Trade and sustainable markets

Traditional trade policy cares about products: what they are, what they cost and whether they are safe. Sustainable markets add a second dimension: how a product was made. Was the forest managed responsibly? Were workers paid fairly? Was the fish caught without depleting the stock? Questions like these are answered, or at least addressed, through standards, labels and certification schemes that travel with the product along global supply chains.

The building blocks

Several kinds of instruments are often grouped together under the heading of sustainable markets.

The line between voluntary and mandatory is moving. Requirements that started as private initiatives are increasingly referenced in laws, procurement rules and disclosure obligations.

How certification works

A typical certification scheme has four parts:

1. A standard that sets out the criteria, such as rules on land use, chemical use, working conditions or traceability.
2. Assessment by an auditor or certification body that checks whether a farm, forest, fishery or factory meets the criteria.
3. Chain of custody rules that track certified material through processing and trading, so that the final product can carry the claim.
4. A label or claim that communicates the result to buyers.

Some schemes require that certified material is kept physically separate from uncertified material. Others allow mixing and use bookkeeping systems, in which a share of the final product is credited as certified. Buyers often do not know which model applies, which is one reason why labels can be misunderstood.

What sustainable markets can achieve

Supporters see several benefits:

• Rewarding better practice. Producers who invest in sustainable methods can reach buyers willing to pay for them or, more often, gain access to buyers who require them.
• Information. Labels give buyers information they could not otherwise check, about processes far away in the supply chain.
• Spreading norms. Large buyers adopting a standard can shift practice across an entire sector.
• Complementing regulation. Where governments lack the capacity to enforce rules, private standards can fill some gaps.

The limits and concerns

There are also well-known criticisms.

Cost and access. Audits, documentation and changes in practice cost money. Larger producers can usually absorb these costs more easily than smallholders, who may be pushed out of supply chains rather than helped to improve. Group certification and support programmes try to address this.

Proliferation. Many sectors have several competing schemes with different criteria. Producers selling to different buyers may need several certificates, and buyers may struggle to compare them.

Credibility. A label is only as good as its criteria and verification. Weak standards, conflicts of interest in auditing, or vague claims can mislead buyers. Concern about misleading environmental claims, often called greenwashing, has led several jurisdictions to tighten rules on what companies may say.

Displacement. If certified production serves one market while uncertified production simply moves to buyers who do not ask questions, the overall effect on the environment may be smaller than it looks.

Trade friction. Exporting countries sometimes see sustainability requirements as hidden barriers, especially when they are designed without their involvement or do not recognise local conditions and national regulations.

Biofuels: an early test case

Biofuels illustrate how sustainability and trade became entangled. Policies to replace fossil fuels in transport created demand for crops such as maize, sugar cane, rapeseed and palm oil, much of it traded internationally. Concerns soon arose that this demand could drive deforestation, compete with food production and, in some cases, cause more emissions than it saved once land-use change was counted.

Some governments responded by setting sustainability criteria that biofuels must meet to count towards renewable energy targets or to receive support. The European Union, for example, built such criteria into its renewable energy legislation. These criteria apply to imported and domestic biofuels alike, but their design raised questions familiar from the rest of this page: how to verify claims across borders, how to treat indirect effects such as land being converted elsewhere to replace displaced food crops, and how to avoid discriminating between trading partners.

Trade in environmental goods

Sustainable markets are not only about labels. Trade policy can also make clean technologies cheaper and easier to deploy. Tariffs and other barriers on goods such as wind turbine components, solar equipment, water treatment technology and pollution control devices raise their costs. Groups of countries have discussed lowering tariffs on lists of environmental goods; APEC economies, for example, agreed such a list. Defining what counts as an environmental good is harder than it sounds, because many products have both clean and conventional uses.

Questions to ask about any sustainability claim

• Who wrote the standard, and who was consulted?
• What exactly does it cover: environment, labour, land rights, traceability?
• Who checks compliance, and how independent are they?
• Is certified material kept separate, or is a mass-balance or credit system used?
• Is information about the criteria and audit results public?
• Does the scheme help small producers meet the requirements, or only check whether they do?

The bottom line

Sustainable markets can turn concerns about how products are made into signals that travel through global trade. They work best when standards are credible, verification is independent and producers in exporting countries are partners rather than just subjects of audits. As governments write more sustainability requirements into law, the questions once debated about private labels are becoming questions of trade rules as well.