental standards and agreements, effectively enforcing their environmental labour laws, sustainably trading natural resources such as fish and timber, not deviating from environmental laws to encourage trade or investment, encouraging trade that supports climate change and also promoting practices that promote corporate social responsibility.  The EU also uses its trade agreements to promote sustainable procurement, and also the removal of barriers to trade and investment in renewable energy.  During major trade negotiations the commission also uses sustainability impact assessments which analyse the potential economic, social, human rights and environmental impact of ongoing trade negotiations and in practice it also meets with its partners regularly to discuss how they and the EU are implementing trade and sustainable development commitments in the agreements between them. 

So now if we look in particular at some of the agreements that are being concluded or are in the process of being concluded such as the EU Mercosur agreement.  If you look at the agreement in principle, it is based on the premise that increased trade should not come at the expense of the environment or labour conditions, and on the contrary it should promote sustainable development. And in a specific article on climate change they agreed to strong language committing to effectively implement the Paris agreement and also to co-operate on the trade and climate interface.  This is something that the European commission has stressed is covered by the agreement.  It also lists a number of areas of potential co-operation regarding the sustainable management for us as well as responsible business conduct.  The chapter also as Ursula mentioned about enforcement earlier it contains a specific dispute settlement procedure under which a complaint concerning non-compliance is first considered in formal government consultations, so it does deal quite closely with trade and sustainable development. Similarly with the EU Mexico agreement which they have just wrapped up four years of negotiations in April this year it has got a trade and sustainable development chapter including provisions on the fight again climate change and also the transition to a sustainable low carbon economy and also makes reference to the Paris agreement as the EU Mercosur agreement does as well. 

It also identifies potential areas where trade and climate change agendas can reinforce each other such as the conservation sustainable management of biological resources, forest and fisheries, and also the promotion of trade and harvest of sustainable products.  It also deals with endangered species of for example with Fauna and Flora and other agreements that are key international instruments.

Now if we look at the EU calendar trade agreement known as CETA trade agreement this also has a chapter on trade and sustainable development and also a separate chapter on trade and the environment and these also contain specific recognitions and agreements by the parties, for example they recognise that it is inappropriate to encourage trade or investment by weakening or reducing the levels of protection afforded to environmental law.  They also agree to engage in dialogue and consult with one another in relation to trade related sustainable development issues of common interest and they also recognised that economic growth, social development and environmental protection are all interlinked.  There is also specific provisions in relation to trade favouring environmental protection, such as agreeing to make efforts to facilitate and promote trade and investment in environmental goods and services through including the reduction of non-tariff barriers related to these particular goods and services. 

Now if we take a step back and look at the trading relationship between the EU and South Africa, this trade agreement was concluded back in 1999 but it still does have a section on the environment in particular the parties agreed to co-operate, pursue sustainable development through rational use of non-renewable natural resources and the sustainable use of renewable natural resources and it also contains some provisions around sustainability.  For example in the context of improving access to affordable, reliable and sustainable sources of energy and also supports co-operations between countries in southern Africa to exploit locally available energy resources in an efficient and environmentally friendly way, and it also promotes sustainable development in relation to tourism.  So we think this really shows that from an EU perspective sustainability and environmental concerns have been on the agenda for a while.  Now sustainability is not just the focus of EU agreements this is something we are seeing to various degrees of specificity in trade agreements globally.  So for example if you look at the US, Mexico and Canada agreement which was formally signed this year, and is in the process of being ratified, within this agreement there is also a whole chapter dedicated to environmental issues. It is fairly lengthy, approximately 31 pages in total and it sets out the scope and objectives which include again recognition by the parties  that a healthy environment is integral to sustainable development, and also recognising that contribution to trade makes sustainable development. Also in terms of the objectives of this chapter it is to promote mutually supportive trade and environmental practices and policies, promote high levels of environmental protection, and the effect of enforcement of environmental laws, and also to enhance the parties capacities to address trade related environmental issues through again co-operation and aiming for further sustainable development.

The US, Mexico and Canada agreement also contains specific environmental issues for address such as protecting the ozone layer, protection of the marine environment from ship pollution, air quality and also marine litter. 

Now if we look at the agreement between China and Australia that Ursula mentioned earlier it is quite a lot lighter than this and there isn’t an environmental chapter as such.  The environment is mentioned briefly in the investment chapter but its more an exception to obligations under the agreement, for example in relation to measures which would not constitute arbitrary or unjustifiable discrimination or a disguised restriction on trade then nothing in the agreement would prevent a party from implementing measures necessary to protect human, animal or plant life all relating to the conservation of exhaustible and living and non-living resources.  Also protection of the environment is listed as sort of a general exception to some of the chapters.

So that is brief overview of some of the provisions in the various trade agreements that are in negotiation all concluded, and I will pass you back to Ursula who is going to talk a bit about free ports.

Ursula Johnston:  Thank you Savannah that is brilliant.  Something just when you were talking about the recent US, Mexico and Canada agreement.  I think what is very interesting is if you should get an insight into the negotiators thinking particularly from the US because they have obviously for various reasons, well one of the reasons, they have negotiated who whole of the agreement was because they wanted to make sure that Mexico could not undercut US manufacturers and I suspect the policies around the environment and labour for example have been used as a bit of tool to ensure that Mexico brings up its manufacturing costs, so that US manufacturers can complete more evenly in that region.

I thought since this, I am sure today we have got some planning lawyers on the webinar.  I wanted to touch just briefly on a somewhat new regime that the UK is looking to introduce post-Bexit and that is free ports in conjunction with what we call special economic zones.  Now the reason why I think it is important to raise this is this is going to come down the track, is the idea of these free ports and special economic zones is to encourage investment in particular areas of the UK, particularly the north east, and those may be round existing ports but they could also be virtual zones or again inlands and terminals. What these three ports aim to do is to provide a specific geographical area that attracts investors and capital by perhaps loosening some of the restrictions around planning and permitted development rights.  They are aiming to create what we would call an innovation hub with regulatory flexibility, so you can see from an environmental perspective that already there are concerns coming, that whilst on the one hand yes it is good that we need to boost the UK economy and in particular in some of the poorer regions is this going to rub up against UK environmental policy.

So the current free ports would aim to help lower the cost of imports for businesses by creating a tariff free zone, a zone where you do not pay custom duties and most likely import VAT, and part of that is to say as if you are a business or manufacturer who is going to develop new technologies we want you to come and do that in the UK and will give you a softer landing zone in terms of your regulatory commitments.  So there is a UK government consultation that I think was due to close in March but has now been extended to 13 July, so if you are interested in looking at what those free ports propose in terms of the different areas of liberalisation it is worth having a look and potentially responding to that survey if you think it has particular interest for you as an individual or the organisation that you work for.  I don’t think I want to say too much on where the conflicts are because I am not the environmental specialists, but it's something to keep on your radar.  I am going to hand back to Ben as our moderator as I know we are getting close to our end of 40 minute slot.

Ben: Ok thank you both very much for that.  We have had a couple of questions in.  Please do use the Q&A function if you have questions.  Savannah, you talked about free trade agreements and actually I was surprised to hear that since 1999 in South Africa free trade agreement we have environmental provisions or environmental chapters in these.  Do you think free trade agreements are a way of improving environmental standards?

Savannah:  That is a good question.  I think free trade agreements do provide a great opportunity for matters such as sustainability and the environmental to be addressed and climate change as well, and especially because often with trade agreements you have agreements between countries and different continents as Ursula mentioned they are sort of global so there is more of a global impact. So if FTAs or trade agreements in general can facilitate cooperation between countries to work together, confirm their commitments to the environment and sustainable measures then they do provide a great avenue for improving environmental standards generally and more globally.  Particularly a lot of the free trade agreements that I mentioned between the EU and other countries with more modern agreements they do contain these chapters but as these agreements were concluded relatively recently it will be interesting to see what effect they have on the environment and sustainability going forward and I do not know if Ursula is there anything you want to add to that?

Ursula: Yes and I think obviously the UK to a very great extent has been looking to what we can roll over the existing EU trade agreements but I think what will be interesting to see is to what extent it wants to leave itself some wriggle room to diverge.  It does not want dynamic regulatory alignment with the EU and therefore I know that not only environment and sustainability there are other chapters in those FTAs where the UK is thinking very carefully about making sure that it leaves some room to create its own future policies and making sure that those policies are fit for purpose particularly in a time where you think the UK is trying to negotiate trade deals which perhaps traditionally would have taken ten years to conclude and in a matter of six weeks for example in the case of the Japan and the UK.

Ben: You mentioned that the environmental issues are like a gear rather than the engine, and obviously I read the green deal and get very excited as an environmental lawyer.  The world is going to be a different place which is fabulous and exciting, so do you think that gear is going to get larger, do you think that environment will start driving trade or is the UK always going, so I guess that is a question for the EU and will the UK tag along and sort of just copy and paste what the EU have done or will we just be so desperate to get the FTAs done we will agree to anything?

Savannah:  I expect the EU and the UK will be looking for much of this adoption of policies to be driven at a businesses level so they will want businesses to uphold their standards and push their own agendas which on the one hand yes we want to liberalise global trade but the other we want to make sure that we are going to have a business environment which upholds those commitments.  So I suspect that actually the pressure will come from top down and businesses will increasingly need to make sure that they keep this on their growth agenda.

Ben:  Thank you.  And the final question I have that has come through is, you mentioned a lack of enforcement in your research.  What would that look like if there had been enforcement? 

Ursula:  So I think everyone would be fairly familiar with the ongoing disputes between say China and the US and those are outside the WTO because they are relying on provisions in those agreements which say if, for example, you wanted to declare a national emergency well you can impose tariffs on steel.  And we go to the next phases when members of the WTO will bring a complaint to the WTO panel and ask for adjudication.  Now the issue the WTO has at the moment does not have a sitting appellate body, it does not have enough judges appointed to manage any disputes.  So what I suspect is, and those disputes are normally around tariffs so they are more around how much money are we paying, how much money do I have to pay if I want to import my products in to your territory.  What I suspect would happen in these areas around environment and sustainability is there would be much more on a sort of local delegate basis so I know that for example under the EU Mercosur agreement is every 2-3 years they will establish sub-committees that go and sit together in a room and they discuss how successfully different chapters of the agreement have been implemented and whether there are any questions need addressing, but I would find it difficult to think of an example where you would take disputes around perhaps a breach of the chapter or a procedure breach of a chapter on environment past WTO level.

Ben: Thank you.  And then Ursula we have had a question in highlighting that there is a conflict, is there not, between some of the investment chapters, for industries which might drive for example deforestation and logging, and the environmental chapters.  Obviously there is a conflict, how is that justified or how is that dealt with or is that going to become more and more attention going forward?

Ursula: I don’t know the answer to be honest, I think we would need to think about the whole negotiation process.  It is a really good question but I can imagine we are going to have more and more conflicts, you know if I look at data as well how do we share data globally to support movements of business services.  I think that is another example of where on the one hand some countries want to monetise that data on the other for example EU I think have a much more protectionist outlook.  So I think as we have these peripheral chapters to the trade agreements the question of conflict will come much sharper.

Ben: Alright.  I am mindful of time.  I think we will wrap up there so on behalf of Ursula, Savannah and myself thank you for joining us today and obviously on behalf of all our delegates Ursula and Savannah thank you very much for your insight.  Do please fill in the feedback forms when you get the link shortly and please do make a diary note.  We have got a couple more green and sustainabiltiy webinars coming your way so on 30 July we will be talking about how to green your supply chain and your commercial contracts and then on August 27 we will be talking about climate change litigation which is rising in prominence.  So thank you very much for joining us and goodbye.