The integration of trade and sustainable development is an explicitly stated goal in multilateral and bilateral trade agreements. It also governs inter-firm commercial policies. Sustainable development is an overarching theme, which includes the promotion and protection of human rights, maintenance of local and indigenous communities, equity issues, as well as the traditional focus on environmental protection. Further, private welfare and profit are not necessarily in opposition to the promotion of sustainable development (Rotherham, 2000).

In the trade sphere, sustainable development is defined by mandatory technical regulations and voluntary standards, where law drives the former and consumer preferences the latter. The Agreements on Technical Barriers to Trade (TBT) and on the Application of Sanitary and Phytosanitary Measures (SPS) contain provisions for harmonizing these standards globally. The ISO series, SA standards, and the Forest and Marine Stewardship Council standards represent attempts at harmonization by international voluntary bodies. However, harmonization is an elusive concept. If developing countries - for one reason or another - do not participate fully in the consultations of international standards bodies, the standards that emerge out of such consultations do not reflect their concerns. A more inclusive definition of harmonization would probably embrace both consistency (including technical equivalence) and acceptance as necessary and sufficient conditions.

While harmonization is key to reducing protectionism - the downside of environmental, social and quality standards - developing countries are not sufficiently empowered in terms of their institutional, technical and information processing capabilities to contribute to and comply with proliferating standards. Voluntary standards, in particular, are increasing at an almost exponential rate. As a result, they are often caught unawares by non-tariff barriers, which may not be malafide in intent but, invariably, generate adverse political resonances.

Essentially, two options present themselves. The first and preferred option is for developing countries to become proactive in standards setting processes so that their concerns and priorities can be reflected in these standards. But, as mentioned, this pre-supposes the requisite capacity. Absent such capacity, they need to

begin empowering themselves. And here the implicit recognition is that they do so in a “standards taking” rather than “standards making” mode. In particular, textile exporting firms in the South Asian region face a double whammy. The standards regime is likely to hit them hard at the MFA phase-out by end-2004, producing a cliff effect. Whether they tip over will depend very much on how well they have prepared themselves to comply with these standards. This entails appropriate firm-level and institutional/policy responses. National regulatory processes, standards setting and information access, conformity assessment and accreditation are some of the areas where multi-tiered capacities need to come up to speed.

Small and Medium Enterprises (SMEs) in Pakistan: Potential for Compliance
The small to medium enterprises in South Asia, in particular, are firmly embedded in the compliance rather than active standards setting mode. In effect they are the most vulnerable players in an increasingly dominant standards regime. Even in this context they face serious difficulties. This entails problems in accessing information on standards, technology and difficulty in getting loans for lumpy capital investments, such as water treatment plants. In general, SMEs present a strong case for government/donor incentives and support. By contrast, large firms, especially in the textile sector, are already well into the standards regime and aware of the consequences of the MFA phase-out. The exporting firms comply unequivocally with product standards because non-compliance would mean a discontinuation of orders. Process standards are more of a gray area. An example of this is ISO 14,001 certification. Some firms have secured such certification, even though they do not appear to be fully compliant with the national environmental quality standards (NEQS). Also, a number of firms are being granted ISO or bilateral certification ahead of full compliance, by demonstrating partial compliance or intent to comply. However, an encouraging trend is that -- high costs notwithstanding – some firms have invested in water treatment plants.

Two studies undertaken at SDPI examined the scope, pressures and experiences in compliance by SMEs in Pakistan. The results of the more recent study (Khan and Haider: 2003) are presented in some detail, while the results of the earlier study (Nadvi and Kazmi: 2000) are recapped briefly. The first study examined firms producing tanned and finished leather and leather garments, while the second study looked at firms exporting soccer balls and surgical instruments.

The first study focused on donor supported SMEs in the leather sector, with a sizeable number of export firms among them. Public pressure, stemming from pollution and the ensuing health consequences was the driving force for the firms to change their industrial practices. The frame of reference was NEQS. However, it did not matter who drove these standards or what the environmental benchmarks were. In complying with national standards, SMEs were expected to be on track when confronted with more stringent international standards - whether enforced by foreign governments or stipulated under inter-firm contracts. The approach adopted by the donor agencies working with these SMEs matched the premise stated earlier, namely, “private welfare and profit were not necessarily in opposition to the promotion of sustainable development.” The identified “win-win” or “no regret” options generated social, environmental and efficiency benefits.

Demonstration of win-wins
In-plant measures
The Cleaner Production (CP) Programme (Sialkot) provided financial support in those areas where both pollution mitigation was critical and cost savings could be realized. Even though financial outcomes were not evaluated completely, initial results showed that the 16 project-supported firms collectively realized net savings amounting to almost Rs.9 million, about 7.5% of their total capital cost. The programme led to the identification of fourteen economically viable cleaner technology options. The firms with a payback period of less than one year had the highest savings rate. Since the focus of the CP programme was on introducing house keeping measures and better in-house treatments, a majority of the investments had a short payback period. Thus, by making these one-time investments, firms could achieve environmental benefits, cut their costs substantially and not compromise on product quality.

End-of-pipe treatment
Of the 700 tanneries in Pakistan, 237 are located in Kasur. The three tannery clusters discharge about 13,000 m3 per day of heavily polluted tannery wastewater, which drains into the river Rohi Nullah. The estimated annual effluents consist of 4,000 tons of BOD5 11,000 tons of COD, 10,000 tons of suspended solids, 160 tons of chromium and 400 tons of sulphide. Needless to say, the environmental and health consequences were extremely serious until the Kasur Tanneries Pollution Control Project (KTCP) was launched in 1998. The project was a collaborative venture of the federal government, provincial line departments, international donors and the tanneries. The project components included both in-plant and end-of-pipe measures. However, the flagship contribution of the project was the combined wastewater treatment plant.

The following table presents information on capital and recurring costs and benefits.

Consolidated Costs and Benefits

Capital costs and the reclamation/appreciation of agricultural land had a one-off character. Chrome recovery was clearly profitable as were other variables, which were not been estimated, such as waste recycling and water conservation. Recurring costs were relevant from a project sustainability perspective and are reviewed below.

The conjunction of in-plant measures with combined wastewater treatment for tannery clusters demonstrated clear win-wins. This was evident in the relatively short payback periods for in-plant measures, the dispersion of recurring costs associated with end-of-pipe treatment across the cluster and the land reclamation gains. Clean-ups on this scale also yielded impressive environmental and health benefits. With regard to take-up, however, the situation was more ambivalent. Donor subsidies were required to leverage additional contributions by firms to institute in-plant measures, despite their relatively quick paybacks. Firms were even less willing to pay for the costs of running the combined water treatment plant. Essentially, collective action of this kind faced free rider problems. It might be added that in-plant measures are a necessary but not sufficient condition to meet the NEQS/international standard requirements and that they need to be supplemented with end-of-pipe treatment.

Clearly financial sustainability and replicability are the key issues. From a policy perspective, the large one-off investments are feasible and likely to elicit donor interest. Since the bulk of tanneries in the country are clustered, there is merit in a concerted attempt to leverage financial support for additional plants, as well as to address the post-project sustainability constraints. One possible option could be for the government to take on the responsibility of running these plants for which they could charge a mandatory fee from the tanneries. Another option could to contract the plants out to the private sector. While they would, presumably, charge relatively higher fees, by the same token they could also be expected to run the plants more efficiently.

Experience of Compliance
As opposed to demonstrating the potential benefits of compliance with international standards, the Nadvi-Kazmi (2000) study actually documented implementation experiences among SME clusters in Sialkot exporting surgical instruments and soccer balls. The study, basically, debunked the belief that SMEs faced insurmountable institutional and financial difficulties in complying with international standards.

Over the past decade, the surgical instrument cluster in Sialkot faced demands from its two leading markets, the United States and Western Europe which together accounted for over 90% of total annual exports, to conform with international quality assurance standards. The response was significant and rapid. Sialkot now stands out in the country in terms of standards certification. According to data held by the Federation of Pakistani Chambers of Commerce and Industry (FPCCI), the country's apex industrial body, Sialkot’s surgical instrument sector is placed second to the textiles sector, the country's largest industrial sector, in terms of total numbers of ISO 9000 certified firms.

Similarly, international media stories brought to light the presence of child labor in the soccer ball industry. This led to demands from Western consumer groups, trade unions and NGOs for a boycott on products from the cluster.

Manufacturers responded quickly and signed an agreement called the Atlanta Agreement in February 1997 along with SCCI, ILO and UNICEF. According to this agreement ILO was given the mandate to monitor the process of elimination of child labor from soccer ball industry and it was decided that this process would be completed in a period of 18 months. ILO set up its office in Sialkot under ILO-IPEC programme and started monitoring the phasing out of child laborers from the soccer ball industry.

Various factors, which were not present in the first study context, contributed to the pressure upon firms to comply with. First, soccer balls and theatre surgical instrument are niche suppliers, enjoying premium prices. Their prospects for trade diversion are limited, as opposed to tanned and finished leather and leather garments. Second, compliance costs of implementing labor and quality standards are relatively low compared to those for environmental standards, which were the focus of the first study. Third, labor standards were a high profile area, where non-compliance or circumvention attracted adverse publicity. Fourth, ripple effects could occur: for instance, the emphasis on high quality theatre instruments produced spillover effects on disposable floor instruments. Fifth, while clustering did not embody economies of scale or information advantages per se, the quality of the services offered by institutions serving these clusters (trade associations, consultants, certification agencies, technology centers, financial agencies, other government bodies) were important factors in compliance.

Concluding Remarks
Pakistani exporters, though late in tuning into the urgency surrounding international standards are, nonetheless, taking steps to ensure their competitiveness in the world market. This is even as the government and civil society representatives struggle to develop a common and informed stance on the issue. There is a lack of awareness on the part of both industry and government regarding the overlaps and potential synergies that exist between international and national environmental and social standards. The fact that these commonalities are not being stressed and both private and public entities keep each other at arms length needs to be explored further. The government needs to adopt a more pro-active strategy towards bridge building.

For all the developing countries including Pakistan, the challenge is to integrate trade and environmental policies harmoniously in such a way that maximum synergies are achieved. In other words, the ideal paradigm is one where trade policies become environmentally sensitive and environmental policies are not trade-restrictive. While the south has its own environmental agenda, which coincides with many northern environmental concerns, the task is to ensure that these two converge. In this context, we should take advantage of the capacity building opportunities offered under the WTO, TBT and SPS agreements.