The Environment: Dirty Deal?

Many environmentalists are afraid of free trade. To those who are, free trade with Mexico sounds especially bad. They ask incredulously, "You want to merge our economy with the economy of a poor country, right next door, whose capital is choked by the worst air pollution in the world and whose border towns already churn out scandalous gobs of raw sewage and muck?"

Two Princeton University economists, Gene Grossman and Alan Krueger, have an answer that should please both free-trade advocates and people who care about the environment. According to their recent study, it seems that the proposed North American Free Trade Agreement (NAFTA) could actually reduce pollution levels in Mexico. Moreover, instead of encouraging dirty U.S. industries to relocate south of the border, where enforcement of antipollution rules is weaker, NAFTA could actually prompt some of the dirtiest Mexican industries to move north, where they will have to be much more careful about their emissions.

Projecting the environmental impact of liberalizing a country's trade policy is a tricky business; several factors have to be considered. Environmentalists usually worry about only one: an increase in the total amount of economic activity. If an economy grows faster, they reason, it will spew out more pollution and degrade its natural environment more quickly. Not a pretty picture.

Two other major effects, though, could have an even greater impact on the environment than a change in the size of the economy. First, free trade changes the mix of things that a country produces. Historical experience and the principle of comparative advantage show that when two countries begin to trade more freely, each begins to specialize in what it can do more cost-effectively. Costa Rica exports bananas; France exports fancy wine. The new mixture of activities might pollute and chew up habitat less, more, or in different ways from the old mixture.

Second, liberalizing trade rules can bring in new technology. This point is crucial, and it's usually overlooked. Since most new production technology comes from rich countries, with tight rules and health-conscious citizens, it tends to be less polluting than old technology. Improvements in efficiency can also mean less pollution: When people switch from wood to electricity as a source of heat, for example, a major cause of urban pollution is eliminated. Even if the electricity is produced by a coal-burning plant, the resulting emissions can be controlled much more readily than the smoke from millions of chimneys.

In their analysis of how NAFTA might affect the environment, Grossman and Krueger considered all three of these factors. First they looked at how growth in the Mexican economy might affect its pollution levels. Very little solid information exists on this question.

But the World Health Organization has been running an air-pollution measurement project in roughly 50 cities around the world since 1977. It is part of the United Nations Global Environmental Monitoring System (GEMS). Because the measurements are done in a standardized, scientific way, pollution levels can be compared over time, both within countries and across countries. Grossman and Krueger are the first economists to analyze this data set.

The GEMS project has been measuring sulfur-dioxide concentrations, the amount of suspended particulate matter, and the amount of very fine dark particles, which we lay people call "smoke." According to the GEMS data, other things being equal, the level of sulphur dioxide and smoke that a city pumps out initially increases as per-capita income increases. Then, at about $5,000 per capita, a turning point is reached. As income rises past that point, the levels of sulfur dioxide and smoke fall, and keep on falling. The amount of heavy particles suspended in the air follows a similar pattern, except that it turns the corner and begins dropping at a much lower per-capita income.

The GEMS data say it loud and clear: Richer people are cleaner, if you just let them get rich enough. Mexico has never participated in GEMS, but we don't have any reason to think its experience would be very different from those of the countries in the project that were at the same level of economic development. Mexico's per-capita income is somewhere between $2,000 (according to the World Bank) and $4,900 (according to a 1991 study in The Quarterly Journal of Economics cited by Grossman and Krueger). If NAFTA helps Mexico grow more, it will push it into the zone where its citizens begin to demand cleaner air and where they can afford the technology that makes it possible.

Grossman and Krueger also tried to figure out how NAFTA might change the mix of things that Mexico produces. A careful look at the data turned up no evidence that companies move from the United States to Mexico in order to take advantage of weaker pollution abatement laws. In theory, it's possible, but other economists researching the question around the world have reached the same conclusion. Compared to the other costs of production, the cost of pollution control is too small to prompt a move.

What does attract foreign companies to Mexico is its cheap labor. That's the key to understanding NAFTA's impact. The most likely outcome is that the treaty would stimulate growth in Mexican businesses that use large amounts of unskilled or low-skilled labor. That isn't surprising, since all the recent growth in Mexico's economy has been in the maquiladora sector, which is very labor intensive. (In maquiladora production, Mexican workers assemble American-made parts and ship the finished product back to the United States, which lets it in duty-free. In 1987, nearly 44 percent of all Mexican exports to the United States, by value, qualified as maquiladora products.) The flip side is that Canada and the United States will tend to specialize even more in activities that use capital and skilled workers intensively.

What will be the effect of this specialization on the environment? The good news is that the labor-intensive sectors that we would expect to see grow in Mexico—such as agriculture, textiles, clothing, shoes, and leather goods—happen to pollute less than the average Mexican business. They use less electricity and produce less toxic waste. The even better news is that NAFTA would probably cause a shift of heavy manufacturing, chemical production, and other capital- and electricity-intensive businesses to Canada and the United States, two countries with much stricter environmental protection laws.

By letting Mexicans specialize in what they are best at, NAFTA could make Mexico's environment cleaner. Anyone who's visited Mexico City or the border towns knows that's a high priority. By letting Mexicans get richer, NAFTA can also help increase their taste for clean water, blue sky, and frisky wildlife—and their ability to buy the technology that makes those good things possible.

Rhona Mahony is a free-lance writer in Stanford, California.