Free Trade Agreements and Environmental Standards: Do They Work Together

1
Free Trade Agreements and Environmental
Standards Do They Work Together?

• A look into the responsibilities and
  effectiveness of environmental provisions in NAFTA

2
What Will Be Discussed?

• Brief, generalized look at debate over trade and
  the environment.
• NAFTAs environmental provisions.
• Agencies created to foster a favorable
  trade-environment relationship.
• Chapter 11 Trade Disputes.
• A decade later How successful has NAFTA been at
  promoting trade and improving environmental
  standards at the same time?

3
Debate Over How Much Involvement Should
Environmental Issues Have in FTAs

• Ecological Economics assumes economic growth,
  sustainable development, and free trade can have
  a positive relationship.
• Environmental damages (pollution, waste, resource
  extraction) are a function of income in theory.
• The relationship between income and environmental
  damage has an inverted U-shape curve.
• Economics and the environment has always had an
  interesting relationship between classical econ
  theory and more social oriented theory.

4
Pros and Cons to a Proactive Approach with
Environmental Issues in Trade Agreements
Pros Cons

• Hopefully a healthier global environment
• Increased awareness of issues, discussions,
  think-tanks, government funded research
• Environmentally sustainable development and
  economic growth

• Will add a layer to production costs and will
  interfere with theory of product, not process
• Environmental issues can be used as a scapegoat
  to gain a comparative advantage or mask true
  intentions

5
North American Trade Agreement

• Unavoidable environmental concerns with a free
  trade agreement in North America caused by new,
  intense pressure from the public, ENGOs, and a
  general shift in mindset in the early 1990s.
• NAFTA is known as the first major multilateral
  trade treaty incorporate a process to accommodate
  political aspects of the natural environment.
• NAFTA explicitly addresses environmental issues
  in its preamble and in 5 of its 22 chapters.
• Different from GATT (Tuna-Dolphin Case)

6
NAFTAs Stance on Policy Convergence

• NAFTAs environmental stance focused on
  enforcement at a national and regional level in
  order to allow their regional economy to compete
  with other regional economies, such as the E.U.
• This would benefit smaller, local firms who are
  less mobile due to the cost of relocating, than
  multinational enterprises.
• Most concerned with current standards being
  upheld and not chilled in a race to the
  bottom rather than raising the bar.
• However, regulatory convergence of the three
  nations is critical for a perfect
  environment-trade relationship truly sustainable
  development.

7
HOLD BACK THE U.S.!

• NAFTAs trade-environment regimes effectiveness
  relies on its ability to constrain the U.S., to
  stop an protectionist environmental policies.
• Green and Greedy combination of
  environmentalists and U.S. industry.
• U.S. in overall economic weight is ten times
  larger than Canada and almost twenty times larger
  than Mexico.
• However, without U.S. money and support, Canada
  and Mexico would choose a less proactive
  approach.

8
NAFTAs Preamble and Chapter 1

• Preamble assures the goals of the agreement are
  attained in a manner consistent with
  environmental protection and conservation.
• Goals are promotion of sustainable
  development, and strengthening of the
  development and enforcement of environmental laws
  and regulations.
• Chapter 1 says NAFTA has precedence over other
  international agreements except ones where trade
  provisions are included in multilateral
  environmental agreements (MEAs).

9
NAAEC and CEC

• The North American Agreement on Environmental
  Cooperation was created to implement NAFTAs
  environmental accord.
• The NAAEC is mostly a product of U.S. legislative
  battling over NAFTA rather than a result of heavy
  environmental conscious in North American
  governments.
• NAAEC created the Commission for Environmental
  Cooperation (CEC) which acts to enforce
  environmental law and handle trade disputes.
• Both are claimed to address environmental
  challenges in trade-facilitating ways.

10
Chapter 11 Investor Protection

• The better of national treatment or most favored
  nation treatment.
• Treatment in accordance with international law,
  including fair and equitable treatment and full
  protection and security.
• A guarantee that no party will take environmental
  protectionist measures against an investor of
  another party in its territory unless it is for
  public purpose, on a nondiscriminatory basis, and
  in accordance with due process of law.
• Concern, however, arises because Chapter 11
  challenges environmental regulations.

11
First Major Chapter 11 Disputes
12
A Decade Later Has NAFTA Succeeded?

• Paper by Rugman and Kirton in the Journal of
  World Business was examined.
• Used a regime analysis from political science
  to assess institutional aspects of NAFTA as they
  affect the strategies of multinational
  enterprises. They draw conclusions for public
  policy and corporate strategy from interviews
  with government and business leaders as well as
  senior administrators of the NAFTA environmental
  provisions.
• Many studies examine how efficient, active, and
  successful NAFTA has been in purely ecological
  terms or in purely economic terms through
  standard neoclassical trade theory.
• Few studies consider direct relationship of
  economic flows to environmental change.

13
General Findings

• Rugman and Kirton found NAFTA and associated CEC
  are strengthening the access of Canadian and
  Mexican firms to the U.S. market in three ways
  1) By constraining domestic U.S. regulation with
  a protectionist impact. 2) By fostering a
  trilateral convergence of environmental
  regulation. 3) By promoting international
  co-operation.
• Major differences in the effectiveness of NAFTAs
  environmental provisions across various sectors.

14

• Findings through institutional research show that
  NAFTA is leading towards a balanced, trade
  facilitating, high-level convergence of
  environmental regulations in sectors where cases
  of environmental damage is direct, visible, and
  the ecological vulnerability of the U.S. is high.
• Takes on an approach of secure the export
  market of competitive U.S. businesses.

15
Three Main Sectors Looked At Chemicals,
Automotive, and Agricultural

• High level of convergence of environmental
  standards due to successful, rapid, NAFTA
  sanctioned regulations in chemicals (dangerous
  goods transportation, pesticides, etc).
• Mixed level of convergence in the agricultural
  sector.
• Low level of convergence in the automotive sector
  where interests of industry are at stake.
• Success comes in sectors in which the relevant
  U.S. industry has an export surplus.

16
U.S. Exports over Imports 1994 (1990-1994)(US
Millions)
17
Six Factors Affecting Regulatory Convergence

• Public visibility, if it affects more than one
  country, and nature of environmental harm (ex.
  chemical/oil spill).
• Presence of a nested regime in broader
  international system.
• Insulation from corporate influence.
• Functional need to harmonize standards to reap
  NAFTAs trade gains.
• Cost to powerful industries of the high level
  harmonized standards (inverted relationship)
• Support of multi-national enterprises that will
  ultimately pay but also benefit in instances.

18
Several Patterns Noted in NAFTAs Performance

• After a slow start, sharp take off in 1996 and
  beyond in the activities of affiliated
  institutions with virtually all having
  established procedures, structures, priorities,
  and plans.
• Incredible institutional growth from the 26
  original bodies created under NAFTA to now over
  50 trilateral bodies with environmental
  relevance.
• Mexico has become a fuller partner in the
  problem-solving spirit and has enacted standards
  in areas where none existed before.
• NAFTA institutions have moved to broader
  international gatherings to meet North American
  interests.

19
Conclusion

• NAFTA has changed conditions in which green and
  greedy coalitions have flourished in the past.
• U.S. businesses benefit from stable rules and
  reduced environmental activism while Canadian and
  Mexican firms gain secure access to the U.S.
  market.
• A fusion exists between export interests of
  competitive U.S. industries in the NAFTA
  marketplace and environmental regulations and
  especially in trilateral regulations.
• NAFTA allows environmentalists and businesses in
  all three countries to resolve ecological and
  competitiveness concerns.
• Proves FTAs can generate economic gains from
  increased trade as well as improve environmental
  standards, especially of less developed partners.
• It serves as a model for future FTAs with its
  organized environmental provisions.