Trade, Environment, and Development in Mexico Kevin P. Gallagher Global Development and Environment Institute Tufts University www.ase.tufts.edu/gdae

Key Points Mexico is a perfect laboratory to examine trade, environment, and development nexus Overall, Mexico’s environment continues to worsen and is adversely affecting it’s economy Economic integration strategies need to directly incorporate strong environmental provisions

Environmental Kuznets Curve

Limits of the EKC Empirical evidence is relatively weak Limited to criteria air pollutants in developed countries Turning points much higher than original estimates Hasn’t held for single country trajectories Damage leading to turning point could be irreversible or too costly to clean up Drawing single-country development lessons from cross-sectional evidence is questionable

Potential Economic Costs of Waiting for Kuznets in Mexico

Is Mexico a Pollution Haven?

Mexican environmental policy has been inadequate Established key environmental laws and institutions Spending on environmental policy shrinking Plant-level environmental inspections declining “Side-agreement” institutions extremely limited

Implications for Policy Underscores the need to couple environmental policy (at the national and international level) with economic integration Strong environmental policy will not necessarily deter foreign investment Ex-post analyses are important to draw lessons for future trade agreements (US approach to ERs ignores this).

Environmental Kuznets Curve Scale Effects: if pollution per unit of output is constant but the scale of output increases then pollution will increase as well Composition Effects: if pollution per unit of output remains unchanged but the sectoral composition of the economy shifts toward cleaner or dirtier economic activity Technique Effects: reductions in pollution per unit of output due to technological change and transfer and/or rising incomes