Bridges Trade BioRes ReviewVolume 6Number 4 • November 2012

APEC’s environmental goods initiative: How climate-friendly is it?


by Mahesh Sugathan and Thomas L. Brewer

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On 9 September 2012, the leaders of the 21 Asia-Pacific Economic Cooperation (APEC) economies meeting in Vladivostok, Russia agreed to voluntarily liberalise tariffs on 54 environmental goods. Vladivostok Declaration signatories welcomed and endorsed the APEC list and committed to reduce applied tariff rates on the listed goods to five percent or less by the end of 2015.

The deal has been hailed by many observers as a political breakthrough in that it represents the first international agreement to liberalise trade on a set of goods that are considered “environmental.” Indeed, World Trade Organization (WTO) members pursuing a Doha round mandate to liberalise environmental goods and services have struggled for much of the past decade to define what exactly constitutes an “environmental good.”

The 54 sub-headings identified in the APEC list are subject to further refinement as so-called “ex-outs” (products that can be further subdivided because they serve two or more duties), based on national tariff classifications. The products will now need to be interpreted in the individual national tariff schedules of member countries as different APEC members may use different tariff codes and different product descriptions for the ex-outs.

While many of the products in the APEC list are crucial to addressing water and air quality issues, analysis of the details of these goods is not within the scope of this article, which is focused on climate change.

What categories and products matter for climate change mitigation?

A comparison with the universe of 408 product sub-headings submitted by WTO members through both formal and informal submissions is revealing. Almost all of the 54 product groups or sub-headings in the APEC list are featured in submissions made during the course of negotiations on environmental goods at the WTO. Only two product subheadings - (1) optical devices, appliances and instruments and (2) their parts - appear to be new. It is interesting to note that these products include solar heliostats and their parts, which are used in the production of solar thermal power.

The number of products in the table listed below is preliminary and should not be considered definite, as each tariff line contains one or more sub-products that could be used for more than one environmental objective and there is certainly overlap.

It is significant that 19 products in the APEC list are associated with renewable energy generation as well as heat and energy management which is relevant to climate change mitigation. While no APEC member state has used carbon-capture categorisation for goods submitted to the APEC list, it is noteworthy that some 34 products on the APEC list have also been informally submitted by Saudi Arabia at the WTO under the category of “carbon-capture and storage technologies (CCS), gas flaring emission reduction (GFR) technologies, and efficient consumption of energy (EC) technologies” [Ref 1]. It is not clear whether the specific APEC product descriptions correspond with the submission by Saudi Arabia, as the oil-producing country has not proposed any specific ex-outs. It may be the case that the Saudi WTO submission refers to different products under the same six-digit harmonised system (HS) subdivision, which is used to classify internationally traded goods.

From a climate-mitigation perspective it is interesting that natural gas-turbines are present on the list. This raises the question as to whether natural gas-related technologies can be considered an “environmental good.” While natural gas is clearly not free of emissions and often competes with renewable energy sources, it is also considered by many as a “bridge” technology that could help ease the transition towards more sustainable forms of energy. Indeed, substituting coal-fired power plants with natural-gas facilities using conventionally extracted gas could have a significant impact on emissions reductions. Shale gas extracted using fracking methods poses more complex issues about climate change mitigation.

Two intensively-traded products on the list that are potentially important for climate mitigation are wind turbines and photovoltaic (PV) solar cells and modules. Also included on the list are non-wind powered generators and alternating current (AC) generators (alternators), both of which can be combined with various renewable energy sources and also with fossil-fuel sources. This clearly illustrates the dilemma of including dual-use products on the list (i.e., products that have both environmental and non-environmental applications).

The dual-use problem has often prevented WTO members from coming to an agreement on what actually constitutes an environmental good and has led to a slowdown in negotiations. While dual-use products could have an environmental application, many are general industrial products where countries have sensitivities to opening up markets on environmental grounds. While the dual-use issue did not prevent APEC members from eventually reaching a deal, it likely constrained the final number of products that ultimately appeared on the list.

A number of proposed climate-related products - including thermostats, sugar-based ethanol, and compact fluorescent lamps (CFLs) - did not find their way onto the list. It could thus be argued that the list is still far from complete. Only 10 products from a list of 79 climate-friendly products identified by ICTSD [Ref 2], the publisher of BioRes, and 10 products from the World Bank’s list of 43 climate-friendly products [Ref 3] are included in the APEC list.

Another interesting issue related to the list is that in some cases, such as certain steam turbines, the final-equipment is excluded but their parts are included. In other cases, such as wind-energy equipment, the main turbine and related parts are included but other important parts are excluded. The exclusion of certain parts on the list may be because of concerns with their non-environmental uses. For example, while ball bearings are a critical component in wind-power projects, only a very small part of the overall trade in ball bearings is driven by the deployment of wind technologies.

Asia-Pacific as an environmental goods trade hub

Trade in the specific products contained in the APEC list has been much more dynamic than manufactured products as a whole. Between 2002 and 2011, exports from APEC countries in the 54 listed product categories grew by 18.9 percent annually compared to just 10.5 percent for all manufactured products as a whole; meanwhile, imports on the list of 54 products grew by 16.1 percent compared to 12.1 percent for all manufactured goods.

The top five traded items in terms of value from the list are: other optical devices, appliances and instruments; PV cells and modules; other machines and mechanical appliances; automatic regulating or controlling instruments; and parts and accessories for optical devices, appliances and instruments. However, it should be noted that because trade flow data that are comparable across countries are only available for the main product category as a whole, it is difficult to estimate what proportion of total trade is made up by “environmental goods.” Some exceptions for this include the category comprising wind-powered generating sets, solar panels, and LEDs.

The volume of trade for the 54 subcategories involved in the APEC region is significant, even if it makes up only a small portion of total APEC trade in manufactured goods. The top six APEC exporters - to the region as well as the rest of the world - in the 54 subdivisions are China (US$86.7 billion in 2011), the US (US$49.1 billion), Japan (US$48.7 billion), Korea (US$42.6 billion), Chinese Taipei (US$27.41 billion), Singapore (US$14.3 billion), and Mexico (US$8 billion). The top six importers are China (US$88.8 billion), the US (US$48.9 billion), Korea (US$17.6 billion), Hong Kong (US$15.2 billion), Japan (US$14.8 billion), and Mexico (US$14.2 billion). Thus the top exporters and importers are nearly the same group of countries and, with the exception of the US and Mexico, all are in Asia. The numbers clearly demonstrate the relevance of Asia to trade in these products as well as its key role in shaping any similar agreement at the multilateral level as well. However, it should be borne in mind that the data also include trade in “non-environmental” goods that are captured under the 6-digit HS codes.

For most products on the APEC list, applied tariffs are already quite low, often below the 5 percent threshold identified in the Vladivostok Agreement or even at zero. However, in the case of wind-powered generators, several APEC economies (Brunei, China, Chinese Taipei, Chile, Indonesia, South Korea, Mexico, and Thailand) have tariffs greater than 5 percent - in the case of Brunei, Chinese Taipei, and Indonesia tariffs are 10 percent or higher. The majority of APEC tariffs for the 54 product sub-headings or categories are already at 5 percent or less and more than half are zero. The overall simple average of tariffs is only 2.6 percent. However, further tariffs reductions are still relevant in other cases. For example, according to the latest WTO tariff data, several APEC economies (Brunei, China, Chinese Taipei, Chile, Indonesia, and South Korea) have tariffs greater than 5 percent on wind-powered generators. China imposes tariffs of about 14 percent on auxiliary plants for use with boilers (HS 840420), and Indonesia, South Korea, the Philippines, and the US also have tariffs of over 5 percent for all national tariff lines under this position [Ref 4]. Some APEC economies apply relatively high tariffs to non-electric water heaters, including solar water heaters. For example, applied rates in China are 35 percent and rates for Mexico, Thailand and Vietnam are all set at 10 percent. Another example includes alternators and electric generating sets/rotary convertors where applied rates for Brunei are 20 percent.

Multiple national tariff lines often exist for various products under the 54 tariff positions and tariff cuts would be necessary only if an identified environmental good is imported with a rate that is over 5 percent. It would thus be necessary to consider national tariff schedules, taking into account any additional relevant, product specifications stated in Annex C of the APEC declaration. Some member economies - including Australia, Hong Kong, Japan, Papua New Guinea, New Zealand, and Singapore - do not have a single tariff line of more than 5 percent and, as such, are already in compliance.

Future implications and the road ahead

Unlike many other Regional Trade Agreements (RTAs), the benefits of the APEC outcome will also be extended to non-participating economies such as the EU, Brazil, India, and South Africa. This raised the question: Would it be better if these countries had also joined such an initiative? In many of these economies, applied tariffs on climate-friendly goods such as solar panels and wind-turbines are already at zero or only slightly above the 5 percent threshold. These countries are important markets or potential growth markets for APEC economies and, for products where applied tariffs are significantly higher than 5 percent, efforts to reduce those tariffs, either voluntarily or as part of a formal agreement, could also help lower domestic costs of environmental technologies.

The APEC outcome could also provide an important and positive “signalling” effect to the WTO as well as to other regional trade blocs that want to undertake similar initiatives. While some observers have been critical of the lack of enforceability of the APEC outcome, the voluntary, non-binding nature of APEC decisions could have been a factor in ensuring a successful environmental goods agreement and likely encouraged members to be bolder than they would have been at the WTO. Further, given the political weight behind any APEC ministerial decision, it seems unlikely that members would attempt to raise tariffs once lowered. That said, Annex C of the APEC declaration also recognises that the tariff reduction would take into account economies’ economic circumstances and without prejudice to their positions in the WTO.

APEC’s total exports for products on the environmental goods list amounted to some US$270 billion in 2010 - over 70 percent of world exports (excluding intra-EU trade). In the case that non-APEC members, such as the EU, also voluntarily lower their tariffs and extend benefits on a most favoured nation (MFN) basis, this would mean an even greater trade coverage of these products - over 85  percent of world imports. However, as stated earlier, the trade values data also include a number of “non-environmental” goods within the same tariff lines.

Voluntarily lowering actual applied tariffs by WTO members and maintaining these levels over a period of time would likely make these economies more comfortable with agreeing to legally-binding commitments at the WTO once the atmospherics for a multilateral trade deal improve.

For the various environmental goods ex-outs already listed within each of the 54 tariff subheadings, members planning to introduce tariff reductions may need to engage in technical work to clarify the application of the list to their respective national codes and product descriptions. This is to ensure there is a common understanding on what products precisely are being liberalised in the context of their national tariff schedules. In addition to tariffs, non-tariff barriers - such as local content requirements, subsidies, and restrictive standards - could impede greater trade flows in these products. Government procurement practices could also restrict trade.

APEC’s 2010 Honolulu declaration mandates member states to eliminate local content requirements that distort trade in environmental goods and services by the end of 2012 and refrain from adopting new ones included as part of domestic clean energy policy. It also asks APEC members to ensure consistency of all government procurement policies with the 1999 APEC Non-Binding Principles on Government Procurement. These are important non-tariff measures that often have a greater impact on trade than tariffs do. From a climate perspective, while trade in environmental services will also be important, they have thus far not been addressed.

Does the APEC agreement match up to what is feasible and desirable as a trade-policy deliverable for the environment, including climate change mitigation? Views on this may differ. Clearly there is much work still remaining both within and outside APEC, particularly on non-tariff measures, services, and rules. Given the reality of the negotiating climate, the APEC agreement was perhaps the best that could have been achieved under the circumstances.

There is no doubt however that the APEC outcome, as well as the process itself, has provided useful lessons and sets a positive and politically significant precedent for other possible environment-related trade initiatives, such as those on sustainable energy, at the regional as well as multilateral levels. It will also help policymakers in the course of time to better understand the impact and viability of such initiatives and perhaps go further in terms of ensuring that trade policy truly delivers on climate change mitigation.

Mahesh Sugathan
Research Fellow, International Centre for Trade and Sustainable Development

Thomas L. Brewer
Senior Fellow, International Centre for Trade and Sustainable Development

[Ref 1] See WTO Committee on Trade and Environment Special Session, Report by the Chairman, Ambassador Manuel A. J. Teehankee, to the Trade Negotiations Committee for the purpose of the TNC stocktaking exercise, TN/TE/19.

[Ref 2] See Annex A, page 82  in ICTSD; (2011); Fostering Low Carbon Growth: The Case for a Sustainable Energy Trade Agreement; accessible at http://bit.ly/TRpQ2I.

[Ref 3] See p.130-132. World Bank (2007), International Trade and Climate Change: Economic, Legal and Institutional Perspectives, accessible at  http://bit.ly/SaHe3g. are included in the APEC list.

[Ref 4] WTO tariff download facility.

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