Free Trade and the Environment: Mexico, NAFTA, and the WTO Kevin P. Gallagher International Relations, Boston University Global Development and Environment Institute, Tufts University

Overview of Presentation To what extent has economic integration affected levels of environmental degradation in Mexico? –Is there an Environmental Kuznets Curve for Mexico? –Is Mexico a Pollution Haven? Implications for the WTO negotiations

Environmental Kuznets Curve

Problems with the EKC Empirical evidence is relatively weak –Limited to criteria air pollutants in developed countries –Turning points much higher than original estimates –Doesn’t hold 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

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

Side Agreement Limited $3 million budgeted for Mexico dwarfed by economic costs of environmental degradation Serves as interesting “pilot project” for serious effort –Citizen submissions –Research –Technical cooperation (PRTR) –Funds for clean development (FIPREV, NAFEC) Environmental components of trade agreements post- NAFTA are weaker than NAFTA’s

Potential Economic Costs of Waiting for Kuznets in Mexico

Summary of Findings No EKC-like relationship in Mexico (at least for now) Mexico is not a pollution haven for pollution-intensive US manufacturing firms Mexican government is not adequately addressing the market failures resulting from economic transformation International institutions not filling gap made by integration process

Implications for Policy Without the proper environmental institutions and policies in place, liberalization may worsen environmental conditions Strong environmental policy is justified on economic grounds Strong environmental policy will not deter foreign investment flows to developing countries Substantial international financing can supplement developing country environmental goals

Implications for the WTO Developing nations need the policy space to develop and innovate environmental policy Key aspects of WTO negotiations –Environmental Goods and Services Negotiations –“Implementation Issues” Article 8 of the SCM agreement Developing nations need assistance with capacity building and financing environmental policy

Mexico: Mixed Record Inflation and Current Account stabilized Increases in Exports and FDI (until 2001) Slow growth in real income –2.6 percent in GDP –1.2 percent in GDP per capita Low annual net job creation: –79,000 per year in manufacturing –Annual new entrants into workforce: 730,000 Increase in informal work and out-migration: –Informal sector now 30 to 60 percent of workforce –380,000 migrants to US per year (up from 200,000 pre-NAFTA)

Y variables (84-99 and post-NAFTA) –Growth in Mexican exports –Growth in Mexican production –Growth in Mexican export share of US consumption P variables –Marginal abatements costs in the US –Gap in Mexico/US pollution intensity Y it =β 1 +β 2 P it +…