Kevin P. Gallagher. Free Trade and the Environment: Mexico, NAFTA, and Beyond. Stanford: Stanford University Press, 2004. x + 125 pp. $47.00 (cloth), ISBN 978-0-8047-5065-3; $19.95 (paper), ISBN 978-0-8047-5125-4.

Reviewed by Jaime R. Aguila (Department of Humanities and Fine Arts, The University of Texas of the Permian Basin)
Published on H-LatAm (October, 2005)

Who Is to Blame for Mexico's Worsening Environment?

Kevin Gallagher's evaluation of free trade's impact on the Mexican/U.S. border's environment is an exceptionally telling study. The book assesses the Mexican economy, its environmental record, and the validity of leading theories concerning economic integration. The period under review, 1985-99, is significant for two reasons; in 1985, Mexico began incorporating itself into the world economy and by 1999, it had one of the most open economies in the world. 1999 is also the most recent year of consistently available data for Mexico's manufacturing sector, which is the primary industrial sector reviewed.

Gallagher found that although many environmental areas worsened as the average Mexican income rose during this period, free trade policies and dirty industries moving into Mexico were not the cause. Gallagher explained that the term "trade" within policy and environmental circles has become a catchall for a whole package of economic strategies. Other related terms such as "neoliberalismo" in Latin America, "economic integration" in the United States, and "globalization" refer to "the liberalization of both trade and investment, the increase in structural adjustment programs in less developed countries, and the decreasing role of government in developed and developing countries alike" (p. 4).

Mexico's rapid embrace of free trade and foreign investment beginning in the mid-1980s is remarkable when juxtaposed with its long history of maintaining a closed economic system, known as Important Substitution Industrialization (ISI). Although ISI emanated during World War II when Mexican consumers were shut off from many U.S. imports, policymakers as early as 1920, following the end of the Mexican Revolution, sought to promote large-scale native industrialization. Over the course of the latter half of the twentieth century, ISI became an integral ingredient of the Partido Institucional Revolucionario's (PRI) seemingly invulnerable hegemony. However, as went the PRI's absolute control over the nation so did ISI. Consequently, developing a functional open political system and developing environmentally safe trade schemes are now integral challenges deriving from Mexican society's recent apertura. Gallagher promises to measure the extent to which economic integration has affected environmental degradation in Mexico by focusing on the manufacturing sector's development since 1985 (p. 2).

Chapters 1 through 3 assess the debate between environmentalists fearing that the North American Free Trade Agreement (NAFTA) would worsen the contamination on an already heavily polluted border region versus free trade advocates. The maquiladora program's poor record along the border influenced many assumptions about NAFTA's potential impact on the environment. According to Gallagher, "Many environmentalists pointed to the Mexico-U.S border ... as an example of what would happen to the rest of Mexico and other developing countries if the WTO (World Trade Organization) and NAFTA came into effect" (p. 1). Supporters of free trade's expansion cited Jagdish Bhagwati, a highly respected and well-known trade economist from Columbia University. He argues that once NAFTA-stimulated economic growth reached a certain measurable level, the Mexican government would begin to adequately protect its environment.

The scholarly dispute between Bhagwati and Herman Daly, an environmental economist formerly with the World Bank, reveals the basic disagreements between NAFTA's supporters and opponents. Bhagwati is a promoter of the Environmental Kuznets Curve hypothesis (EKC), which "predicts that environmental degradation can sharply increase in the early stages of economic development, but the rise in per capita income past a certain turning point may gradually reduce environmental damage in developing countries" (p. 12). Daly's case against free trade is based on the pollution haven hypothesis, which claims that free trade will encourage heavily polluting industries from developed nations to move their operations to developing nations where regulation is more lax and less expensive (pp.1-2). Gallagher found that neither theory was correct and that further studies were needed. In addition, although contamination did occur, NAFTA and similar free trade policies were not to blame. This may at first appear as a failed project, but the findings were nonetheless significant and had much to offer policymakers and scholars.

Evaluating the validity of the pollution haven analysis was necessary to determine whether or not the Mexican economy would become a pollution haven for U.S. companies. This theory is based on the assumption that "the liberalization of trade between two countries with different levels of environmental protection could lead pollution-intensive industry to concentrate in the nation where environmental regulation is most lax (or less costly)" (p. 26). If true, developing and developed nations could lose their "comparative advantage" because increasing marginal pollution costs would in turn force a diminishment of environmental regulation.[1] In addition, multinationals could pressure nations with effective regulations to weaken such laws in the name of competition or developing nations might abandon improving such regulations for fear of scaring away foreign investors.

According to EKC studies, the level of Mexico's real gross domestic product (GDP) per capita that needed to be reached in order for economic degradation to decrease was $3,000-$5,000. Ironically in 1985 Mexico's GDP per capita was $5,000, the same year it commenced integrating itself into world economy. Gallagher concluded that based on Mexico's modest economic growth, it would take several decades before a number of key pollutants began to decrease, if at all. Furthermore, Mexico's share of dirty industries declined more so than in the United States, but not at a rate great enough to reverse contamination. However, the most surprising and noteworthy finding was that NAFTA and the arrival of former U.S. based companies were not responsible. Instead lax enforcement of Mexico's environmental regulations was the primary culprit.

Gallagher also disproved the assertion that Mexico had become a pollution haven following NAFTA's commencement. Specifically, "high pollution abatement costs in the United States are not significantly correlated to the levels of economic activity in Mexico during the period of economic integration or to the changes in economic activity since NAFTA" (p. 31). For policymakers this meant that the costs of pollution are too insignificant to influence the average firm's location decisions; however, further studies are still needed to provide a more well-rounded and conclusive picture of the environment's future in a world economy dominated by free trade policies.

The second half of the book provides the results of an air pollution study based on the scale, composition, and technique effects of economic integration on industrial criteria. Although driven by specialized terminology and formulas, Gallagher nonetheless coherently explains the purpose of his methodology that could be understood by a general audience and provides extremely relevant conclusions regarding the Mexican economy and environment's future. The introduction of NAFTA caused the economy's composition to significantly shift away from pollution intensive sectors such as oil production. However due to the increase in the scale effect particularly within manufacturing, there was no clear improvement or worsening in levels of criteria air pollution during this era under review. In other words although the share of pollution intensive industry within the Mexican economy declined over this period, the pace of manufacturing's economic growth increased to such an extent that the total criteria air pollution in manufacturing almost doubled. This point is significant for understanding why the pollution haven analysis is incorrect, yet Mexico still suffers from increased environmental contamination.

Many of the barriers preventing adequate regulation of the environment stem from policy-makers misusing data and over simplifying their descriptions of problems and potential solutions. This factor is amazingly similar to issues related to undocumented Mexican immigration to the United States. Opposing groups frequently cite different information and use similar terminology but with different meanings and purposes. In addition, public policy frequently appears contradictory to the general public, as does the lack of binational cooperation. As is the case with the issue regarding Mexican immigration to the United States, attempts at effectively regulating the environment are hampered by a variety of factors. Gallagher found that after 1985 Mexico had successfully become one of the more open economies in the world; however, this new economic system was ill-equipped to deal with the environmental gap. "Environmental degradation worsened because the Mexican and U.S. governments did not instate adequate environmental policies that would have coupled environmental benefits with economic integration" (p. 80). The same basic policy tenet can be applied to the regulation of movement across the Mexican/U.S. border: an inadequate system of enforcement. More specifically protecting the environment and regulating the immigration process are hampered by misinformation, oversimplified conclusions, mishandling of statistics, and the negative influence of multiple players with distinct agendas.

Although neither the EKC nor the pollution haven hypothesis withstand Gallagher's analysis, understanding their shortcomings proves enlightening. The complexity associated with protecting the environment while developing a system of free trade is a daunting task and one that neither U.S. nor Mexican policymakers have mastered. Although many of the conclusions called for further research, Free Trade and the Environment nonetheless provides many significant findings. In particular, Gallagher calls for "nation-states in the developing world and international institutions to address market failures related to environmental externalities" (p. 80). Developing nations should pursue stricter environmental controls without fear of scaring away foreign investors. Gallagher ultimately found that the pollution intensity of the Mexican economy is growing significantly because real spending on environmental policy has dropped by 45 percent since NAFTA and the number of plant-level environmental inspections has also decreased by 45 percent. The decreasing efforts at effectively regulating the environment are at the core of Mexico's environmental problems.

Although this study is aimed at political scientists and environmentalists, it has much to offer laymen and non-specialists. In this regard the book would have been more user-friendly if a glossary of terms and acronyms had been included. As is the case with most works, having to look back in a book for the meaning of a term can be cumbersome. Also, this may be a bit too particular, but the Scientific American articles of Bhagwati and Daly were not included in the bibliography, although the citation was provided in the text. Environmental and immigration scholars should produce more works that facilitate the transfer of information and encourage more multidisciplinary interaction. Such efforts will make our work more relevant to the general public. I would recommend this book to upper division undergraduate courses concerning the environment and above.[2]

Notes

[1]. "Comparative Advantage" found in the World Trade Organization website at http://www.wto.org/english/rese/resere/cadve.htm; see also David Ricardo, On the Principles of Political Economy and Taxation_ (1817).

[2]. I found myself looking up various reports and organizations through the web as I read, so I included some of the more interesting: GATT and the Goods Council, gatewayhttp://www.wto.org/english/tratope/gatte/gatt_e.htm; GATT, guidehttp://www.ciesin.org/TG/PI/TRADE/gatt.html; World Trade Organization Homepage, http://www.wto.org/; Global Exchange (Opposes expansion NAFTA), http://www.globalexchange.org/campaigns/wto/; Global Trade Watch, http://www.citizen.org/trade/nafta/; Organization for Economic Co-operation and Development, www.oecd.org.

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Citation: Jaime R. Aguila. Review of Gallagher, Kevin P., Free Trade and the Environment: Mexico, NAFTA, and Beyond. H-LatAm, H-Net Reviews. October, 2005.
URL: http://www.h-net.org/reviews/showrev.php?id=11190

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