On export rivalry and the greening of agriculture—the role of eco-labels

Abstract

Why do some countries have eco-labelling programs and others do not? In this paper, we provide both theoretical arguments and empirical evidence suggesting that the answer to this question can shed new light on three questions that have taken center-stage in the trade and environment debate: (i) does trade exacerbate the exploitation of the environment; (ii) are countries competing in export markets engaged in a race to the bottom in environmental performance; and (iii) do market-based environmental instruments benefit the rich and hurt the poor?

Introduction

Eco-labelled products provide consumers with information about the environmental externalities associated with the production and consumption processes. The adoption of eco-labels has rapidly grown worldwide, and the prevalence of the practice of eco-labelling is becoming evident in both industrial and agricultural sectors.³ This paper focuses on the adoption of labelling in the agricultural sector for two reasons. To begin with, labelling initiatives in the agricultural sector clearly preceded similar efforts in the industrial sector.⁴ Second, and in the context of the development consequences of market-based environmental initiatives, eco-labelling in agriculture has become a contentious issue. Indeed, a potential conflict of interests between developed and developing countries arises, at least in part, because of the differential degrees of dependence on agriculture for the purposes of export earnings and job creation in these two groups of countries. As such, the argument goes that the market access consequence of eco-labelling may have a disproportionate impact on producers in developing countries.

The debate surrounding eco-labelling in the context of international trade can be more succinctly summarised under three main themes. First, eco-labelling represents a potential market-based policy response to the threat of environmental exploitation in the face of increasing international trade (OECD, 1997a, OECD, 1997b, WTO–CTE, 1997, Basu and Chau, 2001). A question that naturally arises is whether countries and/or producers that practice green production methods are indeed favourably selected in the set of countries that have adopted eco-labelling. Relatedly, trade competition and the need to cut cost have led to concerns regarding the threat of a ‘race to the bottom’ (Basu et al., 2003, Chau and Kanbur, 2000). In this context, eco-labelling provides a potential market-based alternative to regulatory standards aimed at levelling the playing field. Precisely since the adoption of eco-labelling is voluntary, however, an important question remains as to whether observed adoption patterns reveal indication of a ‘race’—in the sense that adoption decisions across countries are mutually dependent—and whether observed adoption time patterns in fact reveal a move towards vicious interdependence.

A third theme in the eco-labelling debate involves the North–South dialogue regarding the threat of increasing disparities between the rich and the poor (Basu and Chau, 1998, Basu et al., 2003). By its very nature, eco-labelling takes advantage not just of a country's cost advantage, but potentially also of its ‘reputational’ comparative advantage in a segmented market where the credibility of labelling programs is key to the determination of the green premium, and hence, the terms of trade. Therefore, the question that arises here is whether eco-labelling can exacerbate income disparities between developed and developing countries via one or more of the following routes: (i) the lack of technological know-how and the inability to shoulder the costs involved in implementing eco-labelling programs; and (ii) the inherent disadvantage that developing countries may be confronted with when industries in developed and developing countries are faced with different green premia.

These observations accordingly serve as the motivation of this paper, and our focus on tracing out the adoption pattern of eco-labelling programs. Our approaches to understand the role of export rivalry in the adoption of green agricultural production methods in this paper are two-fold. We begin by proposing an analytical framework to examine the economic incentives to initiate eco-labelling. The framework entertains export rivalry in a multicountry setting, and yields a set of theoretical implications in a subgame perfect Nash equilibrium, highlighting: (i) the selection criteria of countries that adopt eco-labelling; and (ii) the endogeneity of labelling incentives and the welfare consequences of observed labelling initiatives.

The second approach undertaken in this paper is closely related to the first, and presents an empirical investigation of the determinations of the time to adopt eco-labelling. The objectives are to empirically verify both the relative importance and significance of non-trade and trade related factors associated with the decision to adopt eco-labelling. As the analysis unfolds, we will also present the findings of our empirical estimation of whether systematic divergences in the industry-level green premium between developed and developing countries may be inferred from the time pattern of adoption decisions.