Gradual trade liberalisation and carefully managed market opening in these sectors can also be a powerful tool for economic development by generating economic growth and employment and enabling the transfer of valuable skills, technology and know- how embedded in such goods and services. In short, well-managed trade liberalisation in EGS can facilitate the achievement of sustainable development goals laid out in global mandates such as the Johannesburg Plan of Implementation, the UN Millennium Development Goals and various multilateral environmental agreements (MEAs).

While Paragraph 31(iii) of the Doha mandate calls for a reduction, or as appropriate, elimination of tariffs and non-tariff barriers (NTBs) on EGS, the lack of a universally accepted definition on EGS has meant that trade delegates have struggled over the scope of goods and services that would be taken up for liberalisation. Further, while the aim of the EGS mandate is to liberalise, it provides no indication of the pace, depth or sequencing of liberalisation vis-à-vis ‘other’ goods and services. A major fault line in the negotiations on environmental goods is the dispute over whether only goods intended solely for environmental protection purposes should be included as opposed to goods that may have both environmental and non-environmental uses. A number of developing countries are concerned about the inclusion of goods which they perceive as only vaguely linked to environmental protection. They are also worried about the import-led impacts of including a broad range of industrial goods on their domestic industries, employment and tariff revenues. In a broader context, a lack of movement on issues of interest to developing countries, particularly agriculture, also inhibits proactive developing country engagement on EGS negotiations.

Developing countries are clearly interested in including, as part of ongoing WTO negotiations, products of export interest that could provide environmental benefits, export earnings and livelihoods to local populations. At the same time, many developing countries lack a comparative advantage in the so-called ‘traditional’ environmental goods and services that are reflected in lists developed by the Organisation for Economic Cooperation and Development (OECD) and the Asia-Pacific Economic Cooperation (APEC) and are often capital and technology-intensive. This has also led experts to point to environmentally preferable products (EPPs) as an export category worth consideration by developing countries. The global market size and export share of developing countries in these products is, however, still relatively small. There are also systemic concerns developing countries have with regard to environmentally preferable products, particularly in those cases where environmental benefits arise as a result of the process and production methods (PPMs).

Negotiations on environmental services have also not made much headway. The issue of classification of environmental services is important as it will set clear parameters on the types of services that are actually liberalised. The development of sound domestic regulatory frameworks in the environmental services sector is also an important pre-requisite to liberalisation. It is feared that lack of strong regulatory mechanisms in the environmental services sector, combined with the ‘public service’ dimension of a number of these services, would hinder developing countries’ ability to ensure that trade liberalisation in these services was compatible with sustainable development objectives such as universal and equitable access.

It is obvious that the economic and social dimensions of sustainable development will play as important a role as environmental ones in guiding WTO Members’ negotiating strategy on EGS. But these elements also need to be more clearly defined by each country taking into account domestic sustainable development priorities and concerns. WTO Members should respond to these priorities and concerns by negotiating appropriately-crafted language and numbers.

The reality, however, is that clear knowledge gaps exist on the various dimensions of trade in EGS as well as the methods and options by which countries can formulate a domestic and negotiating strategy on EGS. This EGS Policy Discussion Paper is an attempt to bridge some of the knowledge gaps in this area and facilitate strengthened engagement of developing countries in the EGS negotiations so that they can work towards an outcome meaningful for their sustainable development goals and priorities.

The EGS Policy Discussion Paper is part of a series of issue papers commissioned in the context of ICTSD’s Environmental Goods and Services Project, which address a range of cross-cutting, country specific and regional issues of relevance to the current EGS negotiations. The project aims to enhance developing countries’ capacity to understand trade and sustainable development issue linkages with respect to EGS and reflect regional perspectives and priorities in regional and multilateral trade negotiations. We hope you will find this paper to be stimulating and informative reading and useful for your work.

While Paragraph 31(iii) of the Doha mandate calls for a reduction, or as appropriate, elimination of tariffs and non-tariff barriers (NTBs) on EGS, the lack of a universally accepted definition on EGS has meant that trade delegates have struggled over the scope of goods and services that would be taken up for liberalisation. Further, while the aim of the EGS mandate is to liberalise, it provides no indication of the pace, depth or sequencing of liberalisation vis-à-vis ‘other’ goods and services. A major fault line in the negotiations on environmental goods is the dispute over whether only goods intended solely for environmental protection purposes should be included as opposed to goods that may have both environmental and non-environmental uses. A number of developing countries are concerned about the inclusion of goods which they perceive as only vaguely linked to environmental protection. They are also worried about the import-led impacts of including a broad range of industrial goods on their domestic industries, employment and tariff revenues. In a broader context, a lack of movement on issues of interest to developing countries, particularly agriculture, also inhibits proactive developing country engagement on EGS negotiations.

Developing countries are clearly interested in including, as part of ongoing WTO negotiations, products of export interest that could provide environmental benefits, export earnings and livelihoods to local populations. At the same time, many developing countries lack a comparative advantage in the so-called ‘traditional’ environmental goods and services that are reflected in lists developed by the Organisation for Economic Cooperation and Development (OECD) and the Asia-Pacific Economic Cooperation (APEC) and are often capital and technology-intensive. This has also led experts to point to environmentally preferable products (EPPs) as an export category worth consideration by developing countries. The global market size and export share of developing countries in these products is, however, still relatively small. There are also systemic concerns developing countries have with regard to environmentally preferable products, particularly in those cases where environmental benefits arise as a result of the process and production methods (PPMs).

Negotiations on environmental services have also not made much headway. The issue of classification of environmental services is important as it will set clear parameters on the types of services that are actually liberalised. The development of sound domestic regulatory frameworks in the environmental services sector is also an important pre-requisite to liberalisation. It is feared that lack of strong regulatory mechanisms in the environmental services sector, combined with the ‘public service’ dimension of a number of these services, would hinder developing countries’ ability to ensure that trade liberalisation in these services was compatible with sustainable development objectives such as universal and equitable access.

It is obvious that the economic and social dimensions of sustainable development will play as important a role as environmental ones in guiding WTO Members’ negotiating strategy on EGS. But these elements also need to be more clearly defined by each country taking into account domestic sustainable development priorities and concerns. WTO Members should respond to these priorities and concerns by negotiating appropriately-crafted language and numbers.

The reality, however, is that clear knowledge gaps exist on the various dimensions of trade in EGS as well as the methods and options by which countries can formulate a domestic and negotiating strategy on EGS. This EGS Policy Discussion Paper is an attempt to bridge some of the knowledge gaps in this area and facilitate strengthened engagement of developing countries in the EGS negotiations so that they can work towards an outcome meaningful for their sustainable development goals and priorities.

The EGS Policy Discussion Paper is part of a series of issue papers commissioned in the context of ICTSD’s Environmental Goods and Services Project, which address a range of cross-cutting, country specific and regional issues of relevance to the current EGS negotiations. The project aims to enhance developing countries’ capacity to understand trade and sustainable development issue linkages with respect to EGS and reflect regional perspectives and priorities in regional and multilateral trade negotiations. We hope you will find this paper to be stimulating and informative reading and useful for your work.

At the end of September 2007, China - the country with the largest foreign exchange reserve in the world - hit a fresh record with a US$1.43 trillion reserve. The reserve was 45 percent higher than it was in the previous year, and 52 percent higher than that of the second runner up, Japan. A senior economist at the State Information Center of China said “The increasing trade surplus has been the main driver of the reserve expansion.” (China Daily 2007)

Thanks to its ceaselessly growing economy and successful transformation into a major merchandise supplier serving consumers worldwide, China ranked third in global trade terms (the sum of the absolute values of export and import) in 2005-2006 and is expected to be number two in 2007 (WTO 2006). China also has the largest trade surplus globally. During the first nine months of 2007, China’s trade surplus soared to US$185.7 billion, which already was higher than its total 2006 surplus that amounted to US$177.5 billion.

As the largest merchandise importer, the US has been a solid first at the opposite end, registering its largest trade deficit for decades. In 2006, the US trade deficit escalated to US$817 billion, of which as much as 28 percent related to its trade with China (see Figure1).

Although China’s currency has appreciated since last year (registering a 7.4 percent increase between 2006 and September 2007), the US-China trade deficit seems still to be growing. For example, the US monthly trade deficits with China during January and September of this year were between three and 34 percent higher than they were for the same months the year before.

CO2 emissions from China and the US

Although the US and China are at the opposite ends of the spectrum with respect to trade balance, the countries converge as the top two emitters of CO2 globally. In 2005, the US emitted 5,957 million metric tons of CO2 (MtCO2) followed by China’s 5,323 MtCO2. Together, their emissions make up 40 percent of the global total (see Figure 2). As the world’s largest fossil fuel producer and consumer, as well as the largest CO2 emitter, the US has been in the spotlight as the clear frontrunner. Since 2002, China’s annual growth of carbon emissions has taken off sharply, with growth rates ranging from 11 percent to 19 percent between 2002 and 2005. In June 2007, the Netherlands Environmental Assessment Agency (MNP) announced that “according to preliminary estimates for 2006, China topped the list of CO2 emitting countries, surpassing the USA by an estimated 8 percent.” (MNP 2007). The 2007 edition of the International Energy Agency (IEA)’s Global Energy Outlook, released in November, confirmed that China will overtake the US as the world’s biggest emitter of CO2 before 2010. (IEA 2007).

The CO2 emissions associated with US-China trade

In the age of globalisation, are there linkages between trade and CO2 emissions? The answer is yes. Trade can include the transportation of more than one thinks: goods, services, capital, and also CO2 emissions.

According to the existing CO2 accounting framework, CO2 emissions resulting from the manufacture of a product are accounted for by the manufacturer/producer (in the country of origin) – not by the consumer (in the destination country). Therefore, when a country imports a product, it also “outsources” the related CO2 to the exporting country. In the case of the trade between the US and China, one can ask the following questions:

1) How much of China’s carbon is emitted to meet final consumer demand in the US?

2) What quantity of CO2 emissions has the US avoided emitting by trading with China?

3) What are the impacts of US-China trade on global CO2 emissions?

Shui and Harriss have tried to answer these questions. Their research is based on US-China trade data1 from 1997 to 2003 and an input-output approach2, and has produced some interesting preliminary results (Shui and Harriss, 2006). The following sections give an overview, and raises questions for the future.

CO2 embodied in exports/imports

During 1997 to 2003, the top ten Chinese products exported to the US mainly comprised computers and their peripheral equipment, electronics, toys and clothing. The top ten US exports to China were more diverse, ranging from soybean, aircraft, semiconductors and computer peripheral equipment to fertilizers, as presented in Table 1. The US trade deficit with China during the study period rose from US$49.7 billion to US$124.0 billion, with an annual growth rate of 16.5 percent. Mainly due to their large monetary value, the top five Chinese and US export products with the largest CO2 embodiment pretty much fall into the same categories as when ranked by their trade value. For example, audio and video equipment (27.4 MtCO2) and toys (25.7 MtCO2) were the two Chinese exports with the largest CO2 embodiment, and soybean (1.7 MtCO2) and plastics materials (1.1 MtCO2) were the US exports with largest associated CO2 embodiment. Table 2 illustrates the top five Chinese and American exports with the highest associated CO2 embodiment in 2003.

Shui and Harriss’s study also revealed that the CO2 embodiment of Chinese exports to the US has climbed from 213 MtCO2 in 1997 to 497 MtCO2 in 2003. This indicates that 6.8 percent and 13.3 percent of China’s CO2 in 1997 and 2003 were emitted to meet final demand in the US. The CO2 embodiment of US exports to China was insignificant, 10 MtCO2 in 1997 and 18 MtCO2 in 2003, accounting for 0.2 percent of the US’ annual CO2 emissions during the same period.

“Avoided” CO2 emissions in the US

It is well known that the US has suffered a vast trade deficit with China. The untold part of this story is that the US has avoided emitting a large amount of CO2 within its shores because of its trade with other countries, including China. Had the US manufactured the same quantity of products domestically, its reported CO2 emissions would be significantly higher than they are today.

The avoided CO2 emissions due to the US-China trade (compared to US production of the same quantity of goods domestically) are significant and growing, in line with growing US imports from China. The avoided CO2 emissions have risen from 150 MtCO2 in 1997 to 358 MtCO2 in 2003. The total avoided amount was 1,711 MtCO2 during this period, about six percent higher than the emissions of the world’s third largest CO2 emitter, Russia, in 2003.

The top three Chinese exports which brought about the largest avoided CO2 emissions for the US included audio and video equipment (21.2 MtCO2), games and toys (19.8 MtCO2), and computer peripheral equipment (15.0 MtCO2).

The impact of US-China trade on global CO2 emissions

The previous two sections have looked at the impacts of US-China trade on national emissions.

What is the impact of US-China trade at the global scale?

The CO2 embodiment in audio and video equipment, the largest Chinese export to the US in 2003, is 27.4 MtCO2. However, the CO2 embodiment in the same quantity of audio and video equipment produced in the US would be 21,2 MtCO2 – that is, 6.2 MtCO2lower. These figures suggest that CO2 emissions from the manufacturing of a product in China are higher than the CO2 emissions from producing the same product in the US, which is largely due to the relatively high use of coal and less efficient manufacturing technologies in the industrial sector in China.

Therefore, the “additional” global CO2 emissions resulting from US-China trade during 1997-2003 would be 720 MtCO2 in total, about 17 percent higher than Canada’s total CO2 emissions in 2003 (See Figure 3).

Concluding observations

Trade is a complicated and multifaceted issue. The economic, financial, political and social impacts of trade have been discussed at great length. Embodied carbon in trade is less well studied, and has remained rather “invisible” in current discussions of the linkages between trade and climate change. In the case of the two global top traders – the US and China – the monetary imbalance has fueled political and economic arguments. The embodied carbon of their trade flows has not quite established itself as a talking point for these top two carbon emitters. The huge US trade deficit does help it reduce its domestic CO2 emissions. For China, its rocketing trade surplus includes the cost of rising domestic and global carbon emissions.

There are now an increasing number of studies on carbon embodiment in trade. All indicate the significant role trade plays in national, regional and global CO2 emissions (Antweiler, 1996; Wyckoff and Roop, 1994; Muradian et al., 2002; Peters and Hertwich, 2006; Weber and Matthews, 2007). Quantifying carbon and other pollutants associated with international trade will shed light on opportunities and priorities for implementing emissions mitigation programmes such as the successors to the Kyoto Protocol.

Deepening globalisation has ensured a need to address the significance of the carbon dimension of trade if we are really serious about finding a way to confront climate change. Shui Bin is a researcher at the Joint Global Change Research Institute, USA, and Robert C. Harriss is president of the Houston Advanced Research Center,USA

Acknowledgement

The authors are grateful for the helpful reviews and comments received from Dr. Ronald D. Sands and Mr. Page G. Kyle at the Joint Global Change Research Institute.

References

1. Antweiler, W. (1996). “The pollution terms of trade.” Econ. Syst. Res. 8(4): pp 361-365.

2. China Daily (2007). “Foreign exchange reserves swell to US$1.43 trillion.” http://www.chinadaily.com.cn/bizchina/2007-10/13/ content_6171927.htm

3. IEA (2007). “The World Energy Outlook 2006 Maps Out a Cleaner, Cleverer and More Competitive Energy Future.” http://www.iea. org/textbase/press/pressdetail.asp?PRESS_REL_ID=187

4. MNP (2007). “Chinese CO2 emissions in perspective.” Retrieved August 16, 2007, from http://www.mnp.nl/en/service/ pressreleases/2007/20070622ChineseCO2emissionsinperspective. html.

5. Muradian, R., M. O’Connor, et al. (2002). “Embodied pollution in trade: estimating the ‘environmental load displacement’ of industrialised countries.” Ecological Economics 41(1): 51-67

6. Peters, G. P. and E. G. Hertwich (2006). “Pollution embodied in trade: The Norwegian case.” Global Environmental Change 16(4): 379-387.

7. Shui, B. and R. C. Harriss (2006). “The Role of CO2 Embodiment in US-China Trade.” Energy Policy 34(18): 4063-4068.

8. US Census Bureau (2007). “Foreign Trade Statistics.” http://www. census.gov/foreign-trade/www/

9. US Energy Information Administration (2007). “Total emissions from the consumption of energy.” http://www.eia.doe.gov/ emeu/international/carbondioxide.html

10. Weber, C. L. and H. S. Matthews (2007). “Embodied Environmental Emissions in U.S. International Trade, 1997-2004.” Environ. Sci. Technol. 41(14): 4875-4881.

11. WTO (2006). International Trade Statistics 2006.

12. Wyckoff, A. W. and J. M. Roop (1994). “The embodiment of carbon in imports of manufactured products: Implications for international agreements on greenhouse gas emissions.” Energy Policy 22(3): 187-194.

Endnotes

1 The data was provided by the US Department of Commerce.

2 One of main models used is called the Economic Input-Output Lifecycle Assessment (http://www.eiolca.net/about.html).

Chinese Version

This potential, however, has to be placed within the broader context of prevailing viability constraints that – if not addressed – will jeopardise the productivity and survival of the world’s fisheries and the millions of people that depend on them for their livelihoods. With three-quarters of fish resources already under threat, this prospect is becoming a reality in some parts of the globe. Fish trade – where it provides an incentive for increasing fishing efforts beyond sustainable limits in the absence of an effective management regime – clearly exacerbates these pressures. Similarly, fisheries subsidies that have enabled industrial fleets to exploit fishing grounds around the world have significantly contributed to global fish stock declines.

Trade policy can provide a range of tools to help take advantage of opportunities while mitigating some of the pressures. Eco-labelling, for instance, could provide necessary market advantage to compensate for investments in sustainable fisheries. Well-targeted subsidies could foster development of poor fishing communities provided that they do not lead to unsustainable fishing efforts. At the same time, if not designed well, these tools can undermine sustainable development objectives by encouraging over-exploitation, unnecessarily restricting trade and jeopardising livelihoods. Market standards and the use of safeguards continue to prevent the poorest countries in particular from taking advantage of trading opportunities. Fisheries access agreements, where they do not include adequate catch limits and enforcement mechanisms, can lead to the long-term decline of fisheries resources at the expense of local fishermen.

To ensure that fish trade indeed delivers on sustainable development objectives, policy-making at the multilateral, regional and local levels will need to reflect and balance the varied priorities and concerns. To date, however, the policy debate has been characterised by a fragmentation of issues, actors and perspectives. While negotiations on regulating fisheries subsidies have attracted considerable attention at the WTO, other areas with a direct bearing on the fisheries sector – such as market access, non-tariff barriers, and measures taken under multilateral environmental agreements – remain neglected and understudied. Policy responsibilities for the various aspects of the fisheries-trade interface are spread across different ministries and institutions with limited coordination between them. At the same time, many stakeholders – among them those with the greatest stake and interest in the debate, including fishermen, traders, conservationists and fisheries analysts – are frequently not heard and effectively integrated in policy formulation.

As part of the ICTSD project on International Trade, Fisheries and Sustainable Development, this Policy Discussion Paper aims to help foster an inclusive and informed process for crafting multilateral, regional and domestic trade rules and policies in the fisheries sector that are supportive of sustainable development. To this end, the paper provides a comprehensive assessment of the complex set of trade policy issues and tools that bear on the sustainability and development of the fisheries sector. It does so through the lens of sustainable development: How will trade policy tools such as tariffs, subsidies, standards or eco-labelling impact on the pursuit of public policy objectives related to social development, employment and food security? Under what conditions will these tools foster or undermine the long-term viability of fisheries resources? How will the use of the various policy tools influence countries’ ability to secure export revenues and preserve the profitability of the fisheries sector?

This paper is not meant to be an academic exercise nor does it propose specific recommendations; rather, it aims to provide a framework for those making and influencing policies to better understand and analyse how key trade policy issues and tools in fisheries relate to and impact on their sustainable development objectives. By providing a comprehensive yet applied basis for debate and analysis, the paper endeavours to help bridge the divide between the different communities and enable dialogue among the different actors and areas. We would like to encourage our readers to take this document as a starting point for further analysis of their specific fishery and country contexts which will provide the necessary basis for identifying their interests and priorities towards integrated policies and negotiating positions in this area.

We hope that you will find this Policy Discussion Paper to be stimulating and useful reading.

The incorporation of water services into a broad-based trade agreement for all services results in a number of problems. This paper concentrates on two pressing issues: the importance of promoting and safeguarding community-managed services and the ability of governments to establish market structures that favour effective subsidy regimes.

Water, community-managed services and the General Agreement on Trade in Services (GATS)

Water services and the poor

It is beyond doubt that there are deficiencies in the current reach of public water networks and household connections.1 WHO and UNICEF say that 1.1 billion people do not have access to safe water supplies.2 The proportion of people living in lowincome settlements without household connections are high: 66% in Africa, over 50% in Asia and 33% in Latin America.3 64% of Africa’s urban population have access to safe water but of these only 14% have household connections.4 For many, public standpipes are a considerable distance away from their homes. Overwhelmingly, it is the poor that are not connected. Argentina provides evidence of the relationship between socio-economic status and access to public network water connections: 90% of high-income households have water connections compared to less than 25% of those in the low-income category.5

In the absence of piped water, consumers meet their needs from informal providers, their own endeavours and collective activities. Development agencies are increasingly interested in community-managed water services. However little attention has been given to the potentially adverse consequences of adopting GATS liberalisation without appropriate safeguards for communitymanaged services.

Community-managed services

Community-managed water services have a long tradition in many communities in the South, both rural and urban.6 The lack of state and formalsector private services has encouraged some communities to address their own needs by developing alternative models to secure the services they need for improved livelihoods and development opportunities. The growing significance of such services is a reflection of both local demand and the growing interest of development assistance agencies looking for effective mechanisms to help poor people get access to water, as well as, to a limited extent, the search by some private sector companies for more cost effective strategies to extend supplies.

Community-managed services should not be seen as a second best option.7 Given the limited state investment capacity, local resources can make an essential contribution to improved infrastructure. Their other advantages include inexpensive installation and maintenance strategies, participation by local residents, strong local ownership and accountability, possibilities for locally agreed assistance to the poorest, and flexible provision with management approaches that are closer to community members’ needs. In Faisalabad, Pakistan, for example, the Anjuman Samaji Behbook, a local grassroots organisation, worked with 300 families to develop a local piped network that resulted in considerable cost savings for those involved. Despite initial scepticism and some hostility from local politicians and authorities, the success has resulted in public support to extend the scheme.8

Conventional suppliers’ reactions to communitymanaged services have been mixed. In Pune, India, the boundary between the community and the public water company is contested; the water company is seeking to take over the communities’ role, changing the terms and conditions of supply.9

Private sector companies that have recently expanded into urban services have often been open to exploring the potential involvement of the local community. However, effective models for community management components within private sector services do not appear to be emerging.10 The stronger examples are where communities themselves (generally with the support of NGOs) have developed appropriate approaches that are scaled up.

Implications of GATS-style liberalisation for community-managed services

GATS liberalisation has rendered the future of communitymanaged supplies uncertain. The threat comes from the commitments made by governments to open specific sectors to competition under the GATS framework. GATS seeks in principle to construct a competitive market with a minimal role for state intervention. If the water sector is committed by governments to be opened for international competition, obligations under Article XVII (national treatment) and Article XVI (market access) prevent preferential treatment of any kind to national companies or community-managed services suppliers in the provision of water for human use, water treatment, and other related services. Neighbourhoods (large or small) will not be able to secure the right to community-managed services unless their governments specifically reserve the right to declare areas for community management (horizontal limitation) when scheduling obligations at the WTO. Without such a reserve, any act that favours community-managed services would contravene Articles XVI and XVII and be seen as a restriction on trade.11

Even though private sector involvement in water services in the South remains limited, some companies have shown interest in working with communities in self management. However, many of these community managed service providers would not have the capacity to compete with large-scale water services providers in a freely competitive market. Their higher costs, stemming in part from longer planning schedules, greater inclusiveness, increased local participation and use of local materials, mean that they would require some form of public support in order to compete. Without it, communities might be left unable to provide themselves with water services.

What can be done to safeguard community-managed services?

Given the high level of interest in community-managed water services, the potentially adverse implications as a result of the GATS provisions are probably unintended. Some safeguards to protect them could be put in place which would probably benefit both pro-liberalisation groups and campaigners for public interest – a few highprofile examples of how inclusive effective communitymanaged services were forced to close would benefit no one, least of all those in favour of liberalisation. The following ‘safeguards’ could be advocated by developing countries to ensure rights for communitymanaged services:

_ WTO Members could include appropriate horizontal limitations in any water services liberalisation commitment to safeguard their right to undertake discriminatory measures in favour of national community managed providers, to designate certain geographical areas only for community management and to establish certain market access limitations. Such limitations would restrict the scope of Articles XVI and XVII of the GATS in the particular sector. Communities would be given the right to choose to manage their own services, restricting access to other suppliers.

_ The WTO could issue a stand-alone political declaration emphasising that Members should be aware that the GATS Agreement does not intend to restrict communities’ right to self-management of water services.

_ Currently there are no rules on subsidies in services. Governments could provide direct (grants) or indirect (tax breaks) subsidies designed to support communitymanaged services.12

_ WTO Members could make a decision to ease Article XXI compensation requirements for developing countries that wish to modify liberalisation commitments concerning public utilities.

Subsidies to water services and liberalisation

Global water use has increased in recent decades because of growing population and greater use.13 In order to reduce the pressure on water resources, many governments and development agencies are moving towards full cost pricing. However, water supply companies’ move to full cost pricing and cost recovery has brought affordability issues to the fore. Although, for the last decade, they have been anathema to governments and development agencies seeking financially viable water services providers, there is an increasing recognition that some kind of public support in the form of subsidies will be necessary if cost recovery is to be achieved while simultaneously extending water services to low-income households.

Issues related to universal access and affordability remain contentious. Governments’ Millennium Development Goal ‘to halve, by 2015, the proportion of people without sustainable access to safe drinking water’ has generated a revision of acceptable mechanisms to achieve the target, including the provision of subsidies in water services.

Subsidies and access to water

Despite the efforts that have been put into reducing the cost of water, not everyone can afford even the lower prices. If they cannot, how can access for the poor be secured?14 A recent WaterAid evaluation in Bangladesh highlighted that the issue of subsidies is not just one for the private sector but is also relevant to community managed supplies.15 Some from the private sector acknowledge that they cannot supply to the poor without a subsidy. JF Talbot (chief executive of SAUR International) argues that subsidies are a requirement: ‘ “water pays for water” is no longer realistic in developing countries: even Europe and the US subsidise services… Service users can’t pay for the level of investments required, nor for social projects…’ 16

Consumption subsidies would probably require some kind of rationing in order to prevent excessive consumption and also to ensure that it is the needy socio-economic groups that benefit from them. The definition of a ‘socially acceptable consumption standard’ is also liable to evolution and change.17 A recent UNU/WIDER analysis cautions that ‘while regulatory reform can bring long term benefits to consumers through lower costs and prices, low income consumers will not necessarily benefit most or fastest from the changes’.18 In particular the introduction of competition may erode traditional cross-subsidies with adverse distributional effects. New subsidies or regulations obligating utilities to provide services may be needed to protect the interests of the vulnerable and ensure that they receive a ‘fair share’ of the benefits of reform’. An ideal scheme would ‘maximise the benefits for the target group, while minimising the efficiency losses through distortion which any such mechanism inevitably involves.’ 19

The development of new technologies for water services provision and the minimisation of waste would help improve the affordability and accessibility of water. In existing pipelines water lost by evaporation, leaking and spills can account for 20% to 40% depending of the state of the network.20 In fact, tackling such waste could be an effective and low-cost method to improve access to water supplies in many countries. Research on new or alternative technologies to improve distribution of water has been somewhat neglected. Public support could help correct this, with a particular eye to finding low cost solutions and promoting technology transfer.

Market trends and non-affordability

There is an increasing interest in ‘unbundling’ – identifying the potentially lucrative elements of water services, within private sector experiences. In the struggle to achieve cost recovery, companies appear to be moving towards ringfencing profitable customers and excluding the poor.21 The segmentation of markets in this case is detrimental to the interests of the poor as they are excluded from improvements in services. Some experts have even argued that progress towards greater access to water services requires attention to a range of ‘reform levers’ including various aspects of market structure (such as partnerships, degree of competition, interconnection and supply-arrangements), price regulation and price-structure, quality regulation and subsidies. The preservation of community models and subsidy systems will also entail formulating complementary and supplementary policies to deal with these other ‘levers’ so that access is maximised in terms of both quantity and quality.

GATS negotiations on subsidies

Current international trade rules place no horizontal disciplines on subsidies in services. Ongoing WTO negotiations have been dealing with the services subsidies issue since 1995 in the Working Party on GATS Rules (WPGR), where subsidies, in comparison with other issues, have drawn little attention.22 This does not, however, mean that Members attach no importance to the issue in current negotiations. In fact, many countries have observed that the existence of services subsidies will have significant consequences for the effectiveness and value of any new market access concessions made as part of the current negotiations. On the other hand, disciplines regulating the use of subsidies might have a large impact on Members’ ability to use subsidies for promoting national policy objectives, including access to, and the affordability of, water.

What is already in the GATS on subsidies?

There are some rules in the GATS that have – in principle – disciplining effects on how WTO Members grant subsidies. When a sector is liberalised under the GATS, subsidies will be subject to non-discrimination unless Members specifically exclude them from the application of the national treatment principle. For example, the US, the EU, Japan, and Canada reserved their ability to provide subsidies in their initial GATS offers in areas such as research and development. Also, Article XXIII.3 of GATS could theoretically be used to discipline subsidisation by allowing the deposit of ‘additional commitments’ that could include the nongranting of – or phasing-out of – subsidies in specific sectors. In conclusion, current GATS rules contain some rules that might discipline the use of subsidies when depositing commitments under the GATS.

The consequences of GATS style liberalisation and subsidies schemes available to water

For governments attempting to safeguard water provision, market liberalisation per se is not the problem. Private sector involvement in water services has, for the most part, included international companies; many companies welcome subsidies, particularly since they are often required to meet broad inclusion targets. The danger is that the GATS Articles, drafted to minimise the risks of deception by states (e.g., promising liberalisation to gain markets but continuing protection measures at home), will reduce governments’ ability to manage water markets for the benefit of the poor.

There are essentially two ways of financing subsidies: through general redistribution or through cross-subsidies (where different consumers are charged different rates with the high rates subsidising the low) within a designated water market. While the former is thought to be less market-distorting, it is not necessarily appropriate for countries with under-developed tax systems.23 In South Africa, local authorities receive a central subsidy to provide a basic allowance of free water.24 In Durban, the scheme appears to work relatively well but is critically dependent on the authority’s ability to use a cross-subsidy within the city.25 In South African towns that cannot afford such a subsidy, suppliers and users face major problems.26

The highest priority is for all possible options in water subsidisation to remain open. Ongoing studies are assessing the relative advantages of different systems.27 Cross-subsidies, for instance, may be neither possible nor suitable in all circumstances. However, countries facing substantial developmental problems with limited resources need to be free to address the water needs of their population in whatever manner possible.

The GATS is clear that any subsidies should be offered equally to all suppliers once a commitment has been deposited in a particular sector without exceptions. This paper has argued that there is an increasing recognition of the need for subsidies and that cross-subsidies appear to offer a number of advantages. Why should GATS be a reason for alarm?

First, current negotiations on services and subsidies might end in the creation of rules on subsidies which may lead to several of them being phased out. Any future subsidies rules should exempt subsidies necessary to achieve certain public policy objectives, including the universal provision of services and more specifically the provision of water and related services. This demand is backed up by the mandate of Article XV GATS itself, which provides that the ‘needs of Members, particularly developing countries for flexibility in [the] area’ of subsidies are to be taken into account.

Second, water markets may need to be constructed and potentially reconstructed – including alterations in the socio economic characteristics of neighbourhoods – in ways that maximise the possibilities for crosssubsidisation. However good the reason, restructuring might be considered a restriction of trade. This is especially true if international companies decide that ‘unbundling’ (cherry picking) higher-income areas is the answer to problems of affordability. They may resist being asked to use high profits from one area to subsidise losses in another.28

A third concern is that the requirement that regulations not be unduly burdensome (Article VI) may also be used against pro-poor urban planning. One WTO Secretariat background paper has even suggested controls on land use as well as building and environmental regulations may be examples of overly burdensome regulations.29

What can be done?

Negotiations need to respect the global objectives of poverty reduction as well as those of free trade. Many developing country Members are calling for spaces for development policies – WTO permission for developing country governments to use ‘active’ policies30 to promote competitiveness, including subsidies. In their view, such special and differential treatment must be part of all normative results of the Doha round, including in the subsidies and services negotiations.

WTO Members need to ensure that area designation and re-designation for the purposes of maximising revenue for a cross-subsidy is allowed under GATS and will not be considered a restriction of trade or a burdensome regulation. Although some argue that governments can include such a limitation within their Schedules, this is clearly inadequate. Pressures could be exerted on developing countries forcing them to commit in areas where they are not ready, or want to keep reserved for reasons of national policy (such as poverty reduction). The co-existence of several different models for water-services supply should be the norm, offering valuable lessons for water management and provision in the future.

Conclusion

For the most part, formal sector water companies, whether public or private, have failed the poor. Levels of access and affordability are grossly inadequate. The experience of the OECD countries suggests that there is no clear consensus in favour of public or private provision of water services. Of the 29 OECD countries, 21 have public ownership of water assets and a further 5 have mixed public and private ownership. 14 OECD countries have exclusively public management while 13 have mixed public and private.31 The arguments in favour of private sector involvement in water services are, generally, to improve efficiency and to add to investment funds. Though both reasons may be valid for countries with low GDP, neither argument remains strong as countries grow richer. In the case of water, what appears to be important is the flexibility of the approach towards management of water services.

The GATS text and the current WTO negotiations should incorporate legal flexibilities and spaces to safeguard community-managed services and policy frameworks that allow for the universal provision of water services, the grant of subsidies and cross subsidisation in services. Even if the GATS permits commitments on water and related services, developing country Members should not be required to provide trade compensation when they reverse or modify their commitments schedules to better address the basic needs of the poor, as in the case of water and related services. _

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UNCHS, Water for African cities: Building capacity to improve water management in African cities, 2000. References 1 We have used public to refer to large-scale piped networks whether provided by the government or private sector.

2 Quoted in OECD (2003, 19).

3 From Hardoy, Mitlin and Satterthwaite (2001, 44-62); the data is drawn from Africa (10 cities), Asia (14 cities) and Latin America (8 cities).

4 Estache and Kouassi (2002, 3).

5 Mazzucchelli, Rodriguez Pardinas and Gonzalez Tossi (2001, 70). In total, an average of 57% of households in the Buenos Aires Metropolitan Area had water connections.

6 Gross, van Wijk and Mukherjee (2001, 26). Estache and Kouassi (2002, 4-5) also argue that community driven approaches are becoming more significant in sub-Saharan Africa in rural and peri-urban areas and also in more central urban areas.

7 There is an assumption in GATS that more liberalisation is a good thing (Article XIX). Whilst understandable in the context of many goods and services, this assumption appears curious in the context of basic services. It is evident that OECD countries, with the benefit of considerable expertise, choose to use both public and privately provided water services. (OECD 2003, 57.)

8 Alimuddin, Hasan and Sadiq (2001).

9 Case study of community managed water provision in India by SPARC and the National Slum Dwellers Federation for the Asian Coalition for Housing Rights.

10 Mazzucchelli, Rodriguez Pardinas and Gonzalez Tossi (2001, 99). Nickson (2001a, 25) and Nickson (2001b, 17-19).

11 Water is clearly not the only area of concern in regard to community-managed services. Community-managed micro-hydro stations for local energy production are another example. Energy specialists at the Intermediate Technology Development Group are concerned about the future of such ventures.

12 The main limitation of this option may be the lack of financial resources from developing country governments.

13 OECD (2003, 13).

14 Chisari, Estache and Waddams Price (2001, 1).

15 Hanchett, Hoque Khan and Akhter (2001).

16 Hall (2002, 8).

17 Chisari, Estache and Waddams Price (2001,15).

18 Ibid.

19 Ibid.

20 See, for example, UNCHS (2000).

21 Hall (2002, 9). In the case of Ghana, Public Citizen/Water for All (2002, 34) suggest that ‘…the World Bank and other PSP advocates argue that it is quite appropriate to rely on private operators for that portion of the sector to which they are attracted; the efficiencies which the private sector is purported to introduce should be obtained to whatever extent possible.’

22 Other horizontal issues include ESM and government procurement.

23 Gomes-Lobo (2000, 5).

24 See, for example, the description in Palmer Development Group (2000b).

25 pers. Comm.. Director of Infrastructure, Durban Water.

26 McDonald and Pape (2002).

27 See Gomez-Lobo (2000).

28 See, for example, the concerns expressed in Gould (2003).

29 Quoted in Hardstaff (2003, 4).

30 Active policies imply polices that are undertaken directly by the government to promote competitiveness.

31 OECD (2003, 57).

Part One provides a general explanation of the rationale behind IPRs and their evolution, as well as an overview of the multilateral system for their protection. These international rules have important socio-economic implications that are dealt with in Parts Two and Three. Part Two addresses some broad cross-cutting issues that constitute the basic premises behind the adoption of stronger IPR regimes in developing countries, such as the fostering of innovation and creativity as well as access to and use of new technologies. Finally, Part Three discusses the impact of new IPR standards on specific areas of concern for developing countries, namely: health; food, agriculture and biodiversity; traditional knowledge and folklore; and access to knowledge and educational, technical and scientific information. Parts Two and Three therefore analyse in more depth some of the issues addressed in Part One.