Upton-on-line: Special Trade & Environment Issue

In this edition

A lengthy rumination about just what Europeans might (and then again might not) be on about when they raise environmental issues in the context of trade liberalisation; but first, some notes on the fall-out from France's summer heatwave.

All hot and bothered

The heat has provided the French with an almost inexhaustible vein of conversation since the 1 September rentrée has thrown everybody back into their workplaces. Their is no question that the heat was exceptional. While it didn't break the all-time high of 44.2 degrees recorded in Toulouse in 1927, there were quite enough lesser records for comfort. A large very stable and very dry mass of air crossed the Mediterranean from the Sahara and sat neatly over France for over two weeks. Unlike previous heatwaves (or canicules as they are deliciously known) night time temperatures were unusually high so the amplifying effect of the whole business in cities was pretty unbearable. Peak temperatures in Paris nudged 40 degrees day after day. But of course those temperatures are taken somewhere in a park. The full heat island effect of acres of stone and asphalt meant even higher temperatures around town. No wonder then that rather a lot of French keeled over - 11,500 more than usual for the time of the year.

Finding someone to blame

Needless to say, in a country firmly committed to finding political solutions (and causes) for every problem, it wasn't long before politicians started taking their parasols to one another. The Minister of Health, Jean-François Mattei, committed the unpardonable sin of giving interviews about the crisis from his villa on the Riviera. The President was condemned for being in Quebec during the worst of it. The implication seemed to be that even climatic conditions in the state of France are susceptible to influence from the Elysée. (His office, after all, carries with it echoes of the ancien regime in which a predecessor, Louis XIV - the Sun King, indulged a lifestyle which provided a sort of fiscal canicule for his subjects.)

It was swiftly concluded that special anti-canicule measures had all been triggered too late in the day. The head of the Health Ministry resigned but still the search for culpables continued. A ritual head having been guillotined, guns were turned on 'the system'. One didn't even need to read the papers to know that a lack of resources would be the defence. It was all so familiar - and so like New Zealand. Until, that is, the Church stepped in and rather spoilt everyone's political fun by suggesting that a nice abstract target like the Government or the system was just a bit too easy.

Unclaimed bodies

It all started when bodies started piling up, unclaimed, in morgues. Not surprisingly, many victims were elderly, people living alone without any close family and sometimes no friends. In the suffocating heat (magnified in the upper stories of often old apartment blocks) they simply died of dehydration through self neglect. This was immediately diagnosed by 'experts' as evidence of emaciated social services and the numbing effects of atomised urban culture. That people could die, un-noticed in their apartments for days and then lie still unclaimed in a morgue weeks later was an irresistible basis for moralising. Until, that is, priests (the other 'experts' on the receiving end of the canicule) revealed that the epicentre of neglect might be a bit more specific than the State in some cases and come down to straight family neglect. Not all the victims were without family. In some cases they just hadn't bothered to keep in touch. More incredibly still, one priest reported having relatives probe the possibility of delaying the obsequies until they'd got back from their holidays!

It's an ill heat-wave that blows no good

France's Prime Minister, Jean-Pierre Raffarin, lost no time in taking charge, announcing the establishment of a special inter-ministerial task force on the care of elderly people in the community. Just another committee you might think - and what could it recommend with the budget deficit in near free-fall? But this Prime Minister is capable of strokes of absolute genius, and in upton-on-line's view his next proposal was worthy of the finest moments of the Grande Armée. He floated the idea that the whole thing should be funded by scrapping one of France's many public holidays and applying the extra social security payments to the task in hand. In a country where the slightest suggestion of belt-tightening causes an orgy of strikes, suggesting the deletion of a holiday would normally lead to the fall of the Republic (we're up to number five at present and there's already a committee in the wings working on a sixth). But M Raffarin picked his opportunity perfectly. Who could possibly oppose the idea of a small sacrifice for the elderly?

Who indeed? And just when it appeared there would be an unholy row instead about which holiday to let go (the veterans got all ready to ensure that both remembrance days were protected) the Roman Catholic church in France nobly stepped forward, commended the idea of sacrifice (not a popular word these days noted the French Primate, Mgr Philippe Barbarin) and said that the Church would not stand in the way if the Monday after Pentecost Sunday were sacrificed. As church leaders noted, the French don't exactly overdo liturgical observances on Pentecost Sunday itself, let alone the day after.

So there you have it. A wake-up call for family solidarity, new moral authority for the church and a roll-back in the work-free society to which France has in recent times dedicated so much effort. What more tricks does this conservative Prime Minister have up his sleeve? His Ministers will be praying for heavy snow this winter to find out.

Can-cun, can't do

It was upton-on-line's fate to pass briefly through the margins of the Cancun trade talks. To have travelled there via Miami on American Airlines flight 62 (the same one chosen for immortality by the shoe bomber) and then to have travelled back on 11th September (when x-ray queues started to ressemble St Vincent de Paul shoe shops so all-inclusive was the de-shoeing), shows what the cause of free trade can do to an otherwise sane person. But that's nothing compared with the sanity of delegates from 148 nations (that's the latest WTO tally) trying to wrest an agreement from all sorts of pre-arranged roadblocks.

It didn't happen - and the recriminations are only just starting. Europe's Trade Commissioner Pascal Lamy pronounced the WTO's decision-making procedures to be "mediaeval". The Americans are no less flattering when they diagnose a terminal case of UN-itis. Andrew Stoler, a senior US negotiator, pronounced the WTO system "a monster". From the point of view of many developing countries, the mediaeval monstrosity is the level of rich world subsidies and barriers in sectors like agriculture.

Cotton, which achieved notorious star-billing as a breaking point, highlights the sort of gap between free trade rhetoric and actual practice at the tables of the rich. As the Financial Times summed it up:

"The $3bn-$4bn a year in subsidies paid to the US's 25,000 cotton farmers exceeds the gross domestic product of Burkina Faso and is three times the entire US aid budget for Africa. Meanwhile, 10 million cotton farmers in west and central Africa - many living on less than $1 a day - are losing $1 bn a year in export earnings."

In short, there are no votes in Burkina Faso. It remains to be seen what patch-up job if any is attempted. But one thing is clear. If you are going to put 148 nations in a room and try to seek agreement, the more complicated the agenda, the less likely anything approaching a business-like solution is to emerge. Which raises some interesting questions about the Doha Agenda, rich as it was with topics like the environment - of which more below.

Shoe-horning environmental issues into the trade debate

Upton-on-line's presence was in Cancun was in response to a Round Table hosted by the Mexican Government on trade and environment issues. In trade circles, mention of the environment brings on varying degrees of apoplexy (in much the same way that mention of trade at an anti-mondialiste demonstration causes peace-loving people to riot spontaneously). So it was a brave enough step to propose a symposium even if it was discretely held on the island of Cozumel in advance of the conference proper.

The subject of the first session was, for a New Zealander, irresistible: trade liberalisation and the removal of environmentally damaging subsidies. So what a coincidence that, on getting on the plane to Mexico, upton-on-line should pick up the latest copy of Le Figaro and find a lengthy pre-Cancun essay by EU Commissioners Lamy (Trade) and Fischler (Agriculture) covering, amongst other things, the reasons why for Europeans, agriculture is different!

Both Commissioners are gifted and committed individuals; both have only the room to manoeuvre that member states give them. So they cannot be personally faulted if at times their logic seems strained. But whatever the limitations of their brief, they (and their team of wordsmiths) have certainly put a power of thought into marketing the EU's beguiling case. In contrast with the stark, simple formalism of the free trade case advanced with a genuinely straight face by New Zealand (and varying degrees of straightness by other co-travellers), Europe's negotiators have to start from the position that there will always be a Common Agricultural Policy and it will always have to be defended. Hence, in place of brevity there is complexity; and in place of simplicity there is ingenuity. Here are some extracts from the Lamy/Fischler defence:

"[F]or Europe, agriculture cannot simply be left to the mercy of the law of the jungle. This is our conception of sustainable development: a regulated economy, social choices upheld, a protected environment, quality products. Agriculture is an economic activity, but it depends on climatic and geographic conditions. In Europe, land is scarce: the average size of our holdings is 20 hectares; 60% of them are less than 5 hectares. How can one compete with an average 200 hectares in the United States, or 300 hectares in Argentina?

"European agriculture must satisfy consumer-citizens who are more and more concerned about the quality and security of food and who want to be assured that production is taking place in conditions that are respectful of the environment and in particular animal welfare. All this comes at a cost. Finally, agriculture is a livelihood in and of the land. Throughout Europe, our landscapes are kept cultivated and alive. However, 55% of our agricultural holdings are in difficult or mountainous zones. What would become of these often magnificent regions if they were entirely depopulated?

"...All this goes to explain why we Europeans refuse to expose our agriculture fully to the pure liberalism of the law of comparative advantage. Agriculture isn't coal, and our farmers will not be the miners of the 21st century destined inexorably to disappear on account of their supposed economic inefficiency..."

European sophistication versus American simplicity Now it is easy for New Zealand free traders always to single out the Europeans. But the Europeans aren't the only sinners. Let's face it, the Americans know how to damage world trade with subsidies (due to rise by 70% over the coming decade), emergency duties and all sorts of things. So upton-on-line does not seek to unfairly let American or any other agricultural protectionists off the hook. In terms of the damage done to global economic welfare and in particular to developing countries, subsidies cause harm regardless of their paternity.

The reason it is worth focusing on Europe is that it is the Europeans that have gone to such lengths to link the issues of subsidies and the environmental consequences of trade liberalisation. And they have now announced far-reaching changes to the CAP designed to switch the focus of subsidies towards environmental values (amongst other). Upton-on-line is unaware of any American attempts to take these arguments seriously. Americans tend to accept without serious challenge that their subsidies are little more than the outcome of blatant pork-barrel politics. No-one pretends that any future reductions might be crafted to garner significant environmental gains. Farm subsidies in the States will disappear the day politicians feel emboldened to ignore the lobby groups circling around the Capitol. We may be in for some wait.

But as the Lamy/Fishler piece shows, the Europeans have mounted a more sophisticated defence. They have acknowledged the trade-distorting effects of their billowing subsidies but have equally drawn attention to the environmental consequences of liberalisation and subsidy removal, not all of them positive. The argument on the environment is worth scrutinising.

What theory says Classical trade theory says that any level of liberalisation no matter how partial is advantageous. This flows from the uncontentious claim that comparative advantage will bring benefits to all participants even if not in equal measure. It is not a zero-sum game. Where the environmental consequences of changed patterns of trade and production are concerned, however, there is no such guarantee. Certainly, there are rafts of subsidies that, by encouraging production, wreak all sorts of enviornmental havoc not to mention economic harm (particularly in developing countries and those like New Zealand in danger of joining them). But an automatic positive-sum game from the environmental point of view is not guaranteed by removing them.

That's because environmental outcomes are dependent on a huge array of bio-physical and regulatory environments. They may or may not be exacerbated depending on the regulatory environment in countries to which production shifts in response to changing comparative advantage. Even if exactly the same environmental regulations applied globally (and they never have and never will), physical and social factors can mean quite different outcomes in the face of changing patterns of trade.

So what are the environmental risks that are worrying the Europeans? Well, that's where the argument gets a bit vague. Just a week before Cancun, Pascal Lamy appeared in Le Monde arguing that “The European Union has made a political choice to support agriculture because it cannot just be regarded as an economic activity like any other. It fills many other roles than simply that of production. It contributes to the protection of the environment, food safety, animal welfare, etc.”

I think it is the “etc” that worries me as much as anything. Because the failure to specify the problem leaves us in a warm – and potentially limitless – zone of comfort that defies tough-minded analysis. Is agriculture so different? The chemical industry impinges equally on environmental protection, food safety and animal welfare not to mention a vast array of human welfare-related issues.

I can identify three sorts of legitimate environmental concerns. Properly described we can then decide whether and how those concerns might be addressed.

1. Local environmental impacts in the country contemplating liberalisation

This concern often focuses on concern for cultural and heritage values imprinted on the rural landscape. These are real in many cases. They are also exclusively the domestic concern of the country in which they are found. At least conceptually, they should pose no problems for negotiators – to the extent that they involve the provision of public goods that would not otherwise be provided, they can be transparently purchased from taxes. Needless to say, the boundary line between landscape values and the desirability of having real, live, close-to-nature artisans not just tilling those Brueghelian fields but living in those exquisite villages is not easy to draw. But social subsidies can be equally transparent. To some extent the mooted CAP reforms – scheduled only to bite some years from now – mark a step in this direction. The key reform to the CAP will be the expanded ‘decoupling’ of support to EU farmers from production and moving this support to non-production related activities.

Of one thing we can be certain: this concern cannot credibly be extended to fields as far as the eye can see broken only by silos, large tractors, irrigators and farm factories. Neither can, at least on economic grounds, the argument that similar agricultural products from countries abroad should be kept out because they would compete unfairly. If the objective is to maintain the landscapes and the people who inhabit them, there is a positive economic gain for consumers in the same country (who are after all paying the taxes that purchase the public good) to benefit from lower prices. (It’s worth noting that the annual welfare gains to Western Europe from full liberalisation are estimated to exceed €15 billion.)

2. Local impacts in countries likely to benefit from liberalisation by currently protectionist countries

The concern here, again a real one, is that the opening of markets will lead to significant new production beyond the liberalising country’s borders with negative environmental impacts. The fear is that whatever environmental damage may be mitigated at home as a result of reduced production in response to lowered subsidies and/or tariffs, will simply be transferred to another country, and particularly to developing countries that may not be able to support such rigorous environmental standards. The net result may not be a simple transfer of harm but an overall increase in environmental damage at the global level.

While the concern is a real one, it does not follow that subsidies should be maintained on the basis that this represents some lesser of two evils. The local responses by producers in a developing country represent trade-offs which they have jealously guarded the right to make – see Principle 2 of the Rio Declaration. No developing country is going to limit its freedom to develop as developed countries have before them. Developed world living standards are built on the conversion (for which read, destruction) of natural resources into intellectual and human resources. This ‘substitution of natural capital with human capital’ (as economists characterise it) is a trade-off that every country regards as its own sovereign choice.

But that does not leave developed countries without the means to respond to this concern. A co-ordinated re-focussing of technical and development assistance aimed at alleviating such problems could go a long way to helping both development and the environment. Here’s a real world example involving cotton subsidies.

OECD member subsidies to cotton farmers lower world prices by some 25 per cent. A reduction in cotton subsidies would certainly mean improved market access for a number of developing countries. But what would it mean for the environment?

One country with significant cotton interests is Uzbekistan. Improved world prices for Uzbek cotton as a consequence of reductions in cotton subsidies would certainly have positive implications for poverty reduction and economic growth in this central Asian economy. However, the increased output is likely to have negative implications for water use and the Aral Sea in Uzbekistan. The water supply of Uzbek cotton farmers is already a dwindling resource. Currently, more than 40 percent of the water taken from the severely stressed Aral Sea to irrigate the cotton fields evaporates before it even reaches those fields because Uzbek farmers use open channels, not closed pipes, for irrigation. Further pressure on the Aral Sea water resource would have significant negative spill-overs to other parts of the Uzbek economy. What can be done about this?

If countries concerned about the environmental impact of liberalisation beyond their shores are really worried about these sorts of consequences, they can look to technical and development assistance to plug the gaps. So if improved market access for Uzbek cotton as a consequence of subsidy reductions threatened local environmental harm, developed country policy makers should be able to fund flanking measures to mitigate them (such as enhanced technical assistance for improved irrigation techniques).

3. Global environmental impacts stemming from liberalisation and subsidy removal

Finally, there may be concerns that the economic welfare gains from subsidy removal will accentuate a variety of non-local environmental externalities as a result of higher consumption. Greenhouse gas emissions come to mind. Again, this is a valid concern (although I must confess I haven’t heard it argued by a government). But the solution for such problems lies, by definition, with the negotiation of multi-lateral environmental agreements. Whatever our difficulties in elaborating them, it would be hard to argue that maintaining subsidies was a legitimate alternative.

Time for the worriers to take a look at the New Zealand experience

It seems to upton-on-line that these three possible concerns are, in varying degrees, legitimate. But before proposing expensive solutions or negotiating new MEAs, one would first want to take into account the very significant environmental benefits that are likely to flow from the elimination of agricultural subsidies. This can be said with some feeling from a New Zealand perspective given that production-based subsidies were allowed to become an engine for the destruction of primaeval temperate rain forests on a large scale. The consequences for soil, water and biodiversity were alarming. The complete removal of those subsidies has seen huge areas of land undergo changes to less destructive uses than grazing, and in some cases begin the process of reversion to native forest. The on-going degradation of water quality has been arrested.

That is not to say that there are no remaining environmental problems. The peculiar payment system in the dairy industry that divorces farmers from the market place and still effectively rewards production undoubtedly underwrites a heavier environmental footprint than would otherwise be the case. And even if such final distortions were eliminated, there would still be environmental impacts. These are properly the subject of regulatory interventions and, in some cases, some very limited payment of public moneys to secure particular public goods. But nothing that happens in New Zealand could support the idea that other countries, in the name of environmental protection, should keep New Zealand goods out.

There are environmental consequences of subsidy removal. Those countries which have raised them – bravely in upton-on-line's view - must be challenged to make their arguments defensible rather than a cover for domestic political paralysis. In the final analysis, let’s be blunt, agricultural subsidies as we have come to know them are largely the result of a failure or an unwillingness to confront tricky social and economic dislocations. The resulting distortions have made the potential dislocations even bigger– like huge potential capital losses in land values if the rules of the game change. These dislocations are quantifiable. People can be bought out or compensated. If doing it in a way that purchases some clearly recognisable public good makes that easier, so be it. But nothing can justify keeping everyone poorer – off-shore producers and domestic consumers – by preserving the status quo.

So this will all be resolved by a rational argument between consenting economists?

No chance. The carefully nuanced efforts of Messrs Lamy and Fischler were rubbished just four days later, again in Figaro, by two French political defenders of the status quo - Philippe de Villiers and Dominique Souchet. In a swift and chilling dismissal of the Commissioners' advocacy for Europe, these self-proclaimed sovereigntists gave notice that their negotiators were under close surveillance. Here's the voice of the provinces, protectionist in tooth and claw:

"...because we consider that nations have a fundamental right to sovereign control over food production we propose, contrary to the model of global free trade in agricultural products that the Commission is seeking to impose, an alternative model based on the creation of a common agricultural market - national or regional - which would be at one and the same time as protected or as open as is needed to achieve a fair balance of trade. This is the only way to preserve family farms and to avoid the Ukrainisation of our agriculture and to set in motion the process of development in the least developed countries."

This sort of unyielding approach may explain why New Zealand and like-minded countries have done little to examine in depth the arguments that relate to environment and trade. If the farm-gate European position is as hostile as this (and if these are the views which moderates like Lamy must eventually accommodate) then perhaps there's not much to debate. Clinging to the 'high' ground of pure trade theory as our negotiators seem to do may be the smartest tactic.

But in upton-on-line's view it would be so much more interesting to take the Europeans at their word and scrutinise the trade and environment arguments on their merits. Who knows, it might even rouse New Zealanders to match the unquestionable integrity of their trade views with equally robust ones on environmental management! But there's now a chance, following the train wreck in Cancun, that domestic forces in Europe will seek to reverse even the limited reforms planned for the CAP. In which case, they won't be needing to buttress their arguments with stuff about the environment will they?

ENDS

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