Trade Liberalization
and the Environment

Steven Globerman
Department of Economics
Simon Fraser University

Introduction

FROM THE VERY START OF THE North American Free Trade Agreement (NAFTA) discussions, environmental concerns have been at the forefront of the surrounding public policy debate. Specifically, opponents of the NAFTA have consistently argued that further trade liberalization, especially between Mexico and the United States, would result in significant incremental environmental damage. Indeed, reflecting the strength of the early concerns raised in this regard, the Bush Administration agreed to carry on parallel negotiations concerning environmental issues alongside the trade negotiations in order to win Congressional approval for "fast-tracking" the NAFTA.

The signing of the NAFTA by Presidents Bush and Salinas and Prime Minister Mulroney on December 16, 1992, along with the election of Bill Clinton as the next president of the United States, have focused the free trade debate even more sharply around the question of whether the specific agreement does "enough" to recognize environmental concerns. [See Government of Canada, North American Free Trade Agreement, Draft Legal Text, September 8, 1992.] For example, President-elect Clinton has indicated that one of his concerns about NAFTA is that it does not go far enough in addressing environmental remedies and protection. In a speech given at North Carolina State University on October 4, 1992, Clinton expressed support for NAFTA, while at the same time he proposed the establishment of an environmental protection committee with substantial powers and resources to clean up water pollution and encourage the enforcement of each country's own environmental laws.

While government officials in Mexico, Canada and the United States lauded the NAFTA as being the "greenest" trade agreement ever produced, opponents are already claiming that it does not go far enough to recognize and remedy the damaging effect that increased trade will have on the environment. At this stage of the NAFTA debate, it seems fair to conclude that opponents of free trade will rely heavily upon the argument that the Agreement, as it now stands, will lead to substantial deterioration of environmental conditions, primarily along the U.S.-Mexican border.

The primary purpose of this chapter is to identify and assess the interactions between liberalized trade and the environment. Contrary to the standard argument that trade liberalization inevitably leads to further environmental degradation, this chapter argues that trade liberalization may well promote more careful use of environmental resources, as well as more extensive and widespread remedies for existing environmental pollution. It also argues that efforts to enforce environmental standards through trade policy measures invite a serious risk that importers will invoke spurious claims about environmental misbehaviour on the part of foreign exporters in order to protect domestic markets. In short, the NAFTA, if anything, may err in the direction of giving too much emphasis to environmental matters rather than too little.

The chapter proceeds in the following manner. First, environmental provisions in the NAFTA are identified and discussed. Then the chapter lays out the major direct and indirect linkages between trade liberalization and the environment. It then discusses available evidence bearing upon the nature of these linkages. Finally, it assesses the overall environmental consequences of the NAFTA in light of both theory and evidence.

Environmental Provisions of NAFTA

Several important environmental provisions in the NAFTA are similar to provisions in the General Agreement on Tariffs and Trade (GATT). In particular, NAFTA allows the trade obligations of the NAFTA countries under specified environmental agreements to take precedence over NAFTA provisions. For example, NAFTA accords priority to three international agreements to which the U.S. is a party: the convention on international trade in endangered species of wild fauna and flora, 1973, the Montreal protocol on substances that deplete the ozone layer, 1987, and amended in 1990, and the Basel convention on the control of transboundary movements of hazardous wastes and their disposal, 1989, on the latter's entry into force for all three countries. [These agreements were cited earlier in Weintraub's chapter for this volume.] NAFTA affirms the right of each country to choose the level of protection of human, animal or plant life or health or of environmental protection that it considers appropriate. Moreover, each country may maintain and adopt standards and phyto sanitary measures, including those more stringent than international standards, to secure its chosen level of protection.

There are provisions in the NAFTA which establish standards subcommittees to work to make compatible standards-related measures in the areas of, for example, vehicle emissions and other motor carrier environmental pollution levels. The parties also agree to promote making compatible standards-related measures that are developed or maintained by state, provincial and local authorities and private sector organizations; [Ibid., Annexes 913 A-C.] however, there is nothing in the agreement which obliges countries with "stricter" environmental standards to harmonize those standards with the "more lax" standards of other trading partners. On the contrary, countries are free to raise their environmental standards to whatever chosen level is desirable.

To be sure, disputes may arise over whether specific environmental provisions are merely disguised trade barriers.

In disputes regarding a country's standards that raise factual issues concerning the environment, that country may choose to have the dispute submitted to the NAFTA dispute settlement procedure rather than to procedures under another trade agreement such as GATT. The same option is available for disputes concerning trade measures taken under specified international environmental agreements. The panel hearing the dispute will presumably seek to determine if the action taken is credible on environmental (or related) grounds or whether it is transparently a trade protectionist measure. In dispute settlement, the complaining country bears the burden of proving that another NAFTA country's environmental or health measure is inconsistent with NAFTA.

In what is arguably a new departure for an international trade agreement, the NAFTA contains general statements that the signatories will work jointly to enhance the protection of human, animal and plant life and health and the environment. This ostensibly refers to earlier commitments on the part of the negotiators to carry on parallel discussions regarding environmental initiatives. The Agreement also embodies a general statement that no NAFTA country should lower its health, safety or environmental standards for the purpose of attracting investment. It is unclear at this time how effectively this latter clause can be enforced given that complaints would have to be handled through a dispute resolution procedure. Moreover, it is unclear what standards of evidence would be required to "prove" that investment patterns were changed by changes in environmental laws and standards.

Finally, as part of the parallel track negotiations, Mexico and the U.S. agreed in the spring of 1992 to a cooperative plan for improving the environment along the border. As part of this plan, the U.S. government pledged $379 million over two years for various activities, while the Mexican government's share is $466 million. Critics of the cooperative plan have focused on two issues in particular: (i) the failure of the plan to outline any new revenue-raising measures for border environmental programs; (ii) the absence of a binational enforcement group legally empowered to enforce pollution laws on both sides of the border. [For a detailed discussion of the border environmental plan, see Jan Gilbreath Rich, Planning the Border's Future: The Mexican-U.S. Integrated Border Environmental Plan, Austin: The University of Texas, LBJ School of Public Affairs, U.S.-Mexican Occasional Paper No. 1, March 1992.]

In short, the NAFTA embodies several unique, albeit general commitments to protect the environment and to ensure that environmental amenities are not sacrificed to attract capital investment. The latter commitment is an obvious obeisance to arguments raised by critics of NAFTA that "environmental dumping" will take place, whereby toxic firms relocate to Mexico to evade stricter enforcement of environmental standards in the United States and Canada. Precisely how and to what extent these commitments will be carried out in practice is unclear at the present time. Individual countries retain sovereignty over their domestic health and safety standards, although these standards can be challenged as unwarranted trade restrictions.

Economic Incentives and the Environment

It is clear that the NAFTA, per se, does nothing directly to weaken environmental standards and their enforcement in the member countries. That is, countries are free to strengthen their environmental laws and enforcement efforts as long as "legitimate" environmental objectives are being pursued. Hence, potential environmental objections to NAFTA must be based on the adverse impacts that trade liberalization has, directly or indirectly, on environmental amenities. In this section, we consider the potential for such impacts.

The relationship between economic activity and the environment can be made more explicit by noting that all economic activities involve the transformation of specific inputs into specific outputs. Some of the inputs utilized will be closely related to environmental amenities such as clean air and clean water. For example, the activities in question might utilize water as a direct input in the production process or they might use water indirectly, e.g. by dumping waste byproducts into nearby waterways. It is difficult to be precise in defining environmental amenities, since what is included in the definition will depend, in part, upon the tastes and preferences of the individual offering the definition. For example, some might opt for a broad definition including clean air and water, the preservation of biodiversity, the preservation of wilderness areas and so forth. Others might opt for a narrower definition.

For purposes of this discussion, we do not need to define environmental amenities precisely; however, it is useful to be able to think of these amenities as being divisible and as being "used up" by specific economic activities to a greater or lesser extent. In this context, trade liberalization would damage the environment to the extent that it accelerated the rate at which environmental amenities are used up. By the same token, other economic activities can have the effect of increasing available environmental inputs, e.g. water treatment procedures which reduce chemical and other pollutants in waterways.

In this context, there are several ways in which economic activity can affect the environment. Most directly, an increase in the overall level of economic activity would presumably lead to an increase in the utilization of environmental inputs. Changes in the mix of economic activities can lead either to increases or decreases in the utilization of environmental inputs. For example, as real incomes rise, the demand for environmental amenities should increase. While the increase in demand may be relatively small at low levels of income, it can be expected to increase at a faster rate as a nation becomes wealthier. In more technical terms, the income elasticity of demand for environmental inputs is arguably positive and larger at higher levels of income. [Income elasticity of demand is defined as the percentage change in the quantity demanded of a specific good divided by the percentage change in real income.] If demand turns strongly in the direction of consuming more environmental amenities, it is quite possible that increased levels of economic activity (and resulting increases in income levels) may lead to overall decreases in the utilization of environmental inputs. [That is to say, a shift towards a mix of "cleaner" activities might offset the impact of an increase in the overall level of economic activity.]

Ordinarily there will be several different ways to produce a given product. Put in other words, several economic activities may result in the same or similar products being produced. The activities differ in the sense that different mixes of factor inputs are used; e.g. some use more labour relative to capital, some use more capital relative to labour and so forth. In this context, some activities may use environmental resources more intensively than others. As noted above, as incomes increase, members of a society in their roles as both consumers and voters will likely spend an increasing share of their incomes on activities which use relatively small amounts of environmental inputs.

Different ways to produce any given product may persist for periods of time, even if some ways are clearly less efficient than others, because inefficient producers may be subsidized or otherwise protected by the government. Increased competition can be expected to change the mix of activities in use. Specifically, activities which are high cost relative to other activities producing similar products should be driven out of the economy. In this respect, trade liberalization can be expected to lead to such a rationalisation of production within a protected economy, at least on the margin.

One can fit the "environmental dumping" argument into the framework suggested in the preceding paragraph. Specifically, prior to free trade, it may be cheaper to produce a product in the U.S. than in Mexico, even if certain costs associated with environmental standards must be borne in the U.S., because of relatively high U.S. tariffs on Mexican imports. If these tariffs are eliminated, producers may find that it is cheaper to move from the U.S. to Mexico in order to avoid costs of complying with environmental standards. [Note that it may not be less costly in a social sense if the costs of environmental externalities are properly attributed to production in Mexico.] In effect, a reduction in protection in the U.S. might lead to the substitution of one set of activities, i.e. production in Mexico, for another set of activities, production in the U.S., holding the product constant.

It should be noted that a "reverse dumping" argument can also be made. Namely, trade liberalization might itself promote market oriented reforms in domestic economic policies including reductions in government subsidies and other pricing distortions. Such reforms, in turn, could result in a substitution of less environmentally damaging activities for more environmentally damaging activities. Probably the most relevant case in point here are subsidies extended by many developing countries to energy intensive activities such as transportation and heavy manufacturing. [Observers have noted that in many developing countries, in particular, deliberate "underpricing" of petroleum products, chemical fertilizers and the like encourages the adoption of environmentally intensive production techniques. See Kym Anderson and Richard Blackhurst, "Trade, the Environment and Public Policy," in Kym Anderson and Richard Blackhurst, eds., The Greening of World Trade Issues, New York: Harvester Wheatsheaf, 1992, pp. 3-22.] If trade liberalization agreements lead to a reduction in trade distorting subsidies, an important byproduct might be reduced environmental pollution, since heavily polluting activities, which are often the focus of government subsidies in developing countries, would become relatively less profitable.

In the next section, we consider empirical evidence bearing upon these potential linkages. The foregoing discussion suggests that two potential linkages are particularly relevant: (i) trade liberalization leads to higher income levels which affect both the aggregate level of overall economic activity, as well as the mix of economic activities; (ii) the potential for pollution intensive activities to migrate to Mexico as a result of lower tariffs in the United States and Canada counterbalanced by the potential for market reforms in Mexico to discourage pollution intensive activities either directly or indirectly.

Evidence on Linkages between Trade and the Environment

As noted above, one potentially important linkage between trade liberalization and the environment occurs through the impact of higher levels of economic activity. Specifically, trade liberalization can be expected to result in a faster expansion of the economies of the free trade area than would otherwise take place. As a consequence, there will be an even greater demand for all factors of production including environmental amenities.

At the same time, higher real income levels should encourage, at some point, increased private and public demand for greater environmental amenities, and the increased wealth associated with faster economic growth enhances the financial capacities of societies to invest in environmental protection and remedies.

The foregoing suggests that the relationship between real income levels and environmental pollution may not be linear. That is, over an initial range, the dominating influence is the overall level of economic activity. But beyond some point, the changing mix of activities towards less polluting ones will come to be the dominating influence. The "switchover point" is ultimately an empirical issue.

Available studies provide support for the hypothesis that the demand for a cleaner and healthier environment is strongly and positively related to higher real income levels, at least beyond some threshold income level. For example, Grossman and Krueger correlated the level of sulphur dioxide and smoke with per capita income and found that the level of pollution rises until income reached $5,000 per head (in 1988 dollars) and then starts to fall. [See Gene Grossman and Alan Krueger, "Environmental Impacts of a North American Free Trade Agreement," Paper prepared for a conference on the U.S.-Mexico Free Trade Agreement, Princeton University Press, October 1991.] By way of background, Mexico's real income level per capita in 1991, measured as gross domestic product per capita in U.S. dollars, was below this threshold at $2,365. Income levels for Canada and the U.S. were well above this threshold.

In the absence of precise estimates of the impacts of trade liberalization on the three countries, it is impossible to infer the net impact of the NAFTA on sulphur dioxide emissions; however, analysts tend to agree that the major economic impacts of a NAFTA will be realized by Mexico. Hence, it is at least plausible to argue that sulphur emissions will increase as a result of the NAFTA, at least in the short run. However, to the extent that NAFTA accelerates the growth of the Mexican economy, it will lead to less sulphur dioxide pollution in the long run, since it will shorten the time it takes Mexico to reach the "crossover" income level.

It might be noted that estimates by the World Bank also indicate a curvilinear relationship between the average ambient level of sulphur dioxide and real income per capita; however, the World Bank places the switchover income level at closer to $2,500. [See "The Environment: Whose World Is It, Anyway?" The Economist, May 30, 1992, p. 8.] This estimate would suggest that the effects of the NAFTA are likely to be benign in both the short and long run, since Mexico will cross this income threshold in the near future with or without a NAFTA in place.

Some additional evidence on the relationship between income levels and environmental amenities is provided in a study by Walter and Ugelow. [Ingo Walter and J. Ugelow, "Environmental Attitudes in Developing Countries," Resources Policy, Vol. 4, 1978, pp. 200-209.] Based on questionnaires sent to national officials in developed and developing countries, they found that while the strictness of environmental policies varied within each group, the level of strictness was nonetheless higher, on average, in the developed countries. This finding is also consistent with observations that urban sanitation tends to be an increasing function of income at all income levels, while ambient levels of particles tend to be a decreasing function of income over virtually all income levels. [See The Economist, op. cit.] This latter observation suggests that NAFTA will unambiguously reduce pollution related to sewage and ambient particles to the extent that it accelerates income growth in Mexico and, to a lesser extent, in Canada and the United States.

To be sure, some forms of environmental pollution increase with higher national income levels. For example, carbon-dioxide emissions tend to increase fairly uniformly with higher income levels, as does solid waste. [The Economist, op. cit.] These observations qualify an unambiguous conclusion that the income effects of a NAFTA will either be benign or favourable for environmental amenities in North America. Nevertheless, taken on balance, one must conclude that the economic growth stimulated by a NAFTA may well be positive, on balance, for the environment in terms of reducing the utilization of environmental amenities. The main effect here is the increased demand for a cleaner environment which is associated with a shifting away from pollution-intensive activities. [Note that such shifting can reflect greater utilization of pollution abatement equipment or practices in activities which hitherto were relatively pollution intensive.]

Another important empirical relationship relates to the environmental dumping issue or the relocation of pollution intensive activities to Mexico. As noted earlier, one argument holds that a reduction in Canadian and U.S. tariffs will, on the margin, make it more attractive for polluting firms to relocate to Mexico in order to serve the North American market. A related concern is that increased competition associated with trade liberalization will lead domestic producers to "cheat" with respect to obeying environmental standards or that it will lead to increased and effective lobbying efforts to have environmental standards relaxed. [See Peter Emerson and Raymond Mikesell, North American Free Trade: A Survey of Environmental Concerns, San Francisco: Pacific Research Institute Policy Briefing, mimeo, December 1991.]

The argument that firms facing the competitive pressures of free trade will abandon environmental responsibility and ignore codified (or uncodified) standards, i.e. use illegal, pollution-intensive production techniques, begs the question: why would they not also cheat prior to the implementation of a free trade agreement if they thought they could do so with impunity? Perhaps the risks of getting caught become worth taking when a firm is faced with the imminent prospect of bankruptcy; however, widespread increases in risks of bankruptcy cannot be realistically contemplated purely as a consequence of NAFTA.

Another scenario is that national governments will be less inclined to pass and enforce environmental standards given industrial dislocations and any short-term increases in unemployment associated with adjustments to trade liberalization. Indeed, governments might rely upon reduced regulation of business as a form of "adjustment assistance" for domestic industries. Equivalently, governments might relax domestic environmental standards in order to permit domestic firms to compete on a "level playing field" with firms based in countries with weaker environmental standards and/or enforcement practices. [An alternative version of this argument might hold that standards in the U.S. and Canada will be "harmonized downward" to be made compatible with standards in Mexico.]

Both the environmental dumping and the standards relaxation arguments are ultimately empirical issues. In both cases, empirical evidence provides little support for the arguments. Since the bulk of the available evidence relates to the environmental dumping issue, we shall review that evidence first.

One comprehensive review of the environmental economics literature concludes that domestic environmental measures have not induced industrial flight and the development of pollution havens. The primary reason seems to be that the costs of pollution control have not, in fact, loomed very large even in heavily polluting industries (i.e. on the order of only 1 to 2.5% of total costs in most pollution-intensive industries). Such small increments to costs are likely to be swamped in their impact on international trade by other effects such as differentials in labour cost. [See Maureen L. Cropper and Wallace Oates, "Environmental Economics: A Survey," The Journal of Economic Literature, Vol. XXX, June 1992, pp. 675-740. Another more focused literature review comes to the same conclusion, namely, there is no evidence to support the hypothesis that more stringent regulations in one country will result in loss of competitiveness, and perhaps industrial flight and the development of pollution havens. See Judith M. Dean, "Trade and the Environment: A Survey of the Literature," Background Paper, Washington, D.C.: The World Bank, 1992.]

Specific studies can be cited to reinforce this conclusion. For example, Leonard found no evidence in overall statistics on foreign investments by U.S. companies and U.S. imports of manufactured goods that key high pollution industries have shifted more production facilities overseas in response to environmental regulations. Yet in a few high pollution, hazardous production industries, environmental regulations and workplace-health standards have become a more prominent and possibly decisive factor in industrial location and have led U.S. firms to move production abroad. Examples of such industries are those that produce highly toxic, dangerous or carcinogenic products, such as copper, zinc and lead. For these latter industries, environmental regulations have combined with other changing location incentives and economic problems to speed international dispersion of capacity. [See H. Jeffrey Leonard, Are Environmental Regulations Driving U.S. Industries Overseas? Washington, D.C.: The Conservation Foundation, 1984.]

In a similar vein, Walter reports that certain copper smelters, petroleum refineries, asbestos plants and ferro-alloy plants have reportedly been constructed abroad rather than in the U.S. for environmental reasons. Moreover, some recent Japanese pollution-intensive industries have reportedly been channelled to developing countries in Southeast Asia and Latin America; however, there is no evidence of a "massive" environment-induced shift in the location of production capacity. Moreover, a significant amount of the observed geographical mobility of production involves cases where major projects were absolutely barred for environmental reasons. [See Ingo Walter, "International Economic Repercussions of Environmental Policy: An Economist's Perspective," in Seymour Rubin and Thomas R. Graham, eds., Environment and Trade, Totawa, New Jersey: Allanheld, Osmun and Co., 1982.]

Rubin and Graham conclude that during the decade of the 1970s, during which complex environmental regulations and high pollution costs were imposed on industries, the overall foreign investment and import trends of the mineral processing, chemical and pulp and paper industries did not differ fundamentally from those of U.S. manufacturing industries in general. The former industries are arguably among those that should have been most adversely affected by environmental legislation implemented in the U.S. In fact, only slight shifts at the margin could be detected in these industries. Specifically, only a few U.S. industries within branches of the chemical manufacturing sector have increased production overseas as a direct or indirect result of environmental regulations. [See Seymour Rubin and Thomas Graham, "Environment and Trade" in Rubin and Graham, eds., op. cit.]

Stafford examined whether traditional factors such as access to markets and differences in costs of labour and materials remained predominant in manufacturing-location decision-making, despite the added dimensions of environmental regulations introduced under the National Environmental Policy Act. [Howard A. Stafford, "Environmental Protection and Industrial Location," Annals of the Association of American Geographers, Vol. 75, 1985, pp. 227-240.] Personal interviews and mailed questionnaires were used to identify the most important factors in the location of 162 new branch plants of U.S. corporations. For most of the decisions investigated, environmental regulations did not rank among the most important factors considered. When such regulations were of some significance, uncertainties about when the necessary permits would be obtained were more important than spatial variations in direct cost. Stafford concludes that environmental regulations have had no consistent effect on the size of the search area, the number of sites considered, the sizes of the facilities built, or the decision to expand existing plants versus building new plants.

Bartik used a database of new manufacturing branch plants opened by Fortune 500 companies between 1972 and 1978 to determine if business location decisions are affected substantially by state environmental regulations. Two measures of state water pollution regulations and four measures of state air pollution regulations were used as variables. The study did not find any statistically significant effect of state environmental regulations on the location of new branch plants. Even sizeable increases in the stringency of state environmental regulations were found unlikely to have a large effect on location decisions for the average industry; however, for some highly polluting industries, the results cannot rule out the possibility of effects of environmental regulation on plant location. [Timothy Bartik, "The Effects of Environmental Regulation on Business Location in the United States," Growth and Change, Vol. 19, 1988, pp. 22-44.]

Finally, McConnell and Schwab estimated a statistical model to investigate the impact of a variety of country characteristics on the locations of 50 new branch plants in the motor vehicle industry during the period 1973-1982, a period when there were wide variations in environmental regulations among regions. Most of the results indicate that environmental regulations do not exert an important influence on location decisions. At the margin, however, there is some evidence that firms may be deterred from locating where the ozone problem is severe and emission controls are correspondingly stringent. [Virginia McConnell and Robert Schwab, "The Impact of Environmental Regulation on Industry Location Decisions: The Motor Vehicle Industry," Land Economics, Vol. 66, 1990, pp. 67-81.]

In summary, the evidence is quite persuasive that geographic differences in environmental standards and enforcement have a relatively small impact on the location decisions of firms. Indeed, any significant impacts appear to be concentrated in resource-based sectors that are arguably relocating from the United States for other reasons anyway. Moreover, there are other locations to which these activities can potentially relocate with environmental standards and enforcement that are substantially weaker than in the case of Mexico.

To be sure, critics might argue that differences in environmental enforcement between Mexico and the United States are much more substantial than those between different states within the United States or, for that matter, between different developed countries. In this regard, it should be noted that a number of the studies cited above consider potential relocation to other developing countries. Moreover, a study by the U.S. Trade Representative's Office concludes that the small share of costs ascribable to pollution abatement and the already low levels of U.S. tariffs in industries facing high pollution abatement costs argue against Mexico being a different case. [Office of the United States Trade Representative, Review of U.S.-Mexico Environmental Issues, Washington, D.C.: Mimeo, October 1991.]

There is less direct empirical evidence to appeal to regarding the potential for environmental standards or the enforcement of these standards to be relaxed in the developed economies as a result either of increased imports from other countries or of formal efforts to harmonize standards. It is certainly relevant to note that increased imports from developing countries in Asia with much weaker environmental regulations than those in North America have not provoked reversals of environmental legislation in the United States to date. [A theoretical model developed by Rauscher concludes that the implications of a common market for environmental policy are uncertain. While there will likely be a relocation of emissions from one country to the other, total emissions may be higher or lower than in the initial state, i.e. prior to production factors being mobile. See Michael Rauscher, "National Environmental Policies and the Effects of Economic Integration," European Journal of Political Economy, Vol. 7, 1991, pp. 313-329.]

The experience of the European Community (EC) suggests that when environmental standards differ across countries, convergence of standards will ultimately take place in the direction of the more restrictive set of standards. By mid-1991, the EC had adopted nearly 300 new directives and regulations dealing with environmental matters along with new measures applying strict liability standards in cases involving pollution. While many member countries arguably have not been aggressive in enforcing the EC environmental rules, pressure from those countries enforcing the rules and adopting their own tougher antipollution laws is apparently bringing about compliance by all members. [See Rudy Portari, "Toughened Environmental Regulation Looms in the EC," National Underwriter, Vol. 95, 1991, pp. 52-53.]

The likelihood of NAFTA triggering a relaxation of environmental standards in the United States and Canada is reduced by the facts that Mexican imports are a relatively small part of total imports and, further, that environmental costs are a small share of all costs in virtually all industries. Furthermore, current pressures in the United States to reduce the burden of environmental regulations on companies is clearly driven by broader macroeconomic weaknesses in the U.S. economy rather than by import pressures in specific industries or from specific countries.

Overall Assessment of NAFTA and the Environment

The preceding sections suggest that existing arguments about NAFTA necessarily contributing directly or indirectly to a further degradation of environmental amenities are both simplistic and arguably incorrect. Increased pollution along the border between Mexico and the United States is frequently pointed to as a necessary consequence of increased cross-border commerce. [There are numerous discussions in the media documenting health and worker safety problems associated primarily with Maquiladora production along the Mexico-U.S. border. See, for example, Joel Simon, "Will Tijuana be a free trade tinderbox?" The Globe and Mail, December 19, 1992, D3.] However, it can be argued in this regard that the economic activity generated by NAFTA will actually encourage less pollution along the border. This is because the incentives that maquila plants now have to congregate along the border will be blunted by a NAFTA which will make all Mexican exports, and not just those from maquila plants, eligible for tariff relief on their North American content.

Undoubtedly, the high degree of congestion along the border has exacerbated pollution problems (given limitations on the ability of the natural environment to absorb pollution), while limited enforcement of pollution standards, particularly by Mexico, has contributed to border-area problems highlighted by NAFTA critics. However, the relevant issue is whether NAFTA will exacerbate or mitigate existing environmental degradation.

As noted above, the NAFTA should mitigate environmental congestion problems at the border by encouraging the dispersal of economic activity away from the border region. Also, tariffs on pollution abatement equipment will be eliminated over time making this equipment substantially cheaper in Mexico. As a result, it will be cheaper for Mexican firms to meet environmental standards, although whether they choose to buy and install more equipment will depend, in part, on the efforts of the Mexican authorities to enforce existing standards. The freer movement of professionals in the environmental engineering area under the NAFTA should assist the Mexican government in its enforcement efforts given shortages of such expertise in Mexico. [The NAFTA includes provisions expediting the visa process for managers and many professionals including engineers.]

Finally, provisions in the NAFTA liberalizing cross-border trucking restrictions might indirectly encourage a reduction in vehicle pollution at major border crossing stations. For example, vehicles registered in most states currently face tighter emissions control procedures for licensing than do those registered in Mexico. Hence, to the extent that U.S.-owned vehicles displace Mexican vehicles in hauling traffic within the Mexican border, emission standards in Mexico will indirectly rise. On the other hand, Mexican vehicles entering the U.S. will presumably have to meet the same emission standards facing U.S.-registered vehicles. The opportunity to carry more traffic within the United States might therefore encourage Mexican fleet owners to reduce pollution from their vehicles.

These latter considerations add further weight to an argument that NAFTA will lead to improvements in environmental amenities rather than further deterioration, even if the relevant standards subcommittees fail to harmonize emission and other environmental pollution levels. Nevertheless, it might be argued that NAFTA is a promising vehicle for "leveraging" greater efforts from Mexico to deal with domestic pollution problems, as well as greater efforts on the part of all three countries to deal with trans-border pollution problems. In effect, one might argue that trilateral trade liberalization negotiations should be used to directly strengthen existing legislation and enforcement of environmental standards on a North American-wide basis.

One argument for directly linking trade liberalization to environmental protection measures is premised on the view that threats of trade retaliation on the part of trading partners effectively motivate a country to meet the environmental standards demanded by those trading partners. [Equivalently, one can talk about the use of the "carrot" of trade liberalization as the motivating influence.] In this regard, some observers argue that recent increases in Mexican budgets for environmental infrastructure and enforcement of environmental laws and regulations would probably not have come about if NAFTA negotiations had not provided the impetus. [This point is made by Weintraub in his chapter for this volume.]

Another argument for an explicit and comprehensive linkage is that governments in high enforcement countries can and will invoke trade remedy laws, particularly countervailing duties, against exporters in weak enforcement countries. In this case, it might be more effective to have explicit agreements struck than to tolerate significantly higher risks of trade wars tied to escalating retaliation for specific environmental practices. [That this concern is becoming increasingly relevant is suggested by a report that Senator Max Baucus held hearings in December 1991 to discuss possible trade legislation requiring countervailing duties on imports from countries with less strict pollution rules than the U.S. to prevent environmental dumping. See Peter Fuhrman, "Strange Bedfellows," Forbes, December 9, 1991. Concern about this possibility is also expressed in GATT, Media Release: Expanding Trade Can Help Solve Environmental Problems, Geneva: Mimeo, February 3, 1992.]

A counter-argument against directly linking trade and environmental measures is that it is unlikely to be welfare maximizing for all countries to adopt identical environmental standards or environmental cost controls given that the point at which the marginal social benefit of abatement equals the marginal social cost of abatement will vary from country to country depending upon factors such as topography, climate, demography and so forth. [For a detailed discussion of these factors, see Charles S. Pearson, "Environmental Standards, Industrial Location and Pollution Havens," in C.S. Pearson, ed., Multinational Corporations, Environment and the Third World: Business Matters, Durham: Duke University Press, 1987, pp. 113-128.] Another is that it is rarely welfare improving for countries to impose trade restrictions in response to their being "polluted upon" by another country's producers (or consumers) [For a full discussion of this point, see Peter J. Lloyd, "The Problem of Optimal Environmental Choice," in Kym Anderson and Richard Blackhurst, eds., The Greening of World Trade Issues, New York: Harvester Wheatsheaf, 1992, pp. 49-92.]. Nevertheless, a theoretical case can be made for the "victim" country to use tariffs against the polluting country as a second best policy providing the importing country is large in world markets; however, the first best approach is the imposition of a coordinated "globally optimal" tax on trans-border pollution.

The latter observation, combined with the recognition that lobby groups will use environmental issues to extract protection against imports suggests the wisdom, on balance, of separating the treatment of environmental problems from the treatment of trade issues. The existence of dispute resolution panels in the NAFTA promises to mitigate some of the more grievous abuses of environmental standards to blockade imports; however, this does not gainsay a general argument that the more the trade liberalization process is made contingent upon satisfying implicit or explicit environmental conditions, the more likely is trade protectionism.

In the last analysis, the level of inter-governmental cooperation to address border pollution problems is the single most important factor affecting environmental conditions in the member countries. [See Office of the United States Trade Representative, op. cit. A number of studies conclude that the use of trade related measures will have at best a modest impact on natural resource activity which is a major source of environmental problems. See Peter A.G. van Bergeijk, "International Trade and the Environmental Challenge," Journal of World Trade, Vol. 6, 1991, pp. 105-115.] It is useful to repeat in this regard that eliminating explicit and implicit government subsidies, particularly to energy use, would also make a significant contribution to reducing certain emissions. Indeed, market processes can assist in rationalizing the harmonization of environmental standards. A case in point is the infamous American dolphin-protection laws which highlighted the issue of trade retaliation on environmental grounds at the GATT level. In one part of the eastern Pacific, herds of dolphin on the sea's surface signal the presence of schools of tuna farther down. Encircling the dolphins with purse-seine nets is one way of catching the deeper tuna, but at a high cost in dolphin deaths.

The most recent version of America's Marine Mammal Protection Act prevents American fleets from using this method of tuna fishing. Since 1990 the law has insisted that imported tuna must not be fished by methods that involve killing more than one-quarter more dolphin than are killed by the American fishing fleet. Mexico is one of three countries that failed to meet this target. A protest against an American ban on imports of tuna from Mexico led to a GATT ruling against the ban. ["GATTery v. Greenery," The Economist, May 30-June 5, 1992, pp. 12-15.]

The GATT decision throws into doubt environmental laws that impose restrictions or penalties on foreign countries which may constrain in a substantial way the treatment of similar protests brought for dispute resolution under the NAFTA. A point which might be made is that with sufficient information, American consumers might have encouraged a reduction in the dolphin kill. Specifically, consumers could exercise their environmental preferences by buying more "American" tuna and less "Mexican" tuna. If consumers felt strongly enough about this issue, it would pay American producers to advertise their "dolphin-safe" methods of fishing. Certainly there are an increasing number of businesses that trade on a reputation of being "environmentally responsible" entities. Where individual consumption or production decisions impose no substantial third-party externalities, there is no compelling efficiency argument for government intervention, particularly given the risk that such intervention will be motivated by desires of domestic producers for protection and will likely lead to retaliation by other countries.

A contentious international trade environment is unlikely to promote an atmosphere of cooperation for inter-governmental agreements to address cross-border pollution including the harmonization of standards and the implementation of "globally-based, market-type" mechanisms to address pollution externalities. [van Bergeijk, op. cit. briefly discusses the use of internationally tradeable emission permits.] Furthermore, the expertise needed to address trade issues does not necessarily overlap the expertise needed to negotiate international environmental agreements.

In summary, it seems wise to separate trade liberalization treaties from negotiations to create international environmental agreements which was essentially the procedure adopted by NAFTA negotiators. In a similar vein, it would arguably be a mistake to make trade liberalization contingent upon the trading partners resolving all major cross-border environmental problems. The NAFTA as it currently stands adopts basic GATT provisions allowing countries to exercise sovereignty in choosing environmental, health and safety standards as long as national treatment is extended to foreign producers, and the standards are not defined and implemented in a way that is transparently protectionistic. In this respect, the NAFTA recognizes the likelihood that "optimal" environmental standards will differ from country to country, while at the same time recognizing that limits must be placed on the arbitrary use of domestic environmental legislation to disadvantage foreign producers.

In short, one can conclude that the NAFTA adopts a relatively effective position on environmental matters and that efforts to "strengthen" the environmental provisions will impose social costs that likely outweigh any associated social benefits. [This caveat also applies to the provision in the NAFTA which proscribes a weakening of environmental standards to attract new investment. While it is unclear how this provision will be implemented, there is a grave risk of mischievous interventions on the part of governments that are driving away investment through policies that weaken the efficiency of markets. There is also a risk that governments may not be able to rescind environmental laws that are inefficient or even ineffective.] Of course, this is not to say that inter-governmental negotiations to resolve trans-border environmental issues should be discontinued, or that efforts to harmonize standards which are impacting trade relationships should not be enthusiastically pursued. On the contrary, the successful implementation of the NAFTA will arguably facilitate successful negotiations in the environmental area in a setting where the sovereignty of the individual member countries has been formally acknowledged.

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