Trade Liberalization and Industrial Pollution in Mexico: Lessons for the FTAA

As the barriers to hemispheric trade and integration are lowered, it will be asked whether we will we hear the "giant sucking sound" of poorer nations luring U.S. and Canadian firms south to take advantage of low wages and lax environmental regulations? Or, will Latin American nations passively accept this problematical specialization in doing the world's cheap and dirty work? Mexico is the ideal laboratory for such research. Though NAFTA took effect in 1994, trade liberalization in Mexico began long before that. From 1982 to 1996 Mexico transformed itself from one of the most closed to one of the most open economies in the world. As a first step in such efforts, this paper looks at the relationship between industrial pollution and economic activity in Mexico, compares those results to the United States, and draws out implications for the FTAA. The study finds that many of the industries deemed the dirtiest in the world economy are actually cleaner in Mexico than in the US, and the industries labeled the cleanest are dirtier in Mexico. To generalize, this exhibits that trade liberalization can have both positive and negative environmental effects in developing economies. Sectors where plant vintage determines pollution levels can benefit from their ability to take advantage of newer technologies after liberalizing trade, as is the case with the Mexican steel industry. However, if pollution is a function of end of pipe technology, as in the paper industry, pollution levels are determined by levels of regulation, enforcement and compliance, which are lower in Mexico.