Free trade and environment regulations: A study on North American Free Trade Agreement

A challenge identified at Earth Summit is to ensure that trade and environment are mutually supportive. The environmental provisions of NAFTA have implications for future trade and environmental efforts. This dissertation aims to address hypothesis and policy questions regarding trade and environment using NAFTA. The Hecksher-Ohlin model of international trade acts as a framework and yields useful insights about effects of pollution controls on international trade. Theoretical and quantitative general equilibrium models are used to analyze questions regarding trade and environment. NAFTA is a major step for Mexico, Canada and U.S. Though polluting industry products in Mexico have increased between 1968 to 1988, compared to Canada and U.S., the relative change is small. U.S. will view Canada and Mexico as suppliers of natural gas, oil and electricity. Mexico should deregulate its energy market to benefit from NAFTA. Through 1970-90, Mexico has specialized in exports of primary product, whereas U.S. and Canada exports manufacturing products. Productivity in manufacturing is increasing for all NAFTA countries, in Mexico this is so since 1986 due to liberalization of economy. In U.S., increased labor productivity in manufacturing is associated with decreased air pollution. Relation between increased income and pollution level is different for U.S. and Canada. U.S. economy consumes indirect energy that is embodied in non-energy products. NAFTA will increase certain pollution due to increased production and consumption. Canada faces the largest impact, in terms of metric tons/GDP, followed by Mexico. While uniform environmental taxes have little impact on pollution reduction, they affect consumption and trade pattern. To reduce CO$\sb2$ and SO$\sb2$ level by 10%, both U.S. and Canada have to reduce consumption by 5-6%. Given the reduction in pollution it has achieved, CAA hasn't significantly affected the trade pattern during 80's. CAA should incorporate comparative advantage situation to increase its efficiency. Free trade increases consumption and production, thus increasing income levels and productivity, leading to reduction in overall levels of pollution. Hence, free trade is environmentally more friendlier.