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Q&A
Testing two views of trade’s environmental impacts


FEBRUARY 2005

Testing two views of trade’s environmental impacts
QA Picture

Kevin Gallagher

 
Discussion of free trade’s environmental effects on developing countries often features the clash of two opposing yet widely held beliefs. According to one, environmental protection inevitably improves as free trade raises per-capita income. According to the other, liberalized trade turns developing nations into “pollution havens” as heavily polluting industries flock to these countries to escape strict environmental regulation. Both views are put to the test in a new book by Kevin Gallagher, an assistant professor of international relations at Boston University and a research associate at Tufts University’s Global Development and Environment Institute. Gallagher examines Mexican environmental trends from 1985 to 1999. In that period, which included the 1994 implementation of the North American Free Trade Agreement (Nafta), Mexico transformed itself from one of the world’s most closed economies to one of the most open. Gallagher discussed his findings recently with EcoAméricas Editor George Hatch.

In your book, “Free Trade and the Environment: Mexico, Nafta and Beyond,” you say neither theory of free trade’s environmental impact proved true in Mexico’s case. So what did happen?

I found that environmental conditions significantly worsened in Mexico as the country became more integrated with world markets. In the period I looked at [1985-1999], soil erosion, municipal solid waste and urban air and water pollution all grew faster than the economy and the population. But this was not a result of Mexico becoming a pollution haven for dirty industry from the U.S.; indeed, the percentage of dirty industry in Mexico actually declined during this period. Instead, it was a result of the Mexican government and the Nafta environmental side agreement failing to anticipate the increasing environmental degradation [caused by overall industrial growth]. Mexico didn’t put in place the proper institutional structures to promote environmental protection. During 1985-99, spending on environmental protection in Mexico decreased by 50% in real terms and the number of plant-level environmental inspections decreased by 45%. World Bank studies show that plant-level inspections are key to ensuring environmental protection.

Those who believe free trade boosts environmental protection point to the so-called Environmental Kuznets Curve. It shows environmental degradation rising in the early stages of economic integration but then leveling off and declining steadily as per-capita income grows. According to this theory, at what income level should environmental degradation in Mexico have begun to ease?

The turning point was supposed to be $3,000 to $5,000 in per capita annual income, and Mexico already had reached the $5,000 level by 1985. So at the outset of my study I should have observed signs of a decline or at least a leveling off of environmental degradation. But instead, in every year since 1985 we’ve seen pollution grow faster than GDP and the population.

Why the discrepancy?

The Environmental Kuznets Curve makes sense logically, but it doesn’t happen automatically, which unfortunately is the way it has been interpreted in the political realm. The standard line in trade-policy circles is, “Grow now, and worry about the environment later.” But this fails to recognize that environmental degradation is not being incorporated into the cost of production. If you’re a pulp and paper plant just outside Mexico City and you’re selling to factories making cardboard boxes, you impose economic- and health-based costs on a third party—the public. Your pollution blows into the city, and society has to pay for it in such ways as higher health-care costs and days that people miss work. Mexican statistics show that costs like these stemming from environmental degradation were 10% of GDP each year during the 1985-99 period. The most important cause is the lack of adequate institutional structures to improve environmental protection.

What type of institutional structures do you mean?

There needs to be a strong national commitment to environmentally sustainable economic growth. That means factoring the environment into decisions made by government ministries and private businesses. But we know developing countries often need help meeting goals. The CEC [the Commission for Environmental Cooperation, created under Nafta’s environmental side agreement] is an outstanding model. With the Chilean and Central American trade agreements, there has been a rollback because an institution [such as the CEC] hasn’t been set up to monitor the environmental performance of those agreements, and there are little or no financial resources for doing so. Technical cooperation is one of the best things the CEC does. The CEC played a core role in Mexico’s passage of a pollution-disclosure law (PRTR) that has broader coverage than its U.S. or Canadian counterparts. Unfortunately, the current administration in Washington has seen to it that the [Chilean and Central American] trade agreements don’t have these institutions. They point out the environment is now addressed in the body of these trade agreements [rather than being in a side accord, as in the case of Nafta], which is definitely one step forward. But the two steps back is the lack of an institutional presence.

Yet the CEC has been criticized as lacking in scale and clout. Are you saying it is up to the job in its current state?

No. The cost of environmental degradation in Mexico has been [US]$36 billion annually since 1985. The CEC’s total budget is just $9 million a year, and that has been declining in real terms. So the CEC is a great pilot project for a more comprehensive, better-funded effort to make trade work for the development of environmental institutions, but it is clearly too small and is in fact fighting for its existence. You need to have institutions in place to steer economic growth in a sustainable direction. Sometimes policy makers get concerned they’ll scare away investment, both domestic and foreign. But I found that strict standards in the United States are not a key factor in the location decisions of firms that moved to Mexico. The fact is, the costs to comply with standards in the U.S. aren’t that expensive relative to the factors that drive firm-location decisions. Thus, there’s plenty of room for Latin American countries to ratchet up environmental institutions without scaring away investment.

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