Is Free-trade Pact a Dirty Deal?

By Michael Fumento

Investor’s Business Daily, September 10, 1993
Copyright 1993 by Investor’s Business Daily

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Politics makes strange bedfellows, the late Charles Dudley Warner once wrote. Now, add trade to that list.

Just took at the lineup on both sides of the debate over the North American Free Trade Agreement.

On one side are President Clinton and congressional Republicans. On the other are most congressional Democrats, Republican conservative commentator Pat Buchanan and entrepreneur Ross Perot.

The emblem of enviro-hell, or the ensign of improvement?

As for the environmentalists, whose actions may bring the whole thing crashing down, it’s hard to tell exactly which side they’re on.

But some advocates of free trade worry that the green movement could help to kill an agreement that most economists believe will create hundreds of thousands of jobs.

A free-trade zone in North America would be the largest free trading region in the world, comprising over 360 million people and producing an estimated $6.2 trillion worth of goods and services a year.

The agreement must be ratified by all three countries — the U.S., Canada, and Mexico — by January of next year. While it seems likely to pass in Mexico and Canada, environmentalists in the U.S. have obtained a court order preventing implementation until an environmental impact statement has been filed.

The administration appealed the ruling last month. If upheld, the need for the statement could kill the treaty.

Three environmental groups, Public Citizen, the Sierra Club and Friends of the Earth, filed the suit which has put NAFTA on hold.

"The Sierra Club wants a NAFTA, but they want one that is environment-friendly, and this one isn’t quite good enough even with side agreements," said Daniel Seligman, a policy analyst with that Washington-based organization.

One environmentalist argument against NAFTA is that Mexico’s environmental standards are far below those of the U.S., and the country would therefore become a "pollution haven" for U.S. companies fleeing more expensive regulations.

Indeed, by U.S. standards, much of Mexico is dirty. But things are changing.

Under President Carlos Salinas de Gortari, the portion of government spending on environmental protection grew from $12.5 million, or just 0.05% of GNP in 1988, to $1.1 billion, or 0.44% of GNP in 1991.

Mexico City, generally considered to have the worst air pollution problem of any metropolitan area in the world, began stringent control measures two years ago and plans to spend $2.5 billion over the next four years to further clean up its air.

Last year, the Mexican government closed Mexico City’s Pemex oil refinery at a cost of $500 million in lost revenues. While the plant employed 5,000, it also dumped 224 tons of pollutants into the air annually.

"You have to remember that Mexico is still a Third World country with Third World political problems," said Wesley Smith, a Mexico expert with the Heritage Foundation in Washington.

You still see a lot of these in Mexico, but it is becoming industrialized.

"Some environmentalists have the image of Mexicans as riding around on burros and sleeping under sombreros," Smith said. "But Mexico is not a bunch of little villages. It’s already an industrial society and the question is, do you want it efficient or highly polluting."

Many analysts say the main reason for Mexico’s cleanup is the general improvement in the economy. One oft-cited study is by Princeton economists Gene M. Grossman and Alan B. Krueger.

That study concluded that "economic growth tends to alleviate pollution problems once a country’s per capita income reaches about $4,000 to $5,000." Mexico is just below the $4,000 level now.

The Cleanliness Of Wealth

President Clinton has also acknowledged that "only a prosperous society can have the confidence and the means to protect its environment."

"Among people just working in the country, worried about getting enough to eat, the air in Mexico City just isn’t a big concern," said Smith, who has lived in Mexico. "But as you get higher up on the economic ladder, people are much more concerned about the environment because they’re no longer worried about subsistence living."

Yet Seligman isn’t convinced.

"Countries with higher standards of living (also) tend to be democracies where citizens have a right to complain," he said. "In Mexico, that opportunity is sharply limited and unless NAFTA forces parties to actually enforce their laws, we don’t see how a system like Mexico’s will actually clean up the environment."

Smith isn’t especially worried about U.S. companies moving south to escape tougher restrictions.

"On average," he said, "only 2% of expenses (among U.S. companies) go into environmental compliance, although it’s higher with some industries."

However, he notes that when Southern California regulators passed tough new air pollution standards in 1989, much of its furniture industry relocated south of the border.

But not all of those went to Mexico, Smith said. Eight moved across the California desert to Arizona.

Fleeing Furniture

Further, he said, much of the attraction was lower wages, not pollution controls.

Made down south, then shipped up north.

"If they hadn’t moved south, (they) would have gone out of business because they couldn’t compete against Asians."

And not everyone agrees with those critics of free trade who say lax environmental standards will give businesses in Mexico a comparative advantage in competing with foreign companies.

"Poor environmental standards don’t necessarily make a country more competitive," said William Lash, a law professor at St. Louis University School of Law who specializes in trade. "Germany is not being out-competed by Russia or Bangladesh. Only in a few places will those lower standards give you a competitive edge."

One special concern to environmentalists are border regions, where pollution generated on one side can affect the other side. Chris McGinn, a policy analyst with Public Citizen in Washington, cites the instance of a coal-producing plant 20 miles across the Texas border.

"Under NAFTA, it would be possible for a plant (in Mexico) to sell electricity to Texas," said McGinn. "Texas is under the Clean Air Act and since more pollution will be coming across the border, Texas manufacturers will have to be even cleaner, which will make it much more difficult to compete."

But others note that, for every case like the hypothetical one mentioned by McGinn, there are others that make up for it.

"I always point out that for every case like that there’s a case like the Pemex oil refinery that was politically and economically dangerous to close, but they did so because citizens demanded greater environmental quality," said Smith.

The Side-Agreement Shuffle

The side agreements to NAFTA, signed this summer, are another bone of contention.

Those agreements on the environment and labor would create a number of bureaucracies, including a Commission on Environmental Cooperation made up of officials from each country. Those officials would be advised by citizens from each member nation.

For some environmentalists, that’s not enough.

"The only thing that side agreement does is to create a weak, tortuous process by which NAFTA countries can try to get each other to better enforce environmental laws," said Seligman.

"The Clinton side agreements completely fail to address problems with NAFTA," added McGinn.

Free-traders disagree.

"While under most U.S. trade laws and international agreements only aggrieved industries or nations have the ability to institute complaints against U.S. trading partners, the NAFTA side agreement on environmental cooperation provides citizens and interest groups unprecedented ease of access to international dispute resolutions," wrote Lash in a paper for the Center on the Study of American Business in St. Louis.

"The side agreements have quite a bit of teeth built into them," Lash told Investor’s Business Daily. "Environmentalists got what they wanted."

A New Green Bureaucracy?

Unlike the General Agreement on Tariffs and Trade, or GATT, NAFTA would require expert environmental advice to be provided if one party to the dispute requests it. And that usually places the burden of proof on the country challenging, rather than the one defending, a domestic environmental law.

Some environmentalists and their allies in Congress want to go far beyond the current environmental concessions to establish a North American Commission on the Environment.

According to a proposal of Sen. Max Baucus, D-Mont., and chairman of the Senate Environment and Public Works Committee, the commission would be able to directly punish countries that violated environmental laws.

This commission would be funded with a 1% assessment on all traded goods, thereby automatically undoing part of the tariff reduction. It would be like a super-EPA, with an operating budget ten times that of the Environmental Protection Agency.

But some environmentalists say the side agreements already have gone too far.

"NAFTA was palatable before the side agreements because we thought it would create more trade than it would destroy," said Jim Sheehan, a research associate at the Competitive Enterprise Institute, a free-market think tank in Washington. "We think the side agreements tip the scales overwhelmingly" against the treaty.

"Under the side agreements the Clinton administration can now repeal many of the tariff reductions the agreement enacts," said Smith. "It provides for new mechanism for foreign aid to Mexico and an alphabet soup of tri-national bureaucracies to oversee trade."

"There’s a tremendous potential for using environmental concerns as trade barriers," added Lash.

No Deposit, No Return

One example may be a tax that Canada’s Ontario province has placed on imports of non-refillable bottles.

The more of this . . .

While Ontario environmentalists say the law is aimed at preserving the province’s 99% rate of bottle refilling, U.S. trade representatives note that the tariff applies only to alcoholic beverages, not soft drinks. Unlike beer, Ontario companies sell a large number of soft drinks in cans.

The foreign aid Sheehan speaks of is the Sierra Club’s proposal to send a much as $20 billion to Mexico, to come from both the U.S. and the World Bank, for environmental cleanup.

"My feeling is it’s not going to help the environment down there, and I’m afraid that like all foreign aid money this will just get soaked up by the Mexican bureaucracy and won’t really help anybody," said Sheehan.

Sheehan noted that a recent internal study of nearly 2,000 loan projects found that 37.5% of all outstanding World Bank loans were "unsuccessful" in 1991.

Smith’s support for the treaty is not without reservations.

. . . The farther towards this.

"An agreement which would have been a definite step forward in promoting trade has been damaged by side accords, but despite the warts it is better on balance to have it than not," he said.

Still, "the whole idea of NAFTA was to diminish the role and the power of government in private voluntary transactions," said Smith. "But now, after mounting hurdles with the state EPAs, federal EPA, and (Occupational Safety and Health Administration), businesses will potentially face problems with a new environmental commission."

Whatever happens with NAFTA, the stakes are much higher than that agreement alone. The GATT talks, which cover over 100 countries, are already being targeted by environmentalists for similar treatment.

"If NAFTA is approved with side accords, they will demand to have that written into GATT," said Smith.


Read Michael Fumento’s additional work on the environment and on economics.